[P2P-F] "The currency is not the debt"

[chris cook]

Michel, Roberto

Simply put, banks emit/issue currency, which are credit objects, and these are Units redeemable against value to be provided by the issuer. These units may of course be private bank notes as in Hong Kong and Scotland. There may be other countries/administrative regions where there is no Central Bank or where private banks are allowed to issue notes and coin.

My point is that these Units of bank currency to which individuals assume title either in bearer form (notes and coin) or by virtual 'ownership' are distinct from the obligations to which banks are party in relation to the use of these Units over time.

Firstly, Banks have the use of Units deposited with them; may pay 'interest' to depositors, and have obligations - debt obligations - to return these Units to depositors upon demand, or at an agreed date. These obligations are liabilities of the bank on their balance sheet. 

But the currency is not the obligation: it is the object of the obligation.

On the other hand,  as many people are becoming aware, banks lend Units into existence. This creates deposits in the hands of the recipients and it also enables banks to create interest-bearing loans to borrowers as assets credited to their balance sheet on the one hand and deposits as liabilities on the other hand. Note that the currency banks create does not appear anywhere on the balance sheet other than as the £ symbol.

But as even the majority of monetary reformers are unaware, Banks also spend Units into existence, and thereby again create Units which when deposited give rise to obligations to suppliers; staff; management and shareholders (for dividends). 

 ie in accounting terms: Credit Supplier a/c: Debit P & L; Credit Staff a/c: Debit P & L and so on. 

The difference between income received from borrowers for the use of credit Units, and that paid to depositors for the use of credit Units is the profit credited to the bank's P & L and this funds the payments to suppliers referred to above. 

Best Regards

Chris


Date: Wed, 2 Mar 2011 12:01:36 +0700
Subject: Re: [P2P-F] "The currency is not the debt"
From: michelsub2004 at gmail.com
To: p2p-foundation at lists.ourproject.org
CC: rverzola at gn.apc.org; cojock at hotmail.com

let's ask the man himself!

Chris, see below,

Michel

for context, see below, http://p2pfoundation.net/Category:OpenCapital

Roberto, I could create a similar section to host your material on abundance research?


Michel

On Wed, Mar 2, 2011 at 11:36 AM, Roberto Verzola <rverzola at gn.apc.org> wrote:

I'm trying to understand what Chris Cook is saying below...



There are at least two meanings of credit in finance: credit as debt,

and credit as in debit/credit, left/right columns in accounting.



He seems to mean the former, except that he asserts that a credit

instrument is not debt, so apparently not.



If he means the second, accounting people always say that debit/credit

don't mean anything except left/right, which doesn't make sense in the

context below.



Would he mean some other thing then?



He seems to distinguish between the "interest-free currency" created by

the banks (meaning, I suppose, that the banks do not pay any interest

for this currency) and the debt created when this currency is loaned out

(for which the banks *earn* interest. At one point, he says banks "spend

these interest-free currentcy into existence". I could be wrong, but I

understand it differently:



Banks *cannot* spend the debt-money they create, as far as I know. The

currency they create has no independent existence *except* as a loan to

borrowers, and the banks can only spend the interest earnings from these

loans. So creation occurs *only* at the instant the interest-bearing

debt is created. As soon as the principal is paid, the currency created

from it is extinguished. Its interest earnings go to the bank; that's

what they can spend.



This makes debt-money different from the interest-free currency issued

by governments or their central banks, which have independent existence

outside a debt relationship.



At least that's how I understand it. I'd be glad to be clarified about this.



Roberto



Dante-Gabryell Monson wrote:

> This message from Chris Cook is interesting to me...

>

> It initially makes me feel there are "different vectors",

> used as tools,

> which may have accounting equivalents,

> and can spark confusion as to what is what ?

>

> excerpt :

>

> /*" The currency is not the debt, but a credit instrument identical to

> those issued by government. "*/

>

> plus ci dessous...

>

> ---------- Forwarded message ----------

> From: *Chris*

> Date: Sat, Feb 26, 2011 at 3:05 PM

> Subject: [gang8] ....of Public Credit

> To: gang8 at yahoogroups.com <mailto:gang8 at yahoogroups.com>

>

>

>

>

> Dear Gang

>

> I made the following response to someone in a forum on 'Public

> Banking' who was repeating the fallacy that money is debt.

>

> It covers quite a bit of ground, actually, and I'd be interested to

> see if the Gang can pick holes in it

>

> Best Regards

>

> Chris Cook

>

> >>

> I'm afraid you share a fundamental misconception in relation to the

> money created by banks, which is in fact a credit instrument, not a

> debt instrument.

>

> When private banks create credit they create a virtual IOU as an

> accounting object. This interest-free IOU is a 'look-alike' of the

> interest-free IOU issued by Central Banks, and is routinely exchanged

> for such notes and coin in private hands when they are 'deposited' in

> the banks. It is currency created as an object or thing to which

> account owners have title.

>

> When a private bank lends this currency into existence it is creating

> BOTH the currency AND the interest-bearing loan relationship with the

> borrower under a debt contract. The currency is not the debt, but a

> credit instrument identical to those issued by government.

>

> The debt is created in exchange for the use over time of the currency.

> When a private bank spends currency into existence it creates virtual

> credit instruments, and 'deposits' these into the accounts of

> suppliers, staff, management or shareholders by crediting them with an

> entitlement to these virtual assets.

>

> These credit instruments/IOUs are accepted by governments in payment

> of taxes, and that is what gives them their value. There is

> functionally no difference between an invoice issued by a private

> business for private services rendered, and a tax demand issued for

> government services rendered.

>

> Likewise, the issue by government of an undated IOU redeemable against

> taxes is functionally equivalent to the issue by a private business of

> an undated IOU redeemable against goods and services. eg Air Miles,

> Store Loyalty points, or the well known DeliDollars.

>

> Government IOUs differ from private ones in that they are made

> universally acceptable against debts by 'legal tender' laws aka by

> government fiat.

>

> So in a nutshell, governments do not create debt when they 'print

> money' and spend it. Government IOUs are in fact credit instruments

> analogous to a form of undated non interest-bearing redeemable

> preference share.

>

> Of course, these credit instruments must be issued and spent sensibly,

> and not in relation to existing assets, where they will cause

> inflation as the private banks demonstrated by creating the property

> bubble.

>

> In my view public credit need not be inflationary if used to

> facilitate the circulation of goods and services and the creation of

> new productive assets, such as affordable housing; renewable energy

> and energy saving projects; infrastructure such as transport, schools

> and hospitals, and of course on training and education of the

> population to enable them to create these assets.

>

> Such public credit creation should be professionally managed by

> service providers with a stake in the outcome, and accountably

> overseen by a Monetary Authority (as in Hong Kong, where there is no

> Central Bank). Once productive assets are created with public credit,

> they may then be refinanced by private investment in long term credit

> based upon their productive value (eg rental flows and energy flows).

>

> In this way pension investment will enable the public credit used to

> create new assets to be retired and recycled. Likewise, the newly

> productive workforce will pay taxes, which again will retire and

> recycle the public credit which made the workforce productive.

>

> >>

>

> __._,_.___

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