Aug

17

The film "Money as Debt", produced by Canadian filmmaker Paul Grignon, presents the idea that money is created out of thin air when someone signs a 30-year mortgage—does anyone find that idea problematic?

Stefan Jovanovich writes:

Mr. Grignon's "idea" has a few problems.

The first is his notion about where the "money" comes in. When someone signs a 30-year mortgage, they don't get money; their escrow gets a promise to pay from the bank. What is created is a financial asset, secured by the real estate, for the bank and a liability for the borrower. The payment in escrow is itself an IOU that will be discharged when the escrow company's bank and the borrower's bank have their accounts cleared. Even then, there will be no money involved. Whatever is the net balance between the two banks will be handled by adjusting their reserve accounts with the Fed. (The bankers among us are asked to suspend their laughter; this is a simplified illustration, not a description of how financial institutions actually clear their credit transactions with each other.)

This process of clearing is at least 900 years old in Europe. Merchants were doing the same borrowing and lending by accounts at the trade fairs, in volumes that we can only guess at. What we do know is that in England and Wales alone there were 8 fairs and 169 markets as early as 1100 C.E. By 1516 there were 2761 fairs and 2443 markets.

The other part that poor Mr. Grignon does not understand is the fact that money has its origins, not in exchange but in sovereign taxation. Contrary to the textbooks, credit exists and even flourishes in barter economies. The medieval peasant, who never saw a coin, dealt in a variety of exchanges of promises with his neighbors and the local fief. Money only came into importance when the kings demanded tax payments instead of duties of service.

Money has always been the residual - the stuff people hoarded when they wanted to keep their wealth out of the hands of the government and other licenses and unlicensed thieves - as long as the money itself was "good". Hoarding bank notes made no sense; the government could literally abolish their status as legal tender, either by decree or by printing(Hello, Venezuela). Gold, silver, copper all had the virtue of being tangible; the government did not define their reality.

But, as soon as people find it safe to come out of hiding, they want to resume dealing in credit. Why? Because the profits from speculation can only come from exchange. Your hoard of gold is only worth something when you spend it or use it to create credit. The famous example of unopened cigarette packs being used for exchange in the ruins of post-WW II Berlin and Vienna is yet another instance where instruments of credit are described as "money". The cigarette packs were asset-backed securities; they could be broken up into tranches - i.e. individual smokes - whenever demand pushed the price of tobacco above the exchange price of the pack.


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