by Derryl Hermanutz
This commentary is a follow-up to Elliott Morss’ Dec.7 GEI article (Blockchains - What Are They? What Can We Expect?) questioning the hype around blockchains, digital money in general, and bitcoin in particular.The whole world already uses a globally-integrated digital money system: bank deposits. We pay each other bank deposits by check, wire transfer (direct deposit), online banking, debit card, etc; within the central/commercial bank-operated payments system of debiting payments out of payers' bank deposit account balances and crediting the payments into payees' bank deposit account balances.
The users - payers, payees, and banks - already have a secure record of all transactions. We can see our transactions by looking at our bank account statement online, and we can make a paper printout.
We can even convert our bank deposit account balances into cash withdrawals (at ATMs or bank teller windows), to hold spendable money outside the banking system. But only about 3-5% of our total money supply is physical currency (banknotes and coins: cash money). 95-97% of all money is bank deposits: the spendable, savable deposit account balances in our commercial bank accounts; and the investible cash account balances in our shadow bank accounts (brokerage accounts, investment bank accounts, hedge fund accounts, etc).
Bank deposits are electronic digits in banking system accounting software, that can be instantaneously paid by a payer anywhere on Earth, to a payee anywhere else on Earth, within the bank-operated electronic payments system. Bank encryption technology is secure enough that hacks are rare.
Electronic bank deposits are overwhelmingly our main form of payments money; our main form of savings money; and our main form of investible capital.
Who Should Create and Allocate Money?
Are bitcoin advocates assuming that the world's present money system is physical cash money, and encrypted "digital money" that can be spent electronically is a revolutionary new concept? If so, then they don't understand our present money system.
The problem is not creating an electronic form of money. The banking system has already done that. The problem is, Who creates and allocates the money?
Bank deposits are credit-debt instruments that commercial bank create to “fund" their bank loans and bond purchases.
Commercial banks create bank deposits (the deposit account money supply) in debtors' bank deposit accounts: by making loans of bank deposits to private sector debtors and by purchasing securities (interest-bearing Treasury bills, notes, bonds: government bond debts) from government debtors.
Debtors' interest-bearing loan account and bond debts are banks' interest-earning assets.
Commercial banks issue deposit liabilities (bank deposits) to “pay for" the banks’ purchases of those interest-earning debt-assets.
We use commercial banks' deposit liability debts as our main form of money.
Commercial banks create bank deposits "by typing": by typing spendable numbers (bank deposits) into the Credits column of debtors' bank deposit accounts.
Credit as Money Creation
Making a bank loan (or bond purchase) creates a linked pair of credits/debts: a new spendable deposit account credit balance (e.g. +$1000) and an equal new interest-bearing loan account debt balance (-$1000) in the debtor's bank deposit and bank loan accounts.
Debtors spend their new bank loans and bond sale proceeds. Debtors pay the new bank deposits to payees within the bank-operated payments system.
Repaying a bank loan un-creates - extinguishes: cancels out to $0/$0 - the deposit account credit balance (+$1000) and the loan account debt balance (-$1000) that were created by making the bank loan (or bond purchase).
The deposit account money supply only exists so long as debtors' loan account and bond debts remain unpaid.
Bank deposits are a debt-based form of money. Commercial banks - issuers of the bank deposits - "own" all the bank deposits that they issued as "loans". All bank deposits are owed back to the creditor-banks that created them, as payment of the debtors' loan account debt balances and bond debts.
Limitation of Debt-Based Money
A debt-based money supply creation system cannot accommodate payees "keeping the money": saving the bank deposits in our commercial bank savings accounts; and transferring the bank deposits into our shadow bank accounts as our investible capital. Savers' savings, and investors' capital, are the same bank deposits that debtors owe back. As long as payees keep the bank deposits as our savings and capital - rather than spending them into the economy's buy-sell, spend-earn, payer-payee money stream - debtors can't earn them back, so debtors can't pay their debts.
So creditor-banks can't collect their earning assets (the debtors' loan principal and interest payments); so debtor-banks can’t pay their deposit liability debts. So our bank deposit account balances no longer work as 'money'. And the commercial banks' "bank loan and bond purchase" deposit account credit/debt money supply creation system descends into financial crisis: a crisis of creditors' uncollectible money assets (credit balances) that are owed as debtors' unpayable money money liabilities (debt balances).
The solution to the savings problem in the commercial banks' deposit account money supply creation system - a problem that monetary system reformers have recognized for at least the past century - is government/central bank issuance of debt-free money to supplement (or replace) commercial bank-issued credit-debt money.
Bitcoins and Gold
Bitcoins, like physical gold, are "mined". The miners don't "create" the money by typing numbers into bank accounts. The miners "produce" the money by working at mining. The mine-owners own the mine, and own all the money that it produces. Bitcoins and gold are debt-free money: the miners don't owe the money "back" to the mine. But the mine-owners who own the mine and the money it produces, get to spend the money. Once the miners have spent the money buying something or paying somebody, the money exists in "the economy".
Financial Governance of the Economy
Paying money can buy ownership of anything on Earth that can be bought-sold for money, which is pretty much everything. By offering to pay (enough) money, you can motivate people to do, make, build, produce, pretty much anything that is within human power to do. The power to create and allocate money is the power to decide "who" will be provided with how much money, for what purposes.
Money issuance (money creation and allocation) is financial governance of the economy: the power to decide who will be able to buy whatever is for sale; the power to decide what will be built or made, and what will not; the power to decide who will be able to command human action by offering to pay people money for doing stuff.
Within the present system, commercial banks exercise financial governance by issuing the deposit account money supply. But the system doesn't work, because payees have all the money, and debtors owe it all back. The system only appears to work as long as total credit/debt continues increasing at a fast enough rate; so old debtors can earn and extinguish (pay back) some of the new bank deposits that are created and loaned and borrowed and spent.
Under a metal (gold and silver coins) money system, miners would exercise financial governance by producing all the money. But money metals are in short supply, so people hoard (save) gold and silver rather than spend or invest it. Metal money fails at money's primary purpose: as a payments media, to pay for the stuff we buy, and to get paid for the stuff we sell.
Under a government/central bank debt-free money supply issuance system, the government would exercise financial governance.
Who or what exercises financial governance under a bitcoin/blockchain money system? And how will bitcoin solve the problem of hoarding the money that becomes increasingly valuable, rather than being readily spent to enable the buy-sell economy to continue functioning?
These are the questions that will define the ultimate value of cryptocurrencies like bitcoin.
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