What I mean concerns the questions posed to Bill. Suppose that he supports the view that in the modern U.S. banking system, money creation by one bank is ordinarily offset by money destruction by the same bank or by other banks unless the Federal Reserve Board deliberately chooses to make it otherwise. Pat Gunning ---------------------------------------- I do not support that view. I completely reject the money multiplier concept.
The Fed is the concertmaster in the following sense:
Imagine that all the banks in a closed system associate between themselves so that checks drawn on any one bank may be deposited in any other bank. One of the banks is chosen to be the clearing bank at which the member banks maintain clearing accounts that we will henceforth call reserves. All of the banks including the clearing bank continue performing the ordinary functions of banking. Each of the banks may grant loans without limit so long as it maintains a sufficient balance in its reserve account to cover checks that may be deposited in other banks. The clearing bank is the exception in that it is unconstrained by reserves because every check it writes clears back to itself and does not detract from its ability to grant loans.
If each bank including the clearing bank expands credit in tandem with every other bank, clearings between banks will always net to zero regardless of the quantity of aggregate reserves. Therefore credit may be expanded without limit unconstrained by reserves so long as all the banks continue to operate in perfect tandem. If any single bank departs from the prevailing practice, it will gain or lose reserves to other banks, which enhances or detracts from its ability to grant further loans. Each bank therefore competitively attempts to gain reserves from other banks and attempts to avoid losing reserves to other banks.
This juxtapositioning between banks would effectively place an upper limit on bank credit expansion were it not for the fact that the clearing bank writes checks for loans that clear back to itself. So the independent credit policy of the clearing bank sets the upper limit to system wide credit expansion. It is however the upper limit, not the lower limit, which is zero. Credit actually granted to the public is necessarily somewhere between zero and the upper limit subject to change in bank policy contingent on the demand for credit from members of the public.
Douglas' theorem from *Social Credit* first published in 1924 holds as a statistical matter between zero and the upper limit which is continually shifting:
"In respect of financial institutions, let deposits = D, loans etc. = L, cash in hand = C, and capital = K. Then: assets = L + C, liabilities = D + K, so that L + C = D + K. Differentiating with respect to time: dL/dt + dC/dt = dD/dt; K being fixed, dK/dt = 0. Assuming cash in hand is kept constant, dC/dt = 0. Therefore dL/dt = dD/dt, which means that loans create deposits and the repayment of loans cancel deposits." --
15 Nov 2003 11:17:07 +0800
Speaking of apparently misguided proposals, here's a puzzle. Can anyone solve it?
What is wrong with the following proposal?
I propose that we increase the quantity of money by just enough to finance a 10% subsidy to retailers of consumer goods. The result, I predict, will be approximately a 10% decrease in consumer goods prices. (This program is advocated by a movement called "Social Credit." For those who might be interested, here is some background. http://en.wikipedia.org/wiki/Social_Credit
Pat Gunning ---------------------------------------- Professor Gunning posted this Saturday to his austrianschoolofeconomics group at Yahoo. All I can say is that it causes me to empathize with Eimar O'Duffy's allegory that man will be replaced by a creature called rabbit, certainly if this is a fair indication of the ability of man to communicate with man. We've been at this for how many days now with Professor Gunning, two weeks is it? For him to now so misstate the social credit position is to me beyond comprehension. O'Duffy may well have had it right. It certainly does indicate a failure to communicate. I am not however assigning blame as to who is at fault for that failure.
Social Credit does NOT propose an increase to the quantity of money. It DOES propose a credit applied at the point of retail - as a matter of accounting - to enable demand to match supply. That's all that Social Credit proposes. The percentage is determined by what is required to accommodate that match. If nothing is required then the credit is zero, period.
Social Credit analysis - based on the A + B theorem in the form of reductio ad absurdum - concludes there is a defect in the system of accounting which entrepreneurs use to measure the effectiveness of their decisions that is not resolvable at the level of the individual firm.
Therefore, accounting adjustment at the macroeconomic level of the economy considered in statistical whole is required for capitalism to reach technical efficiency.
The wikipedia article that he references contains numerous gross errors in statement of fact. For the moment I'll touch on two:
"Douglas believed that Social Credit could fix this problem by ensuring that there was always enough money (credits) issued to buy all the goods that could be produced. His solution is outlined in three core demands:
"1. For a "National Credit Office" to calculate on a statistical basis the amount of credit that should be circulating in the economy." --------------- The singular purpose of the national credit account is to calculate and apply the necessary credit to the point of retail that enables demand to match supply as a matter of accounting. The "amount of credit...circulating in the economy" is determined exactly as it is determined now -- by the interaction of the institution of banking with the public. --
"2. For a price adjustment mechanism to absorb windfall profits in times of inflation, and return them to people in terms of subsidized, lower prices when the cost of goods on the market exceeds the money available to buy them." --------------- Social Credit has never proposed a "price adjustment mechanism." Social Credit has never proposed that something be taken now and returned later. As I recall, that was the Keynesian Abba Lerner's "functional finance" proposal based on his understanding of the "trade cycle."
Social Credit is pure credit applied at the point of retail or directly to consumers in the form of dividends in the manner of accounting adjustment.
It thereby augments not interferes with the utility of the market.
For a good introduction to Social Credit in Major Douglas' own words, see http://www.geocities.com/socredus/compendium/money_and_the_price_system.txt
I am cross posting this to Professor Gunning's group.
Bill Ryan
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From Eimar O'Duffy's *Kingdom of Assinaria* as quotedby Robert Hogan:
This depression was followed by a great war which destroyed most of the civilized world and reduced the few remaining inhabitants to a primitive pastoral existence. In a few more years, the society of men has been succeeded by a society of rabbits, and in the last chapter two of the Gods "observed a dim star among the drifting millions flash suddenly, and go out." One of the Gods muses that, "There ends another of my experiments."
And the second God inquires, "A successful one?"
"'Nay, a miserable failure, though at one time it gave good promise. That star gave birth to a number of planets, on one of which I evolved, after much thought and toil, a strange creature called Man. At first he was truly interesting, but he reached his zenith too quickly, and then rapidly declined. During his last few hundred years, when he was already far gone in decay, he achieved a mastery of natural forces that was marvelous in a race so stupid, but his wickedness and folly were such that it did him more harm than good. In the end I superseded him by a somewhat lower creature called rabbit; but this had no great potentialities either for good or evil, and so nothing came of it. A few million years ago the planet fell back into its parent sun, which has now itself come to an end.'
"'Did these Men that you have mentioned achieve nothing of lasting worth?' asked the other God.
"'Almost nothing,' replied the first. 'A few of them did occasionally show some glimmerings of divine wisdom to which their fellows paid no heed. That, and some trifles of tolerable music, is their only memorial. If you listen you may catch some echo of the latter still moving among the spheres.'
"The Gods were silent; and the ghost of the Ninth Symphony came stealing through the ether."
This is an effectively wry conclusion to a highly talented writer's major work... http://www.geocities.com/new_economics/assinaria.txt --
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