Re footnote 1: “interest paid” on a bank loan is not “destroyed”; it sticks to the banker’s fingers, like the 25 bushels of wheat that end up in Eve’s hands in your scenario.
Alice may have had her loan interest offset by Eve’s purchase of wheat, but she ultimately paid the bank’s interest with wheat worth £25.
I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it.
As I summarise the outcome of your scenario, Eve spent the bank’s profit (her £25 dividend) to repay the interest-free loan she used to buy £25 worth of Alice’s wheat, so that Alice could pay the £25 interest on the £1,000 loan from the bank, thus replacing the “profit” previously extracted by Eve as a dividend.
Do you mean that the bank [Eve] gave Alice the £25 so she could pay the bank the £25 interest she owed it? And did that £25 come out of the bank’s “equity”?
If so, that would mean “everyone is definitely better off” except the bank, which won’t survive if Eve’s malfeasance persists. Does Eve go to jail for snaffling £25 of bank equity under false pretences?
On reflection, your “breakthrough” doesn’t prove “that banks charging interest can be sustainable”. It sounds more like the perfect argument for ABOLISHING interest charges on all loans of credit – and jailing self-serving, sociopathic bankers.
Basically, if you pay someone with their own IOU, the IOU is destroyed. (It becomes their debt to themself, which is meaningless). So if you use your current account balance to pay interest, it's just destroyed. Deposits decrease and the interest is no longer owed.
"Alice [...] ultimately paid the bank’s interest with wheat worth £25"
Yes, ultimately it all comes back to the real economy. But the focus of the article is that banks charging interest doesn't make it impossible for borrowers to pay their debts to banks.
"I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it. "
She's the sole owner of the bank. She can call an EGM where she tables a motion for the dividend to be paid, and then vote in favour of it.
Yes, she's received 25 bushels of wheat, but that is her profit for owning the bank which provided the liquidity service to Alice. Without providing that service, everyone would have ended up worse off.
I can't understand why you think there's malfeasance and false pretences by Eve. As sole shareholder, she's entitled to the difference between the firm's assets and liabilities. How can it be "snaffling" to have the bank pay that to her as a dividend? And why would you think the bank won't survive?
And what's all this about "jailing self-serving, sociopathic bankers"? What have you got against Eve? She's provided a useful service to Alice, risked losing her car, and she gets to eat some bread as a result.
If interest were abolished on bank lending, banks would have literally no income. All operating costs and all defaults would be losses to the bank. That doesn't work, and is unjust.
Your “Footnote 1” is definitely wrong. The £25 interest is not destroyed when repaid (but it is created, ex nihilo, in the beginning!).
As a non-material form of “credit” in the bank’s records, it always has “two faces,” one looking towards the bank and the other towards Alice, until every “aspect” of it is finally “deleted” from all records.
Journal entries when it’s “created”:
£25 Dr Alice’s loan account [bank asset]
£25 Cr Interest Income [bank equity]
Journal entries when it’s “paid”
£25Dr Cash or Bank account [bank asset]
£25Cr Alice’s loan account [bank asset]
When paid by Alice, both of its “faces” change. The £25Cr cancels the £25Dr on Alice’s Loan Account statement. The bank has it recorded as “a [£25Dr] asset in its books” or “[£25 cash] in its vault”. The interest debt no longer faces Alice, and the bank has “captured” the value of it in its hands in whichever form Alice paid it.
Interestingly, rather than “destruction” at the end of the process, the beginning of this process appears to be another form of “credit creation” [From the bank's perspective that means "debit creation";)].
Perhaps we should think of credit as non-material all the time and use appropriate words to enhance that thought. I’d suggest using “erased” [for accounts on paper] or “deleted” [for accounts on computer], “defaced” or “melted” [for coins] and “incinerated” [for paper/plastic money].
Footnote 1 is absolutely correct in the most common case of Alice paying the interest with £25 of the balance in her current account. If you're right that interest charged is normally accumulated in Alice's loan account, the accounting in your representation would be:
£25Cr Alice’s loan account [bank asset]
£25Dr Alice's current account [bank liability]
That is, Alice has £25 less to spend in her current account, and nobody else has a corresponding increase. It's a contraction of the bank's balance sheet: assets↓ and liabilities↓.
What you showed would be correct if Alice pays the interest by handing over £25 of cash. But that would be unusual.
As I've said, if you pay your creditor using the creditor's own IOU, it destroys the IOU (as well as your own IOU). If you pay a creditor with a third party IOU, it *transfers* that IOU (and destroys your own IOU).
This should not be controversial: there is no other accounting which makes sense. You're not claiming that Alice paying the bank using her current account balance can increase how much cash the bank has are you? I'm sure the central bank would want a word about that. ;-)
I certainly agree that we should think of credit as non-material, which is what I've done consistently throughout this blog. A debt is conceptually different from the medium used for evidence of the debt, which is of little significance economically. If I hand over £10 cash to the Bank of England as a gift, its liabilities are *immediately* reduced by £10, whether it incinerates the plastic note now or later, or retains it to reissue. The creation/destruction of the *representation* (the physical banknote) isn't interesting economically. What really matters is the point at which the BoE becomes a debtor for a new debt (which is evidenced by the issuance of a note, or simply crediting a liability account) or stops being a debtor for an existing debt (which is evidenced by the receipt/destruction of a note, or simply debiting a liability account).
You know more about BoE internal workings than I and I appreciate your insight into money and credit creation/destruction. Your “IOU destruction” comments are also valid (but irrelevant here), and my journal entry, “£25Dr Cash or Bank account”, shows options open for Eve to accumulate her loot; it obviously can’t dictate how Alice opts to pay the interest.
You seem to have forgotten that Alice can’t pay the interest because her current account is empty, having repaid her £1,000 loan. “Alice … doesn’t have any money” undermines your alternative journal entries; so, my “definitely wrong” trumps your “absolutely correct” 😉, and Eve’s “£25 Dr interest” is accumulated in a bank asset account, not destroyed. Only Alice’s “£25 Cr payment” is erased in the payment process.
But that’s getting away from the “Money as Debt” filmmaker’s point you’re determined to debunk here.
Eve calculates I = £25 and books that to Alice’s loan account, posting it in the LH column as “Accrued interest”. Alice’s debit balance grows from £0.00 Dr to £25.00 Dr. The matching £25.00 Cr is posted to “Accrued Interest” [E], the account that will, one day, contribute to whichever account ends up being debited to pay Eve’s £25 dividend; but that will only happen after a dividend has been declared.
And right here, at this precise moment, there’s a physical and logical “Catch 22” that you refuse to recognise.
Eve is not allowed to declare that dividend unless she has the wherewithal to pay it. Bank regulators require sensible, as well as honest, accounting. Eve would be unwise to promise shareholders a dividend payment on the strength of an “accrued [but UNPAID] interest” accounting item. You’ll see why when you think through this physical situation logically. Please don’t speculate about what you think Eve MIGHT be able to do, hypothetically. I simply assume she wants to keep her banking licence.
Eve can’t (and would be foolish to) act on the ASSUMPTION that Alice will pay that interest, for a very simple reason; Alice has no money and cannot pay it! That’s a physical fact built into your model description! It’s not a fantastic story made up by those “Money as Debt” filmmakers.
That’s why regulators enforce that rule, unless you believe bank regulators are also part of a conspiracy by those filmmakers against your theory. So, Alice MUST pay Eve the interest BEFORE Eve can even declare (let alone pay) her shareholders a dividend [assuming a real bank with real shareholders, for the purposes of my argument].
It seems you’ve been determined to prove those “Money as Debt” filmmakers wrong, and that interest can be created some “other way besides lending”, since 2008. Yet I think you agree that when the principal of Alice’s loan was repaid, the £1,000 Dr in Alice’s loan account was digitally erased when her £1,000 Cr was mathematically added to it. And that necessarily implies she can’t pay that interest UNLESS you can find a legitimate way for Eve to put £25 in Alice’s possession, either as credit or cash [without lending it to her!!!].
At the moment she can’t, logically, physically, and legally, and you are, as they say, in logical and physical checkmate. With no money to her name, Alice can’t pay interest, so Eve can’t even declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice can pay the interest Eve needs to declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice ….
That looks like a “vicious circle”, from which there is only one logical escape route. After ~17 years, you must be nearing the point of giving up this quest?
"You seem to have forgotten that Alice can’t pay the interest because her current account is empty, having repaid her £1,000 loan."
The footnote isn't talking about this specific start-from-scratch example, but in general. Whenever someone pays interest using the balance in their account, the balance is just reduced: it's a "write off debt" action (green-to-pink). It would be nice if you'd acknowledge that, because you keep changing the subject.
“Alice … doesn’t have any money” undermines your alternative journal entries; so, my “definitely wrong” trumps your “absolutely correct” 😉, and Eve’s “£25 Dr interest” is accumulated in a bank asset account, not destroyed. Only Alice’s “£25 Cr payment” is erased in the payment process.
It's hard to follow your argument when you don't distinguish Eve, the person, from the corporation "Bank of Eve".
Anyway, the bank's "£25 Dr interest" is a bank asset, yes. That's not what I'm talking about. It's a debt owed by Alice to the bank, and it's not money. What I'm saying is that when Alice uses the £25 in her current account (which is a debt owed by the bank to Alice) to pay that debt, *the £25 in her account* is destroyed. That is to say that Alice pays by allowing the bank to reduce its liabilities to her. In exchange, the bank agrees to reduce Alice's interest liability to it.
The money in Alice's account is destroyed when she pays the interest charge with it. Please say whether you agree or not, and if not, show me what you think is the accounting for Alice paying the interest charge with this £25 in her current account.
[...]
"Eve is not allowed to declare that dividend unless she has the wherewithal to pay it."
What I'm showing here is the simplest possible scenario. The constraints you mention are only legal/regulatory. In principle, there's no reason why Eve can't order the bank to pay her a dividend when its equity is positive. Of course, in reality, banks have capital, so if you want to make it more realistic, without affecting the reasoning in any way, you could say that before anything else happens, Eve initially capitalises the bank by transferring ownership of 50kg of gold bullion to it. Now there's absolutely no problem with the bank declaring a dividend because it's wildly overcapitalised, and the argument I make in this article doesn't change in the slightest.
"It seems you’ve been determined to prove those “Money as Debt” filmmakers wrong, and that interest can be created some “other way besides lending”, since 2008. Yet I think you agree that when the principal of Alice’s loan was repaid, the £1,000 Dr in Alice’s loan account was digitally erased when her £1,000 Cr was mathematically added to it. And that necessarily implies she can’t pay that interest UNLESS you can find a legitimate way for Eve to put £25 in Alice’s possession, either as credit or cash [without lending it to her!!!]."
Correct, and that's exactly what I do in this article - by the bank paying Eve a dividend, which she can use to buy something from Alice.
"At the moment she can’t, logically, physically, and legally, and you are, as they say, in logical and physical checkmate."
Physically is irrelevant since this money isn't physical. Logically she clearly can: that's precisely what the scenario shows. Legally can be covered as above: with Eve capitalising the bank with something tangible and valuable.
"That looks like a “vicious circle”, from which there is only one logical escape route. After ~17 years, you must be nearing the point of giving up this quest? "
This requires a long response, so I’ll break it into parts.
No.1, Re: Incorrectness of Footnote 1. I happily acknowledge TWO "write off debt" actions (green-to-pink) occur, and two annihilation events, but there’s more to it than that.
Your footnote implies “interest paid” is destroyed *the same way* the principal is destroyed, and that means total and complete *annihilation*, never to be seen again, gone, kaput!!
Such “extinction events” look like this: £1,000 Dr + £1,000 Cr => 0; and this £25 Dr + £25 Cr => 0, and that’s what I think you’re describing.
But the “£25 interest” survives that second “extinction event” by *moving* from the asset account, where it looks like “£25 Dr [A]”, and changing its status to “£25 Cr [E]” in an equity account.
The “£25 Dr” interest has been “upgraded” to the status of a credit item in an equity account, not “annihilated”.
Two quick thoughts, which might be wrong. The bank made no profit if Alice’s £25 of interest was “destroyed” when she paid it. So, didn’t Eve’s £25 "dividend" have to come from [E]? That's why the bank is going to fail.
It's important to recognise that profit doesn't mean an increase in the amount of cash. It's an increase in *equity*. If a borrower has a £25 balance in their current account (which is a liability of the bank), and the customer agrees that this balance can be destroyed as payment of the interest due, then the bank's liabilities decrease by £25, so its equity *increases* by £25.
Now it's true that the interest due (bank's asset) also decreases by £25 at that point, but that's only undoing the charging of the interest when interest due increases by £25, so overall the bank's equity increases by £25 due to the interest on the loan. This £25 increase allows Eve to take a £25 dividend.
So, point 3. in your simplified “money creation” scheme [Money and Banking (5)] was a mistake? You didn’t mean money? And it simply wasn’t destroyed, in the literal sense of that word?
“3. The borrowers use the money to pay the interest (which actually destroys the money). The outcome is identical to the 5-stage process.”
Point 3 was correct. The money (bank credit) was created when the bank credited Eve's current account, it was transferred to Alice (in exchange for wheat), and then it was destroyed again when Alice used it to pay the interest on her loan.
The bank's profit was a result of Alice agreeing to the bank charging £25 interest on the loan. That was an asset of the bank (increasing its RNW) and a liability of Alice (decreasing her RNW). This increase in the bank's RNW was what allowed the bank to pay a £25 dividend to Eve.
If “the bank’s [£25] profit was a result of Alice agreeing to the bank charging [£25] interest on the loan”, then her promise was indeed valued at £1,025 and she will be credited with £1,025 for that deposit. That would make a lot of sense if you’re saying that Alice’s initial promise was actually a £1,025 promise, not a £1,000 promise, and I like that idea.
That would be in keeping with the “Mehrling IOU swap” concept, where each party offsets any “interest liability” (for the use of one IOU on one side) with an equal “interest liability” (for the use of the other IOU on the other side) - perfect symmetry!
But it means that Alice created that interest with her promise to pay it, and having it in her account would enable Alice to pay the interest when it fell due (no wheat sale to the bank needed).
So how come the bank ends up with £25 worth of her wheat as well?
I wouldn't say it lends credit. I'd say it lends by crediting the borrower.
Can you confirm that you are fine with a bank lending $1,000 by handing over $1,000 in currency (in exchange for the borrower's promise to repay)? Are you fine with the the borrower then depositing that $1,000 in their current account at the lending bank?
That’s a good response. Your description of the accounting action is correct but incomplete - and you still believe banks can “lend” whatever [it] is. The full description is crediting a liability account in the borrower’s name plus the other end of the transaction: debiting an asset account in the customer’s name. The latter is where the fraudulent deception happens and is concealed.
Do I need to answer your last question? I also prefer the convenience of “credit”, but [it] never, ever belonged to any bank and pretending to “lend” us what we already own, as creditors, is based on demonstrable accounting fraud, the evidence of which I've published at https://patcusack.substack.com/.
(Let's imagine both arrows are for $100 rather than a piece of amber).
The arrow pointing away from the bank is the credit: increasing the balance in Alice's account by $100.
The arrow pointing towards the bank is the debit: increasing the bank's "loans" assets by $100.
Each is writing an IOU to the other for $100. Apart from any interest (or fee), these are the only accounting entries, and they are directly represented in the diagram.
And, yes, please do answer my final question. I'm not claiming that the bank's liability belonged to it, and neither is the bank. Just like the loan debt was never owned by the borrower. It's just a swap of new IOUs. The bank created a new asset for Alice (and liability for itself), and Alice created a new asset for the bank (and liability for herself). Apart from the interest, it's completely symmetrical, so if the bank is committing fraud, then so is Alice. But I don't see how there's anything fraudulent about writing an IOU if you're honest with the debtor about your ability and willingness to pay it.
1: “I'd say it lends by crediting the borrower” [Good; but incomplete]
2: “I'd say it lends by crediting the borrower [and debiting itself].” [Better; more complete, but still incorrect (see below for correction)]
Q1: “Can you confirm that you are fine with a bank lending $1,000 by handing over $1,000 in currency (in exchange for the borrower's promise to repay)?” A1: Yes, assuming “currency” excludes “credit”.
Q2: “Are you fine with the the [sic] borrower then depositing that $1,000 in their current account at the lending bank?” A2: Yes.
“I'm not claiming that the bank's liability belonged to it, and neither is the bank”. I know you aren’t, but you act as though you believe it does, and you can’t speak for the ANZ Bank, which acts as though it does. See its own words in my articles #2 and #6.
Regarding the “completely symmetrical” IOU swap, I not only accept that description, but I also understand its implications. Perry Mehling certainly doesn’t understand those implications, and neither do you. Would you or Perry demand (or pay) an “interest payment” for swapping a $100 note for two $50 notes? Of course not. Why not? Because it’s a “swap of completely symmetrical IOUs”. Even though Eve’s IOU and Alice’s IOU are completely symmetrical, as you say, you expect Alice to pay Eve an additional £25. Eve’s demand for an additional £25 from Alice implies that Eve’s IOU is “more symmetrical(?)” than Alice’s.
“… if the bank is committing fraud, then so is Alice.” False equivalence: an unjustified slur on good-hearted Alice (who paid Bob £5/b and only got £1/b on selling to him). Alice is not demanding that Eve pay £25 interest for borrowing Alice’s IOU. What does that say about “complete symmetry”?
[Note: For simplicity, my analyses of all three banks’ “loan” and “access” accounts deliberately ignore “equity”, as establishing a "loan" doesn't touch a bank's equity.]
Yes, I made a mistake. Eve maintained [E] unchanged. But she acquired £25 worth of wheat without paying for it. That’s the malfeasance. [Even so, “withdrawing” £25 of equity, to enable Alice to replenish it for her later, does seem “unreal”.]
I’ve tried to “understand exactly what’s happening in every step” of this “much simpler problem” but remain puzzled by its complicated “simplicity”.
I've never understood, for example, how Bob might get hold of Eve’s "spare" car in the original scenario, where: “Eve actually has a spare car, and she’d be prepared to exchange it for £1,000 if Bob can’t use it to buy wheat.”
Now, I don’t understand how Eve ever “risked losing her car” to anyone [above]. She had an interest-free loan from her own bank, which pays it off for her by declaring a dividend, equal to the interest Eve is charging Alice for her £1,000 “loan”. [No car needed.]
This caused Eve’s equity [E] to INCREASE [thanks to Alice], after it had DECREASED [thanks to Eve paying Eve, so Eve could buy wheat from Alice, so Alice could pay Eve the interest she owed Eve].
Now, admittedly, that’s much simpler than “the whole economy”, but I never imagined any such goings on in any bank. If this were operating in reality, it would be obvious to everyone that every bank was obtaining goods from the community to the value of the interest we pay for “credit” - which we already own as creditors - and still maintain its [E] unchanged.
When people notice her bank is acquiring wheat without incurring a commensurate expense, Eve will be lucky if she remains alive, let alone in charge of her bank.
It may be that Bob’s <not being able to buy Alice’s wheat with Eve’s car> has had something to do with it, but became lost somewhere in your “Continuity Department”. Please don’t bother trying to explain; I truly don’t want to know.
Yes - in fact I don't think there was even a problem to eliminate. Equity is a record of how much of the firm's assets would be left if all the liabilities were paid, and it belongs to the shareholders. Paying a dividend is just distributing some of this excess without having to wind up the firm.
Re footnote 1: “interest paid” on a bank loan is not “destroyed”; it sticks to the banker’s fingers, like the 25 bushels of wheat that end up in Eve’s hands in your scenario.
Alice may have had her loan interest offset by Eve’s purchase of wheat, but she ultimately paid the bank’s interest with wheat worth £25.
I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it.
As I summarise the outcome of your scenario, Eve spent the bank’s profit (her £25 dividend) to repay the interest-free loan she used to buy £25 worth of Alice’s wheat, so that Alice could pay the £25 interest on the £1,000 loan from the bank, thus replacing the “profit” previously extracted by Eve as a dividend.
Do you mean that the bank [Eve] gave Alice the £25 so she could pay the bank the £25 interest she owed it? And did that £25 come out of the bank’s “equity”?
If so, that would mean “everyone is definitely better off” except the bank, which won’t survive if Eve’s malfeasance persists. Does Eve go to jail for snaffling £25 of bank equity under false pretences?
On reflection, your “breakthrough” doesn’t prove “that banks charging interest can be sustainable”. It sounds more like the perfect argument for ABOLISHING interest charges on all loans of credit – and jailing self-serving, sociopathic bankers.
I address when money (or other debts) are destroyed here:
https://www.economics21st.com/i/154262075/does-paying-interest-really-destroy-the-money-used
Basically, if you pay someone with their own IOU, the IOU is destroyed. (It becomes their debt to themself, which is meaningless). So if you use your current account balance to pay interest, it's just destroyed. Deposits decrease and the interest is no longer owed.
"Alice [...] ultimately paid the bank’s interest with wheat worth £25"
Yes, ultimately it all comes back to the real economy. But the focus of the article is that banks charging interest doesn't make it impossible for borrowers to pay their debts to banks.
"I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it. "
She's the sole owner of the bank. She can call an EGM where she tables a motion for the dividend to be paid, and then vote in favour of it.
Yes, she's received 25 bushels of wheat, but that is her profit for owning the bank which provided the liquidity service to Alice. Without providing that service, everyone would have ended up worse off.
I can't understand why you think there's malfeasance and false pretences by Eve. As sole shareholder, she's entitled to the difference between the firm's assets and liabilities. How can it be "snaffling" to have the bank pay that to her as a dividend? And why would you think the bank won't survive?
And what's all this about "jailing self-serving, sociopathic bankers"? What have you got against Eve? She's provided a useful service to Alice, risked losing her car, and she gets to eat some bread as a result.
If interest were abolished on bank lending, banks would have literally no income. All operating costs and all defaults would be losses to the bank. That doesn't work, and is unjust.
Your “Footnote 1” is definitely wrong. The £25 interest is not destroyed when repaid (but it is created, ex nihilo, in the beginning!).
As a non-material form of “credit” in the bank’s records, it always has “two faces,” one looking towards the bank and the other towards Alice, until every “aspect” of it is finally “deleted” from all records.
Journal entries when it’s “created”:
£25 Dr Alice’s loan account [bank asset]
£25 Cr Interest Income [bank equity]
Journal entries when it’s “paid”
£25Dr Cash or Bank account [bank asset]
£25Cr Alice’s loan account [bank asset]
When paid by Alice, both of its “faces” change. The £25Cr cancels the £25Dr on Alice’s Loan Account statement. The bank has it recorded as “a [£25Dr] asset in its books” or “[£25 cash] in its vault”. The interest debt no longer faces Alice, and the bank has “captured” the value of it in its hands in whichever form Alice paid it.
Interestingly, rather than “destruction” at the end of the process, the beginning of this process appears to be another form of “credit creation” [From the bank's perspective that means "debit creation";)].
Perhaps we should think of credit as non-material all the time and use appropriate words to enhance that thought. I’d suggest using “erased” [for accounts on paper] or “deleted” [for accounts on computer], “defaced” or “melted” [for coins] and “incinerated” [for paper/plastic money].
Footnote 1 is absolutely correct in the most common case of Alice paying the interest with £25 of the balance in her current account. If you're right that interest charged is normally accumulated in Alice's loan account, the accounting in your representation would be:
£25Cr Alice’s loan account [bank asset]
£25Dr Alice's current account [bank liability]
That is, Alice has £25 less to spend in her current account, and nobody else has a corresponding increase. It's a contraction of the bank's balance sheet: assets↓ and liabilities↓.
What you showed would be correct if Alice pays the interest by handing over £25 of cash. But that would be unusual.
As I've said, if you pay your creditor using the creditor's own IOU, it destroys the IOU (as well as your own IOU). If you pay a creditor with a third party IOU, it *transfers* that IOU (and destroys your own IOU).
This should not be controversial: there is no other accounting which makes sense. You're not claiming that Alice paying the bank using her current account balance can increase how much cash the bank has are you? I'm sure the central bank would want a word about that. ;-)
I certainly agree that we should think of credit as non-material, which is what I've done consistently throughout this blog. A debt is conceptually different from the medium used for evidence of the debt, which is of little significance economically. If I hand over £10 cash to the Bank of England as a gift, its liabilities are *immediately* reduced by £10, whether it incinerates the plastic note now or later, or retains it to reissue. The creation/destruction of the *representation* (the physical banknote) isn't interesting economically. What really matters is the point at which the BoE becomes a debtor for a new debt (which is evidenced by the issuance of a note, or simply crediting a liability account) or stops being a debtor for an existing debt (which is evidenced by the receipt/destruction of a note, or simply debiting a liability account).
You know more about BoE internal workings than I and I appreciate your insight into money and credit creation/destruction. Your “IOU destruction” comments are also valid (but irrelevant here), and my journal entry, “£25Dr Cash or Bank account”, shows options open for Eve to accumulate her loot; it obviously can’t dictate how Alice opts to pay the interest.
You seem to have forgotten that Alice can’t pay the interest because her current account is empty, having repaid her £1,000 loan. “Alice … doesn’t have any money” undermines your alternative journal entries; so, my “definitely wrong” trumps your “absolutely correct” 😉, and Eve’s “£25 Dr interest” is accumulated in a bank asset account, not destroyed. Only Alice’s “£25 Cr payment” is erased in the payment process.
But that’s getting away from the “Money as Debt” filmmaker’s point you’re determined to debunk here.
Eve calculates I = £25 and books that to Alice’s loan account, posting it in the LH column as “Accrued interest”. Alice’s debit balance grows from £0.00 Dr to £25.00 Dr. The matching £25.00 Cr is posted to “Accrued Interest” [E], the account that will, one day, contribute to whichever account ends up being debited to pay Eve’s £25 dividend; but that will only happen after a dividend has been declared.
And right here, at this precise moment, there’s a physical and logical “Catch 22” that you refuse to recognise.
Eve is not allowed to declare that dividend unless she has the wherewithal to pay it. Bank regulators require sensible, as well as honest, accounting. Eve would be unwise to promise shareholders a dividend payment on the strength of an “accrued [but UNPAID] interest” accounting item. You’ll see why when you think through this physical situation logically. Please don’t speculate about what you think Eve MIGHT be able to do, hypothetically. I simply assume she wants to keep her banking licence.
Eve can’t (and would be foolish to) act on the ASSUMPTION that Alice will pay that interest, for a very simple reason; Alice has no money and cannot pay it! That’s a physical fact built into your model description! It’s not a fantastic story made up by those “Money as Debt” filmmakers.
That’s why regulators enforce that rule, unless you believe bank regulators are also part of a conspiracy by those filmmakers against your theory. So, Alice MUST pay Eve the interest BEFORE Eve can even declare (let alone pay) her shareholders a dividend [assuming a real bank with real shareholders, for the purposes of my argument].
It seems you’ve been determined to prove those “Money as Debt” filmmakers wrong, and that interest can be created some “other way besides lending”, since 2008. Yet I think you agree that when the principal of Alice’s loan was repaid, the £1,000 Dr in Alice’s loan account was digitally erased when her £1,000 Cr was mathematically added to it. And that necessarily implies she can’t pay that interest UNLESS you can find a legitimate way for Eve to put £25 in Alice’s possession, either as credit or cash [without lending it to her!!!].
At the moment she can’t, logically, physically, and legally, and you are, as they say, in logical and physical checkmate. With no money to her name, Alice can’t pay interest, so Eve can’t even declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice can pay the interest Eve needs to declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice ….
That looks like a “vicious circle”, from which there is only one logical escape route. After ~17 years, you must be nearing the point of giving up this quest?
"You seem to have forgotten that Alice can’t pay the interest because her current account is empty, having repaid her £1,000 loan."
The footnote isn't talking about this specific start-from-scratch example, but in general. Whenever someone pays interest using the balance in their account, the balance is just reduced: it's a "write off debt" action (green-to-pink). It would be nice if you'd acknowledge that, because you keep changing the subject.
“Alice … doesn’t have any money” undermines your alternative journal entries; so, my “definitely wrong” trumps your “absolutely correct” 😉, and Eve’s “£25 Dr interest” is accumulated in a bank asset account, not destroyed. Only Alice’s “£25 Cr payment” is erased in the payment process.
It's hard to follow your argument when you don't distinguish Eve, the person, from the corporation "Bank of Eve".
Anyway, the bank's "£25 Dr interest" is a bank asset, yes. That's not what I'm talking about. It's a debt owed by Alice to the bank, and it's not money. What I'm saying is that when Alice uses the £25 in her current account (which is a debt owed by the bank to Alice) to pay that debt, *the £25 in her account* is destroyed. That is to say that Alice pays by allowing the bank to reduce its liabilities to her. In exchange, the bank agrees to reduce Alice's interest liability to it.
The money in Alice's account is destroyed when she pays the interest charge with it. Please say whether you agree or not, and if not, show me what you think is the accounting for Alice paying the interest charge with this £25 in her current account.
[...]
"Eve is not allowed to declare that dividend unless she has the wherewithal to pay it."
What I'm showing here is the simplest possible scenario. The constraints you mention are only legal/regulatory. In principle, there's no reason why Eve can't order the bank to pay her a dividend when its equity is positive. Of course, in reality, banks have capital, so if you want to make it more realistic, without affecting the reasoning in any way, you could say that before anything else happens, Eve initially capitalises the bank by transferring ownership of 50kg of gold bullion to it. Now there's absolutely no problem with the bank declaring a dividend because it's wildly overcapitalised, and the argument I make in this article doesn't change in the slightest.
"It seems you’ve been determined to prove those “Money as Debt” filmmakers wrong, and that interest can be created some “other way besides lending”, since 2008. Yet I think you agree that when the principal of Alice’s loan was repaid, the £1,000 Dr in Alice’s loan account was digitally erased when her £1,000 Cr was mathematically added to it. And that necessarily implies she can’t pay that interest UNLESS you can find a legitimate way for Eve to put £25 in Alice’s possession, either as credit or cash [without lending it to her!!!]."
Correct, and that's exactly what I do in this article - by the bank paying Eve a dividend, which she can use to buy something from Alice.
"At the moment she can’t, logically, physically, and legally, and you are, as they say, in logical and physical checkmate."
Physically is irrelevant since this money isn't physical. Logically she clearly can: that's precisely what the scenario shows. Legally can be covered as above: with Eve capitalising the bank with something tangible and valuable.
"That looks like a “vicious circle”, from which there is only one logical escape route. After ~17 years, you must be nearing the point of giving up this quest? "
There's no difficulty, no "vicious circle".
This requires a long response, so I’ll break it into parts.
No.1, Re: Incorrectness of Footnote 1. I happily acknowledge TWO "write off debt" actions (green-to-pink) occur, and two annihilation events, but there’s more to it than that.
Your footnote implies “interest paid” is destroyed *the same way* the principal is destroyed, and that means total and complete *annihilation*, never to be seen again, gone, kaput!!
Such “extinction events” look like this: £1,000 Dr + £1,000 Cr => 0; and this £25 Dr + £25 Cr => 0, and that’s what I think you’re describing.
But the “£25 interest” survives that second “extinction event” by *moving* from the asset account, where it looks like “£25 Dr [A]”, and changing its status to “£25 Cr [E]” in an equity account.
The “£25 Dr” interest has been “upgraded” to the status of a credit item in an equity account, not “annihilated”.
Two quick thoughts, which might be wrong. The bank made no profit if Alice’s £25 of interest was “destroyed” when she paid it. So, didn’t Eve’s £25 "dividend" have to come from [E]? That's why the bank is going to fail.
It's important to recognise that profit doesn't mean an increase in the amount of cash. It's an increase in *equity*. If a borrower has a £25 balance in their current account (which is a liability of the bank), and the customer agrees that this balance can be destroyed as payment of the interest due, then the bank's liabilities decrease by £25, so its equity *increases* by £25.
Now it's true that the interest due (bank's asset) also decreases by £25 at that point, but that's only undoing the charging of the interest when interest due increases by £25, so overall the bank's equity increases by £25 due to the interest on the loan. This £25 increase allows Eve to take a £25 dividend.
The bank's not going to fail.
So, point 3. in your simplified “money creation” scheme [Money and Banking (5)] was a mistake? You didn’t mean money? And it simply wasn’t destroyed, in the literal sense of that word?
“3. The borrowers use the money to pay the interest (which actually destroys the money). The outcome is identical to the 5-stage process.”
Point 3 was correct. The money (bank credit) was created when the bank credited Eve's current account, it was transferred to Alice (in exchange for wheat), and then it was destroyed again when Alice used it to pay the interest on her loan.
The bank's profit was a result of Alice agreeing to the bank charging £25 interest on the loan. That was an asset of the bank (increasing its RNW) and a liability of Alice (decreasing her RNW). This increase in the bank's RNW was what allowed the bank to pay a £25 dividend to Eve.
If “the bank’s [£25] profit was a result of Alice agreeing to the bank charging [£25] interest on the loan”, then her promise was indeed valued at £1,025 and she will be credited with £1,025 for that deposit. That would make a lot of sense if you’re saying that Alice’s initial promise was actually a £1,025 promise, not a £1,000 promise, and I like that idea.
That would be in keeping with the “Mehrling IOU swap” concept, where each party offsets any “interest liability” (for the use of one IOU on one side) with an equal “interest liability” (for the use of the other IOU on the other side) - perfect symmetry!
But it means that Alice created that interest with her promise to pay it, and having it in her account would enable Alice to pay the interest when it fell due (no wheat sale to the bank needed).
So how come the bank ends up with £25 worth of her wheat as well?
As bank "lending" of credit is fraudulent, they'd better get used to it.
I wouldn't say it lends credit. I'd say it lends by crediting the borrower.
Can you confirm that you are fine with a bank lending $1,000 by handing over $1,000 in currency (in exchange for the borrower's promise to repay)? Are you fine with the the borrower then depositing that $1,000 in their current account at the lending bank?
That’s a good response. Your description of the accounting action is correct but incomplete - and you still believe banks can “lend” whatever [it] is. The full description is crediting a liability account in the borrower’s name plus the other end of the transaction: debiting an asset account in the customer’s name. The latter is where the fraudulent deception happens and is concealed.
Do I need to answer your last question? I also prefer the convenience of “credit”, but [it] never, ever belonged to any bank and pretending to “lend” us what we already own, as creditors, is based on demonstrable accounting fraud, the evidence of which I've published at https://patcusack.substack.com/.
I don't know how you can argue it's incomplete. Here's an example where a bank "lends", without taking into account the obligation to pay interest:
https://www.economics21st.com/i/133430487/new-loan
(Let's imagine both arrows are for $100 rather than a piece of amber).
The arrow pointing away from the bank is the credit: increasing the balance in Alice's account by $100.
The arrow pointing towards the bank is the debit: increasing the bank's "loans" assets by $100.
Each is writing an IOU to the other for $100. Apart from any interest (or fee), these are the only accounting entries, and they are directly represented in the diagram.
And, yes, please do answer my final question. I'm not claiming that the bank's liability belonged to it, and neither is the bank. Just like the loan debt was never owned by the borrower. It's just a swap of new IOUs. The bank created a new asset for Alice (and liability for itself), and Alice created a new asset for the bank (and liability for herself). Apart from the interest, it's completely symmetrical, so if the bank is committing fraud, then so is Alice. But I don't see how there's anything fraudulent about writing an IOU if you're honest with the debtor about your ability and willingness to pay it.
1: “I'd say it lends by crediting the borrower” [Good; but incomplete]
2: “I'd say it lends by crediting the borrower [and debiting itself].” [Better; more complete, but still incorrect (see below for correction)]
Q1: “Can you confirm that you are fine with a bank lending $1,000 by handing over $1,000 in currency (in exchange for the borrower's promise to repay)?” A1: Yes, assuming “currency” excludes “credit”.
Q2: “Are you fine with the the [sic] borrower then depositing that $1,000 in their current account at the lending bank?” A2: Yes.
“I'm not claiming that the bank's liability belonged to it, and neither is the bank”. I know you aren’t, but you act as though you believe it does, and you can’t speak for the ANZ Bank, which acts as though it does. See its own words in my articles #2 and #6.
Regarding the “completely symmetrical” IOU swap, I not only accept that description, but I also understand its implications. Perry Mehling certainly doesn’t understand those implications, and neither do you. Would you or Perry demand (or pay) an “interest payment” for swapping a $100 note for two $50 notes? Of course not. Why not? Because it’s a “swap of completely symmetrical IOUs”. Even though Eve’s IOU and Alice’s IOU are completely symmetrical, as you say, you expect Alice to pay Eve an additional £25. Eve’s demand for an additional £25 from Alice implies that Eve’s IOU is “more symmetrical(?)” than Alice’s.
“… if the bank is committing fraud, then so is Alice.” False equivalence: an unjustified slur on good-hearted Alice (who paid Bob £5/b and only got £1/b on selling to him). Alice is not demanding that Eve pay £25 interest for borrowing Alice’s IOU. What does that say about “complete symmetry”?
It seems you haven’t read my #6 “Universal Deceit” article, here: https://patcusack.substack.com/p/6-the-universal-deceit-a-one-page. It points to three (3) barefaced accounting lies in the ANZ Bank's [Access] and [Loan] accounts in establishing a $30,000 “loan.” Better images of these account statements appear in article #2, here: https://patcusack.substack.com/i/111202733/forensic-examination
[Note: For simplicity, my analyses of all three banks’ “loan” and “access” accounts deliberately ignore “equity”, as establishing a "loan" doesn't touch a bank's equity.]
Yes, I made a mistake. Eve maintained [E] unchanged. But she acquired £25 worth of wheat without paying for it. That’s the malfeasance. [Even so, “withdrawing” £25 of equity, to enable Alice to replenish it for her later, does seem “unreal”.]
I’ve tried to “understand exactly what’s happening in every step” of this “much simpler problem” but remain puzzled by its complicated “simplicity”.
I've never understood, for example, how Bob might get hold of Eve’s "spare" car in the original scenario, where: “Eve actually has a spare car, and she’d be prepared to exchange it for £1,000 if Bob can’t use it to buy wheat.”
Now, I don’t understand how Eve ever “risked losing her car” to anyone [above]. She had an interest-free loan from her own bank, which pays it off for her by declaring a dividend, equal to the interest Eve is charging Alice for her £1,000 “loan”. [No car needed.]
This caused Eve’s equity [E] to INCREASE [thanks to Alice], after it had DECREASED [thanks to Eve paying Eve, so Eve could buy wheat from Alice, so Alice could pay Eve the interest she owed Eve].
Now, admittedly, that’s much simpler than “the whole economy”, but I never imagined any such goings on in any bank. If this were operating in reality, it would be obvious to everyone that every bank was obtaining goods from the community to the value of the interest we pay for “credit” - which we already own as creditors - and still maintain its [E] unchanged.
When people notice her bank is acquiring wheat without incurring a commensurate expense, Eve will be lucky if she remains alive, let alone in charge of her bank.
It may be that Bob’s <not being able to buy Alice’s wheat with Eve’s car> has had something to do with it, but became lost somewhere in your “Continuity Department”. Please don’t bother trying to explain; I truly don’t want to know.
Another unnecessary adverb: "banks would have *literally* no income". Have you heard about fees-for-service and account-accommodation fees?
If Eve were lawfully entitled to the 25 dividend, would that then eliminate the problem as identified?
Yes - in fact I don't think there was even a problem to eliminate. Equity is a record of how much of the firm's assets would be left if all the liabilities were paid, and it belongs to the shareholders. Paying a dividend is just distributing some of this excess without having to wind up the firm.