1. Banks (and other such) can indeed, in various complex ways, can lend out “money” that no one has really saved. But is this credit expansion, on its own, really the long term increase of the money supply?

    After all unless backed up the government and/or government supported Central Bank, this bank (and other such) increase in the credit bubble (“broad money”) will inevitably lead to a “bust”, The credit money expansion of the banker “boom” will shrink back down towards the monetary base in the “bust” – UNLESS government (and/or government backed Central Bank) moves in to increase the monetary base in order to support the credit-bubble.

    Only in this way can even the worst antics of bankers (and other such) be turned into a long term increase in the money supply. So bankers (and other such) are actually innocent of the charge of long term monetary inflation – as long as neither govenrments nor government supported Central Banks support the increase in credit in any way, shape, or form.

    If government (and government supported entities) stay out – the increase in “broad money” (the increase in size of the CREDIT BUBBLE) enventually turns round. “Boom” turns to “bust”, the banker credit bubble is liquidated and credit shrinks back down towards the monetary base.

    That is why, horrific though they were, the “bank runs” and BANKRUPTCIES (real bankruptcy – the bank closing its doors and not reopening) of the 19th century were not the bad thing that Walter Bagehot and other interventionists thought them to be.

    On the contrary – if one is to allow banker antics (i.e. the lending ouf of “money” that no one has really saved) then one must also allow the inevitable results of such antics. In short if one allows the “boom” one must also allow (not try to prevent – or “mitigate”) the “bust”,



    1. This is the way I understand it also, but what about defaults? The bank loans out new money (which it expects will return and resolve to nothing plus interest), but in the case of default the money has broken free.

      If this did not happen, and there was no money printing (QE) then I suppose we would not have a long-term increase in the money supply. [Somebody please correct me if you know different]

      I would really like to see some stats on loan defaults and especially some related demographics on who (or what) is defaulting.



  2. Right Wing Hippy (a Rush fan?).

    I will give you what I was told (in all seriousness) by a banker.

    “The money really existed – but then it did not exist, the deflation destroyed it”.

    Defaults and other such just make open that “money” never really existed in the first place.

    For example, people do not pay their home loans (they default), but the people who sold their houses want their money, so they turn to the banks and……. (find there is no money there – at least not enough).

    Of course it is worse than that – as the banks (and other such) will have built a vast inverted pyramid of debt upon the home loans (or whatever).

    And when the demands for cash come (which, in the end, they always do). The reply is…..

    “The money really existed – but then it did not exist, the deflation destroyed it”.

    I suggest that no hippy (of any political point of view) has come out with anything as “far out” as the bankers and their deflation Elves.

    “The money really existed – but then it did not exist, the deflation destroyed it”.

    Naughty deflation Elves – they stole the cash from the vaults.

    The bankers are not crooks – not even slightly.

    And it is an old story.

    Even in the 1850s a corrupt New York Court declared that a clearly insolvant New York bank (which did not have the cash to cover its committments) was “not insolvant” even though it could not HONOUR ITS CONTRACTS – i.e. provide cash when demanded.

    What is different now is SCALE.

    In the old days (back in the days of J.P. Morgan and co) the cheating was at the margin.

    It was big cheating (it could bring down the entire fiancial system – or so people like Mr Morgan feared, it kept him up at night and so on).

    However, the main business of banks was still lending out REAL SAVINGS for (hopefully) productive investment.

    That it is not the core business of banking any more.

    I am going to repeat that.

    Lending out REAL SAVINGS for PRODUCTIVE INVESTMENT is NOT the core business of banking any more.

    The cheating is not a margin thing anymore.

    The cheating (the credit bubble scam) is the core “business” of banks.

    Real savings are no longer a major factor.

    The banks are now totally dependent on the Central Banks – the Bank of England, the Federal Reserve, the EuroZone Central Bank.

    The whole financial system is now one big scam.

    No, No, No, “the money was real – but the deflation destroyed it”.

    Short version…….

    The bankers are off with Lucy in the Sky with Diamonds.



    1. “Right Wing Hippy (a Rush fan?).” I don’t get this, hence I have just added Rush Limbaugh to Google Reader. I expect accidental comedy.

      But if somebody doesn’t pay back their home loan, the house seller has already been paid (with funny money) and that money persists where it wouldn’t if it had been paid back, surely? So defaults should case inflation. Then the bank repossesses (and I use that word quite wrongly, because the money was never theirs) the house. Life goes on, but with more money in the system than before.

      I think their meaning of deflation is “us losing money”. As far as I understand it, actual deflation would happen if all the loans were actually paid back, something that scares them witless. I can’t begin to explain how horrendous that is or how clearly this charade has to collapse.



  3. Yes that was what I meant – they were into Ayn Rand and so on. I apologise for showing my age – Right Wing Hippy is lucky I did not get him the complete box set of Edward Elgar (then he really would be after me). Just kidding – actually some of the hippy types I once knew loved late Victorian-Edwardian stuff (very colourful).

    No there would be more money than before – because the bank has to do more than grab the house back, it has to pay the person who sold it the house in the first place.

    And if to many houses are worth less than the bank paid for them – then (if there is no bailout) it is the BANK that goes down.

    And when the bank goes down – so does its debt paper, it is not “money” any more.

    Why should this worse thing this side of the Devil turning up and declaring the end of the world?

    Take the example of my home town – Kettering (Northamptonshire, nor Ohio – although there is not a huge difference). When the Gotch bank went down – the boys had to earn their bread in other ways.

    One became an architect (ironically he designed a lot of banks – Midland ones) and another became a painter.

    Their work (buildings and paintings) was good.

    Had the family bank survived (due to some Walter Bagehot style bailout) they, most likely, would have been crap bankers.

    So surely the collapse of the bank was, if not good, then at least RIGHT.



  4. Rush Limbaugh was in a band? (Joking) I’ve chosen Right-Wing Hippy because of the Ayn Rand “insult”, that much is true.

    “No there would be more money than before – because the bank has to do more than grab the house back, it has to pay the person who sold it the house in the first place.”

    But the bank doesn’t own the house, it holds the creditor-side of the mortgage; the house is owned by the debtor-side of the mortgage and the original owner is long gone and with a huge wedge of loan money in their back pocket paid to them by the debtor with newly created bank funny-money, no? The bank paid the debtor, the debtor paid the original owner, the bank isn’t paying it’s waiting for some real money from the debtor, the fake money is out there in the system.

    The bank repossesses the house, and loses/gains, whatever. Depends on the contract and the current value of the house.



  5. Yes Ayn Rand should not have thrown out the word “libertarian” in politics with such contempt (of course the lady kept it in philosophy – never denying being a libertarian in the sense of being a foe of the determinists). However, the lady was provoked (repeatedly) by the Rothbardian “left and right join hands” stuff (basically “libertarians for Uncle Ho and Mao”) and got pissed off (if I may use the expression). Had Rand stopped looking at these people and looked more at the libertarian mainstream (Frank Meyer and co) things might have been rather different.

    On bank credit “money” expansion.

    The “boom” must (must) lead to a “bust”, And when the bust hits – the credit “money” goes away.

    Unless the bankers get a bailout (open or disguised).

    However, as bankers (since Walter Bagehot followers – and far more extreme people, won out) have nearly always got a de facto bailout……..

    “So Paul – when you say the bust gets rid of the extra “money” you are really stuck in the 19th century”.

    Guilty as charged.

    I hang my head in shame.



  6. Actually I think that Rothbard is the best one to read on money and banking – he took what Mises said and expressed it more clearly (and developed it logically). As for Hayek – and here I am going to make some people gasp with horror, I do not rate him that highely on money and banking. Certainly he is light years better than the Keynesians – but there are big gaps in his thought.

    I often disagree with Rothbard (on all sorts of historical and political stuff) – but I also believe him to have been the best writer on money and banking (and the history of economic thought) in the 20th century.



  7. Actually I like that two volume work to the supposed “third volume” (that came out after the 1960s) “Power and Market” (which shows signs of the over simplefied dogmatic thinking that hit Rothbard). The move from economics to political preaching can be seen.

    However, his late works on the history of economics are very good. As are little works such as “What had the government done with our money?” and “The Mystery of Banking” and The Case for a 100% Gold Dollar.



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