I have published the first in the Economic Truths series of videos. In it I argue that it's an economic truth that no one has money with their name on it in a bank. All you have when you make that claim is a bank statement with an IOU printed on it. The bank has a debt owed to you. And that's it.
For reasons best known to WordPress, this video will not embed here, and so the link to it is here.
The audio version is:
The transcript is:
It's an economic truth that you haven't got money in the bank, even if your bank statement has a positive balance on it.
Now this comes as a bit of a shock to most people, because when you've got savings, people like to say they've got money in the bank. But I'm sorry to inform you that that statement is not true.
So, let's first of all talk about what money is.
Most people think that money looks something like this. There it is, a £20 note. That is the common conception of what money is in the UK. It'll be a dollar bill in the USA, it'll be a euro note in Europe. But that, as far as the UK is concerned, this is what most people think money is.
But it isn't. Because this is just a statement of debt.
How do I know that a banknote is a statement of debt? Well, it's because it says on it, “I promise to pay the bearer on demand the sum of £20”. In other words, this thing that we call money is in fact an IOU. Nothing more, or nothing less, than a record of a debt: a debt owed by the government that issued that note to you, who happens to own it at present.
And if you put your money, which was represented by a pile of those notes, into the bank, the bank then has that pile of notes, and guess what? They are owed money by the government. And you aren't, because this is what is called a bearer bond. And, a bearer bond is one where the money is owed to whoever happens to have it at that moment.
Now that's important because that isn't the relationship you have with your bank. You didn't give the bank your money, as you see it, for them to then say, well, it's mine now, thank you very much. You gave it to them on the basis that they would repay it to you.
And in practice, that's what they acknowledge that they will do. They'll acknowledge that by printing a bank statement with a positive balance on it.
Of course, if you owe the bank money, the bank statement will have a negative balance on it, and now you've got to pay them. But the principle is the same.
In either case, there isn't money floating around. There's debt floating around. And that's because all money is debt. It is just a promise to pay. So, we really shouldn't get confused between debt, which nobody can see, and these things, which are IOUs, which are simply physical records of debt, but actually aren't the debt itself.
The debt, by the way, in the case of that note, is repaid when you pay your tax. They accept your banknote as payment for tax, and that cancels the debt.
Now, how does this impact that relationship between you and the bank? Well, that relationship between you and the bank is one between a borrower, who is the bank, if you think you are in credit there - and you are in credit there because they record the fact that they owe you money as a credit balance on their bank statement, and it's their bank statement they send you, not your bank statement that they send you. It's their books that are recording you as a creditor, and a creditor is somebody to whom money is owed, and you are a debtor of the bank. They owe you money, so they are in debt to you.
Now, that's the relationship. In that case though, for you to expect there to be a pile of what you might think of as money in the bank to represent the payment to you is, I'm afraid, mistaken. There isn't anything with your name on it in the bank, except that bank statement.
That's because, in practice, a modern bank doesn't really deal in what most people think of as money.
I'm not saying they didn't once upon a time. Once upon a time, this idea of money as notes and coin was pretty relevant, because that's the way in which most transactions were undertaken in the economy. And until 1971, in theory, you could still demand that a pound in sterling could be converted, in a roundabout way, via US dollars, into gold.
But that's not true anymore. It hasn't been for over 50 years. So, there is no relationship between the debt that is recorded on your bank statement and anything tangible or physical or anything of the sort that you might think might be sitting on a shelf in the bank with your name on it. It doesn't exist.
There's just a bank statement. And so all the bank is actually doing by operating a bank is recording debts. Debts from you to the bank if you owe them money; from the bank to you if they owe you money because you think you've got money in the bank; and the transfer of debt between people, which is what happens if you say “please pay someone else” out of the funds that you currently owe me. The bank will then reduce the amount it owes you and increase the amount that it owes to somebody else if you make a payment through your bank account.
That's what they do. They are just bookkeepers. A giant accounting exercise is what goes on inside a bank. Which is one reason why, well, banks are very hard to find these days, because they don't need to be physically present on High Streets to do that bookkeeping exercise anymore when we don't use these tokens of debt instead of electronic payments.
Now this matters. It matters because if you are owed money by the bank, what guarantee is there that the bank will pay you? The answer is none at all if the bank is bust.
Now we are very unfamiliar in the UK with banks going bust. Only one has tried it since 1860, and that was Northern Rock, which tried to go bust in 2007, and the government bailed it out. So, as far as the people who deposited funds with Northern Rock were concerned, it didn't go bust. The government paid instead.
And that is, in fact, why the government does now guarantee any deposit in any bank owed to you of up to £85,000, come what may, if the bank you've chosen to put your money in does go bust.
Above £85,000, you are, however, at risk. If the bank goes bust, you may not be paid because this is just a debt that is being recorded on your bank statement there is no money in the bank with your name on it that is sitting there waiting for you to call on it.
You have to get your head around that fact, because unless you understand that all money is debt and that there is no money in the bank as such, it is just a record of monies owing to and from people, then the modern economy makes very little sense at all.
Of all the economic truths you have to understand, that is perhaps the most important of all. There's really no such thing as money in the world these days. There are just debts that we move around between us. And that's what we call money, but it doesn't look anything like the money we think of on a day-to-day basis.
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And the fact that this is a liability of the bank is exactly why it is not capital of the bank.
You do know they are both credits, don’t you?
And you do know liabilities can be capital don’t you?
And you do know they all lose money when a bank goes bust, don’t you?
So, I guess you also know you’re wrong, don’t you?
No, liabilities can’t be capital. The Bank of England explains it here:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2013/bank-capital-and-liquidity#:~:text=Like%20non%2Dfinancial%20companies%2C%20banks,as%20current%20or%20savings%20accounts.
Please let me (or the Bank of- England) know if you have any questions, or don’t understand any of the concepts discussed.
See my reply to Clive Parry
I really do not care what regulators say. They’re maintaining a particular world view (theirs). I am talking economic truths and in insolvency unsecured creditors are, in effect, suppliers of capital. Everything rise is waffle. That’s the reality.
I just think one needs to take care with terminology. Doing so will keep some of the trolls at bay.
The word “Capital” in its general business sense can be equity capital or debt capital.
In the banking world “Capital” is shorthand for Equity Capital….. the Equity required by Regulators to be a bank.
When I borrow money as Working Capital, it is Capital – the clue is in the name.
When a Bank borrows money (takes a deposit) it is not called Capital (by bankers) because it is not Equity.
You could avoid confusion by calling deposits raised by banks “Debt Capital” rather than “Capital”
(I would also note you often get pulled up on the use of “Real Interest Rates” – again, economists/bankers have a specific definition. You often mean the rates that people actually obtain in real life. Perhaps you could use “Real-World” interest rates rather than just “Real” Interest rates.
I disagree
In accounting terms capital is a credit and so too are bank deposit liabilities credits and all can be lost if the bank fails
I am deliberately changing language
The existing language is the problem
I refuse to comply with it when it does not explain what is actually happening. An unsecured creditor provides financial capital to a company. Let’s acknowledge that fact. Bank depositors are unsecured creditors
Capital is both an asset (if we are allowed to think about the cash invested) and a liability (the obligation to repay the lenders or shareholders).
True
But I am talking about the credit side
Of course, depositors are lenders. That’s true whatever terminology you use…. I just don’t understand why you want to use terms that can be ambiguous and permits trolls to make mischief.
Because they’re appropriate?
Sorry – but you never change the world without challenging existing use of language
“I really do not care what regulators say. They’re maintaining a particular world view (theirs). I am talking economic truths and in insolvency unsecured creditors are, in effect, suppliers of capital. Everything rise is waffle. That’s the reality.”
WHICH IS THE WHOLE POINT OF THE “Myth Busting” series of lectures by Richard Murphy.
@Jennifer Radley – What do you NOT understand! My university Econ Professor explained this myth EXACTY as Mr. Murphy does.
Also, a deposit receipt is nothing more than a “legal record of a debt transaction” was a favorite catch phrase of my university Econ Professor.
The aim of ‘Jennifer’ (there’s a 98% chance tjat’s not the posters real name, I suspect) is to discredit
Jennifer is frightened that I am right
Jennifer might even know that I am right, and that makes her even more worried
So truth is not her concern
I’m not an accountant so I occasionally get a bit confused by talk about creditors and debtors and who owes what to whom. Particularly as (if I get this the right way round) an accounting debit is an increasing asset and an accounting credit is an increasing liability. For those of us who are not experts, the terminology can be more confusing than enlightening.
I prefer to think about “payables” and “receivables”. Again, if I get this right, a debtor is someone who is indebted to you and who owes you money. You are their creditor and the right to get the money is an asset. That is a receivable from your perspective. A creditor is a person to whom you owe money. The obligation to pay the money is a liability. You are the debtor and they are the creditor. That is a payable from your perspective.
But that doesn’t contradict the basic point that there is no money “in the bank”. They don’t hold “your” money. And (as you will no doubt explain soon) they don’t use “your” money to make loans to other people.
That’s tomorrow
And I get your point on debits. But people are used to being in credit with the bank….
The way banks show accounts is confusing to the general position because the statements the issue show their position with respect to their customer.
A bank account in credit means the bank owes money to the customer. That is, the customer is the bank’s debtor and the bank is the customer’s debtor. A credit to your bank account means the amount the bank owes to you is greater.
You run up a debt on your credit card. You use your debit card to settle your debts using your credit at the bank.
And this sort of terminological confusion is why I prefer to think about payables and receivables. It is a bit clearer about who owes what to whom.
Perfect.
Are you going to do one which explains how all these untruths have come about, who stands to gain from them and how?
Interesting
Noted
Nigel is spot on in his suggestion.
“Cui bono?” is always a good question. It helps to follow the money.
And also to remember, as the saying goes, that it is is difficult to get a person to understand something, when their salary depends upon them not understanding it.
In my twenties I re-read Robinson Crusoe. In the story he finds another wreck and in the Captain’s cabin discovers a bag of good coins. He throws it down in anger. There is nothing he can buy on the island. I realised then what real wealth is.
I tend to think it of money as credit which enables me to demand real goods and services, now or in the future. I guess money is both. The other side of the coin as it were.
At last! I have been ‘banging on’ about this at every opportunity. I have just a little I wish to add.
All money in a fiat system is debt; but not all debt is money. The difference doesn’t matter normally, until it goes badly wrong; and it does go badly wrong. Banks crash. That is a matter of indisputable fact; it is has gone wrong many times before in Britain, and it will go badly wrong again. That is why it matters that not all debt is money.
The only money produced is under the sole authority of the sovereign power issuing it, in its own jurisdiction. We can see residual traces of that important truth from the pre-digital age, in the fact that only coins and BoE notes are ‘legal tender’ in England; and only coins are still ‘legal tender’ in Scotland. Legal tender is an arcane idea, but it matters. Only the sovereign issuer can give a promise to pay the bearer, that it will always be able to keep; no matter what. Banks do not, and cannot offer that guarantee; they only produce debt, under licence from the sovereign issuer. So far removed from the capacity to issue a guarantee for their debt are the banks; as Richard points out, all British commercial banks require the sovereign issuer to provide a guarantee of up to £85,000 on all deposits held by the bank*. When you put money into a bank there are two things to remember; the money you deposit is an IOU, so you do not own it. The IOU is owned by the person entitled to redeem it. The sovereign issuer. It isn’t your money; you are a creditor of the government. When you have deposited the money, you no longer have money in the bank. You are a creditor of the bank (with a guarantee from the Government on your deposit up to £85,000).
And just to underscore how strange all this is; if you go to the BoE and demand that you wish the promise to be paid to the bearer, and give the BoE your £1; they will swap it, for another £1.
* The commercial Banks are currently being paid around £35Bn a year in interest on CBRAs; reserves held in the BoE, largely made up of QE issued to save the banks from their own reckless stupidity (which they have in abundance from their own record). They should not and need not receive this largesse, and one easy solution to save £BNs, is a system of tiered reserves, used by other Central Banks in the world. But the commercial banks also do not pay for the £85,000 guarantee supplied to them free through the Treasury and BoE. The guarantee means that there is an eye-watering, unquantified contingent liability that could be added to the National debt, in an instant, if there is another crash. The commercial banks should be paying a substantial annual fee for the guarantee, that underpins the security they offer every depositor; and is the best support given to any commercial sector in Britain. The commercial banks are giant, too-big-to-fail spongers. They are the real mega-benefit frauds. They sponge off the state; and you and me.
Absolutely this……..
* The commercial banks also do not pay for the £85,000 guarantee supplied to them free through the Treasury and BoE. The guarantee means that there is an eye-watering, unquantified contingent liability that could be added to the National debt, in an instant, if there is another crash. The commercial banks should be paying a substantial annual fee for the guarantee, that underpins the security they offer every depositor; and is the best support given to any commercial sector in Britain.”
The state is underwriting commercial bank risks as a freebie, at the same time as paying full interest on CBRAs.
Wow… plutocracy or what ?
A contigency insurance premium ought to be charged on an annual basis for all risks underwritten.
This needs to be set at an “appropriate” level proportional to bank profits, in the public interest.
In my näivety I had thought that the 2008 state bailouts to recapitalise the banks would involve an equivalent balancing transfer of bank equity to government as a tradeoff. .
Dream shattered.
Reeves might fly.
Any and all de-risking of commercial activities by the state ought to be accompanied by an equivalent transfer to public benefit.
I note this is a stated intention of the GB Energy bribe, in order to lever in private capital, so yet more financialisation as the primary goal of government.
I think there is a payment, but it is very small.
I have tried to look through DGS, DGS Regulations and FSCS, and was unable to locate any payments by commercial banks; everything I found related to the recipients, and banking regulations. I will be happy if anyone can flush out a fee; and especially the quantum.
HM Treasury, ‘Basic bank Accounts’ gives rudimentary stats., for “basic bank accounts” for the nine (presumably) largest commercial banks; at circa 7.25m, therefore the total will be higher, perhaps significantly. The guarantee is £85,000. Most people do not have £85,000 in a ban kaccount, but we can see the contingent liability being carried by government is very, very large; and in a major crash would increase the national debt significantly. On the other side of the equation, the commercial value of that guarantee to commercial banks, is absolutely enormous.
Free enterprise? Free markets? They are joking? They must be laughing, all the way to the bank ……
FDIC deposit insurance covers an individual depositor up to $250,000.00 per member bank.
Banks pay “deposit insurance” based on the amount of deposits to the FDIC.
If you have a more than $250,000.00 you want to protect then you need to open up a second account at a different bank and start your collection of coffee mugs and china.
See link:
https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation
Corect
Same here, but £85,000
On existing commercial bank deposit insurance in the UK, I remain unclear what substantive fees the banks are actually paying (for a guarantee that is now argued to be too small, compared to US or elsewhere). The FT, 11th January published this: “UK Treasury spares banks from pre-funding deposit guarantee scheme: Government outlines ‘modest’ proposals to strengthen resolution regime in wake of SVB collapse”:(https://www.ft.com/content/bc3867b5-3031-4ec6-bd41-1f265a5c7553). The journalist, Laura Noonan, wrote this observation near the conclusion: “Some regulators have argued that pre-funding the deposit scheme was fairer because it required lenders that go on to fail to contribute to the cost of the regime during healthier years”.
Anyone know the answer to this?
I don’t
I have no idea about how payments are made in the UK but in the USA it is “pay as you go” with payments made on a quarterly basis to the FDIC.
Paid on a quarterly basis to FDIC based on Average Daily Deposits on hand for the quarter.
I had to call a banking a friend to get specifics.
Mr Warren sums up the rules governing the circulation of money most eloquently.
As for the interest charged in the CBRA, I’ve always seen that as crude idea to suggest that the government money that is being produced to stop the bankers from ruining us is owed to someone else.
It’s a sick confidence trick created by those who are funded by its beneficiaries – politicians.
Thanks John S Warren.
What is the UK government’s and BoE ‘s reasoning for not stopping the £35bn interest paid to the banks and for not imposing ” a system of tiered reserves, used by other Central Banks?”
Arrogance or a cosy cartel of interests?
They claim bankers would not understand bank base rate if they were not paid £35bn to do so
“They claim bankers would not understand bank base rate if they were not paid £35bn to do so”
Great work if one can get it! Where do I apply to get such work???? LOL! LOL!
I think been thinking going alot recently about the origin of “money” and it’s previous form of wording “moneta”. Such a thing was created in temples in service to the god of money, Moneta. This form of money was a coin and was equal to its weight in value of the metal contained within it.
In this type of economy, money is a fixed price of metal. The problem comes with industrialisation and the rapid growth in the stock of metal. Such economic growth would devalue the money and the industry would be completely unviable.
If we are to have market prices of metal, we can’t have money fixed in value to metal. As such money had to become paper in the form for of bank notes. However people need to trust that such money was still money, so there existed the gold standard and central bank notes.
In the 20th century we had cheques, coins, central bank notes, bank checking accounts, credit cards; which are all used as “money”. These have all been consolidated as a digital online service provided by a bank.
I don’t spend with bank notes. I deposit them. And I authorise payments with my bank card from a spreedsheet. (Digital service fraudsters run such systems from excel!)
Your causal link is wrong
The term money now has nothing to do with asset backed money of old
The meaning of words change
The meaning of money has, completely
Now it’s debt
Bill,
I urge you to checkout anthropologist David Graeber’s superb BBC Radio 4 series “Promises, Promises: A History of Debt”.
Despite there being much attachment to ‘coinage’ in some quarters, all the research has found that this is NOT the origin of money (though coinage/metallism have come and gone through the ages). As Richard rightly says, ‘money’ is an IOU. Moreover, it always has been an IOU, as anthropologists & historians (with no skin in the game) have found in every civilisation they have ever studied.
https://www.bbc.co.uk/programmes/b054zdp6/episodes/player
I agree wih David Graeber
Money has never been anything but an IOU
At one point in China’s long history, I understand the coins were made of wood.
@John S Warren. I was unaware of coins being made of wood, although it is quite possible since some of the Zhou states issued coins carved from bone or stone, usually shaped like cowry shells. Cowry shells themselves had been used as coins for centuries by then. The tomb of Fu Hao (Lady Hao, died about 1200 BCE) contained 7000 cowry shells.
Hi Richard,
I may be completely wrong about this, but I see a debt only existing if it can be enforced. As you say, if I have £100k in the bank and it goes bust, the Government will pay me £85k, and if the bank now no longer exists, neither does my £15k. So my money never really existed in the bank, except in an agreememt with them.
Regards
It is enforceable, if the wind is blowing in the right direction
A debt is a claim. You have a claim to be repaid £100k. (What form that repayment takes is another matter – you end up with one debt replacing another.)
What that claim may actually be worth is another matter. In the case of insolvency, your claim for £100k may only be worth 85 pence in the pound but you still have a claim for the other 15 pence until the debtor is liquidated.
But the creditor is not paying in that case….