the finance industry / wall street

Isn't that Citigroup/Pandit?

― boxall, Tuesday, April 24, 2012 12:20 AM (12 minutes ago) Bookmark Flag Post Permalink

yes

xposts: Ok, I think that makes sense with what I thought to begin with. There was just something confusing to me about the idea of loaning out what is essentially debt. Except in a weird way it seems like the currency ceases to have its debt connotations as it circulates, because people stop expecting "repayment" from the king.

So then what motivates the Bank of England to lend money to the king without interest?

Also, is there kind of an implicit assumption in all this war-borrowing by kings that "Well, of course when we win the war we'll have spoils to repay you"?

They actually loaned it at 8% interest. But they also got a bunch of privileges on top of that.

But if they loaned it at 8% interest then why are the bearer notes interest-free?

Because they kept the vig! Why wouldn't they?

I guess it just sounds like initially it would be hard to convince people to not only take these notes but actually pay interest to the bank of england on them. But I suppose the promise of the king was worth a lot, hence "fiat currency"

To be clear, as I understand it, they didn't pay interest on the notes, they payed interest on loans, which happened to be given in the form of notes (as opposed to, e.g., gold).

important to remember that all this government debt is an asset

That all makes sense. But I think here's what's strange about it: BOE loans the King money. BOE issues "promise to pay" notes to BOE, which BOE in turn can lend out to third parties. But the result is that the King never actually has to repay the principal of his loan.

Sorry, that should say "KING issues 'promise to pay' notes to BOE"

You can learn more about the Bank of England and fiat currency by visiting your local library and looking under Stephenson, Neal.

in terms of trust, prob also remembering England was much smaller then (about 5 million, London half a mil) & traders, merchants, financiers would be way more likely to know each other personally + more able to assess trustworthiness and solidity of these plans - who else is in? Are they stupid? Who do they know?

And people were suspicious of notes I think - they're mocked into the 1730s at least.

(see Pope's Moral Essays, Epistle III)

Well yes, and my understanding is that banknotes under non-central-banking regimes were even more suspect. But I'm just trying to get my mind around the initial transaction and how these notes were created I guess. Like BOE lends money to the King, the King issues promises to pay that he will literally never fulfill, and then BOE lends out those promises. A strange arrangement.

As far as I know the loans were repaid eventually. The notes issued by the B of E were backed either by a claim on the royal debt, or by gold. On the other hand, even while individual loans were typically repayed, often this was accomplished by rolling over the debt into new loans. Think of modern treasury bonds, for example. They all pay off when they come due -- but there's always a large amount outstanding, and part of the issue of new debt goes towards paying off debt coming due. There's nothing especially tied to royal or governmental fiat about this either -- the same thing is true for bonds issued by most companies, or loans made to them.

xp

But they're given sources of government revenue, so there is money coming from the crown.

no hold on I've confused myself.

The legit sources I've seen on a quick google (this is an interesting topic!) don't go into details of exactly what happened to each individual loan, but they do tend to confirm that these were like real loans that not only had interest payments but a genuine claim on principal. The only source for the "never intended to be repaid" characterization is like ron paulish fringe sites.

if I'm reading this right, there's a grant of tunnage and poundage revenue built into the act that's designed to repay those who advance a lump sum.

Like BOE lends money to the King, the King issues promises to pay that he will literally never fulfill

haha the whole point is that king is in fact very likely to fulfill his promise!!

yeah, I'm not used to reading statutes, but looking at the full version i think there are also systems of annuities built into the act - so there's income from various customs sources, and investors get paid back from that.

Thanks for digging up that full version woof. They sure were terrible at spelling in those days though.

So to get back to the original point, I'm just trying to understand whether what Graeber was saying about the origins of British money is accurate and not overly reductive, and more broadly whether the foundations of his ideas about debt and money are really well-grounded.

It's a mix of correct and incorrect, I think. The specific bit you quoted was fine, but then look at this: "Just as the King can never repay his debt to the Bank of England, or else the British currency system would collapse, the US has to maintain a national debt – as indeed, it always has, we've always been in arrears since independence – or there'd be no money. (Or if you want to be technical, private banks would have to make up all the money by making loans, but of course, at the moment, our big problem is that they aren't doing that.)"

And y'know, technically, the debt was payed back as far as I know. But then more debt was borrowed. And there was nothing magically different about a king doing it or some merchant named Joe or whatever doing it except the king had more means to pay it back. And I think he's even more off about the origins of the u.s. national debt since we didn't have a natl. govt. backed currency until like the civil war (though of course there was natl. debt prior to then -- it just wasn't coupled to a natl. currency). And prior to the war of independence the individual colonies already issued paper -- and the crown trying to stop that was one of the events leading up to the american revolution actually. The coinage act (after the revolution) didn't print paper, but produced metal coins with intrinsic value. Meanwhile the first bank of the u.s. only made short-term loans to the govt. and mainly loaned to others.

Ok, that's a digression, but anyway, it sort of makes the point that Graeber plays fast and loose in sort of common ways, and I think he confuses causality sometimes too. I thought there was good material in parts of his book, but I honestly couldn't extract a straightforward set of "ideas about debt and money" except that he's consistently working to put the state front and center, which is a useful corrective to thinking about the market as existing ex-nihilo, but often goes too far.

Just grasp that a fiat currency is much more elastic than a currency pegged to a metal. It increases both the supply and the velocity of money, and therefore it increases and speeds up economic activity. A well-managed fiat currency strengthens an economy.

A return to the gold standard would be a catastrophe far worse than the hyperinflation the gold bugs seem to fear. It would not only shrink the money supply, it would slow down the velocity of money to a snail's pace as deflation set in. There would be a cash famine of epic proportions.

Ok, that's a digression, but anyway, it sort of makes the point that Graeber plays fast and loose in sort of common ways, and I think he confuses causality sometimes too. I thought there was good material in parts of his book, but I honestly couldn't extract a straightforward set of "ideas about debt and money" except that he's consistently working to put the state front and center, which is a useful corrective to thinking about the market as existing ex-nihilo, but often goes too far.

― s.clover, Tuesday, April 24, 2012 1:21 PM Bookmark Flag Post Permalink

Yeah this is pretty much my impression as well (I have not read his book yet but I've listened to at least six or seven different interviews, podcasts, etc. where he outlines the ideas).

Just grasp that a fiat currency is much more elastic than a currency pegged to a metal. It increases both the supply and the velocity of money, and therefore it increases and speeds up economic activity. A well-managed fiat currency strengthens an economy.

A return to the gold standard would be a catastrophe far worse than the hyperinflation the gold bugs seem to fear. It would not only shrink the money supply, it would slow down the velocity of money to a snail's pace as deflation set in. There would be a cash famine of epic proportions.

― Aimless, Tuesday, April 24, 2012 1:24 PM Bookmark Flag Post Permalink

As for this, you are preaching to the converted. I'm not questioning the preferability of fiat currency over the gold-standard, I'm just trying to understand exactly the mechanism by which modern money was created by looking at it in slow motion.

Aimless: this takes us pretty far afield from what Graeber's talking about, but I suspect that what you're saying isn't true anymore, and perhaps was less true than people ever thought. Like the bank of england didn't yet introduce a fiat currency -- it was still gold backed in some sense. It was just that the debt itself became fungible in a very immediate way. But that's just the nature of debt! (and like even when the u.s. dollar was gold backed or whatever that didn't mean that they actually held enough gold in reserves to make good on every bill printed afaik). But we can see this very immediately now with measures of the money supply. The money supply sort of works by its own rules and the current standard measures only capture a part of it -- far more is currently unmeasured in the "shadow banking system" of circulation of collateral. What I'm getting at, if it makes sense, is that money supply is an artifact of market demand, and that tends to determine both velocity and supply (writ large -- i.e. think M3 and then some). So money is a commodity like any other in a sense, but that commodity isn't determined by the actual supply of bills (or electronic equivalents) but instead that coupled with the transaction costs of "multiplying" money through leveraging up and the recirculation of loans and collateral. And to the extent that those transaction costs are now much cheaper than they were, then the "cost" of money is much less tied to anything in particular the government does (except to the extent that e.g. the Fed has lots of resources to throw around and so can move the market the same way any other player with an equiv. checkbook could).

& his history there looks right, if maybe a little simplified (for the format presumably) - foundation of Bank of England is normally taken as foundation of paper credit + national debt currency system (and it is to fund the 9 Years' War with France), but obvs causes, consequences, politics, etc look a bit messier or more complicated if you get a bit closer.

My copy of Graeber's book arrived today. looking forward to it.

the u.s. dollar was gold backed or whatever that didn't mean that they actually held enough gold in reserves to make good on every bill printed afaik

It was just this fact which eventually drove the U.S. off the gold standard.

In the late 1960s France was choosing to redeem its dollar reserves as physical gold, which it had the right to do under the Bretton Woods agreement. It soon became abundantly clear that the gold reserves in Ft. Knox could easily be drained by such actions, if they were allowed to continue.

In fact, this was DeGaulle's intention. He wished to make it plain that the US dollar had floated far above its presumed anchor, so that it had been de facto heavily diluted against gold while still being accepted at par, thereby creating an unfair trade advantage for the USA. Needless to say, he made his point.

I guess I've approached him with curious skepticism because his ideas seem appealing but I'm ultimately doubtful about any claims of "X is the source of oppression in the world, and we should eliminate X and build an oppression-free society with no hierarchical relationships." I also don't really see what the logical conclusion of his ideas could be other than a sort of small-scale utopianism, because I doubt a modern industrial society could run without either debt finance or some more direct form of coercion.

He's not actually anti-debt. That would be at least something to hold on to :-)

Yes, I do find him a bit slippery.

So can anyone recommend essential books on these kinds of things (central banking, monetary policy, history of money, etc.)? I'm going through Niall Ferguson's Ascent of Money right now and I find it to be way to cursory and jump-aroundy.

Ferguson can be interesting at times but largely I'd say AVOID AVOID AVOID cause he's kind of a right-wing nutjob

Yeah I'm sort of just glossing over anything that strikes me as explicitly right-wing ideological. Parts of the book are very well told and others are incomprehensible. It's a slapdash book that would probably need to be multi-volume to be any good.

Anyone have thoughts on this?
http://www.amazon.com/Primer-Banking-Bernsteins-Finance-Classics/dp/0470287586/ref=sr_1_4?s=books&ie=UTF8&qid=1335453048&sr=1-4

Available at the B&N by my work, should I pull the trigger?

Galbraith's Money: Whence it came, where it went is very readable, but it might be too cursory as well.

in the sandbox 'what are you reading' thread I mentioned:

Casualties of Credit: The English Financial Revolution, 1620-1720. Pretty good - clear, good topic, more history of ideas than history; a bit narrow or superficial in places - the book-from-thesis air.

It might be worth looking at if you want a sense of the arguments about money and credit that were going on then. Goes into alchemy etc iirc, gives a sense of the messiness and unsettledness of the period. Not a lively read though.

oh wait, Hurting, you're *reading* the Ferguson. just watch the TV series and you'll get everything you need to know in a fraction of the time. I'll bet, anyway, I've never read the book.

I mean the good thing about reading it is that when he describes the mechanics of some bond transaction or something I can sit there for a second and read it slowly a couple of times to make sure I actually get it and am not just nodding my head. But too often the book doesn't slow down to actually describe how something worked anyway.

i liked 'capital ideas' although its not like bernstein is free of ideology or anything.

ferguson reaches some terrible conclusions but large parts of 'the cash nexus' are worthwhile as history. better than the 'history of money' although its still quite partisan and flawed as analysis. idk its like reading braudel or s.thing where the detail is incredibly worthwhile

A different sort of read, but Vidal's Lincoln has a great account of the creation of national currency and banking during the civil war.

or you can get a primaryish read by going straight to bagehot: http://www.gutenberg.org/ebooks/4359

Anthropologist Jack Weatherford's The History of Money was more interesting to me than the Ferguson (who strikes me as a overly generalist historian allergic to primary sources). Liberal economist John Kenneth Galbraith's Money: Whence It Came, Where It Went (orig 1975, but revised) is an classic. Galbraith strikes me as the sort of economist who would be welcome at coctail parties.

I can recommend William Greider's Secrets of the Temple for an in depth history of the first 70 years of the Fed. Ed Griffin's The Creature from Jekyll Island is an entertaining read from the libertarian/anti-Fed camp.

The Galbraith title is a really nice bit of dry humor.

on central banking, really liked wells' the federal reserve system: a history even if its pretty dry. also i dug "globalizing capital."

this is really only tangentially relevant, but robert reich is doing a reddit AMA right now

http://www.reddit.com/r/IAmA/comments/sucza/im_robert_reich_former_secretary_of_labor/

Pissed off shareholders, homeowners, and taxpayers converge on Wells Fargo meeting

http://www.sfbg.com/politics/2012/04/25/pissed-shareholders-homeowners-and-taxpayers-converge-wells-fargo-meeting

Barclays facing executive pay protest vote at annual meeting http://www.bbc.co.uk/news/business-17860232

ron paul vs. paul kugman. for the lulz: http://www.bloomberg.com/video/91689761/