I agree our 'correspondence' is becoming unmanageable, so I’ll restrict myself to brief and sharp comments and questions.
First, I sincerely want to understand what supports your rebuttal of my statement that, "The bank is lending a liability", viz., "The bank isn't 'lending a liability'. It's lending by *creating a liability*".
You imply the bank is "lending something", but what that "something" is (or might be) escapes me. If NOT "a liability", what is the bank lending? That’s it for now.
Second, thank you for reading my #6 article and agreeing that ANZ Bank lied to its customer (Bill).
I think reducing the dialogue a bit is best. It was getting a bit out of hand.
I'm using the term "lending" just to describe the transaction (borrower and lender each write the other an IOU), not to imply that any particular asset is transferred from the bank to the borrower. I think we agree with each other and with Richard Werner that the transfer from the bank to the borrower is the bank gaining a liability rather than losing an asset. But the borrower is still able to exchange the bank's IOU for cash. And as I always say, the outcome is identical to the bank lending cash and the borrower immediately depositing that cash at the bank.
I wouldn't say ANZ Bank is lying any more than I'd call a chemistry teacher a liar for describing a solar system model of the atom. In the same way, the cash-flow model is a simplification, but for most customers it's a perfectly reasonable abstraction.
Re footnote 1: “interest paid” on a bank loan is not “destroyed”; it sticks to the banker’s fingers, like the 25 bushels of wheat that end up in Eve’s hands in your scenario.
Alice may have had her loan interest offset by Eve’s purchase of wheat, but she ultimately paid the bank’s interest with wheat worth £25.
I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it.
As I summarise the outcome of your scenario, Eve spent the bank’s profit (her £25 dividend) to repay the interest-free loan she used to buy £25 worth of Alice’s wheat, so that Alice could pay the £25 interest on the £1,000 loan from the bank, thus replacing the “profit” previously extracted by Eve as a dividend.
Do you mean that the bank [Eve] gave Alice the £25 so she could pay the bank the £25 interest she owed it? And did that £25 come out of the bank’s “equity”?
If so, that would mean “everyone is definitely better off” except the bank, which won’t survive if Eve’s malfeasance persists. Does Eve go to jail for snaffling £25 of bank equity under false pretences?
On reflection, your “breakthrough” doesn’t prove “that banks charging interest can be sustainable”. It sounds more like the perfect argument for ABOLISHING interest charges on all loans of credit – and jailing self-serving, sociopathic bankers.
Basically, if you pay someone with their own IOU, the IOU is destroyed. (It becomes their debt to themself, which is meaningless). So if you use your current account balance to pay interest, it's just destroyed. Deposits decrease and the interest is no longer owed.
"Alice [...] ultimately paid the bank’s interest with wheat worth £25"
Yes, ultimately it all comes back to the real economy. But the focus of the article is that banks charging interest doesn't make it impossible for borrowers to pay their debts to banks.
"I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it. "
She's the sole owner of the bank. She can call an EGM where she tables a motion for the dividend to be paid, and then vote in favour of it.
Yes, she's received 25 bushels of wheat, but that is her profit for owning the bank which provided the liquidity service to Alice. Without providing that service, everyone would have ended up worse off.
I can't understand why you think there's malfeasance and false pretences by Eve. As sole shareholder, she's entitled to the difference between the firm's assets and liabilities. How can it be "snaffling" to have the bank pay that to her as a dividend? And why would you think the bank won't survive?
And what's all this about "jailing self-serving, sociopathic bankers"? What have you got against Eve? She's provided a useful service to Alice, risked losing her car, and she gets to eat some bread as a result.
If interest were abolished on bank lending, banks would have literally no income. All operating costs and all defaults would be losses to the bank. That doesn't work, and is unjust.
Your “Footnote 1” is definitely wrong. The £25 interest is not destroyed when repaid (but it is created, ex nihilo, in the beginning!).
As a non-material form of “credit” in the bank’s records, it always has “two faces,” one looking towards the bank and the other towards Alice, until every “aspect” of it is finally “deleted” from all records.
Journal entries when it’s “created”:
£25 Dr Alice’s loan account [bank asset]
£25 Cr Interest Income [bank equity]
Journal entries when it’s “paid”
£25Dr Cash or Bank account [bank asset]
£25Cr Alice’s loan account [bank asset]
When paid by Alice, both of its “faces” change. The £25Cr cancels the £25Dr on Alice’s Loan Account statement. The bank has it recorded as “a [£25Dr] asset in its books” or “[£25 cash] in its vault”. The interest debt no longer faces Alice, and the bank has “captured” the value of it in its hands in whichever form Alice paid it.
Interestingly, rather than “destruction” at the end of the process, the beginning of this process appears to be another form of “credit creation” [From the bank's perspective that means "debit creation";)].
Perhaps we should think of credit as non-material all the time and use appropriate words to enhance that thought. I’d suggest using “erased” [for accounts on paper] or “deleted” [for accounts on computer], “defaced” or “melted” [for coins] and “incinerated” [for paper/plastic money].
Footnote 1 is absolutely correct in the most common case of Alice paying the interest with £25 of the balance in her current account. If you're right that interest charged is normally accumulated in Alice's loan account, the accounting in your representation would be:
£25Cr Alice’s loan account [bank asset]
£25Dr Alice's current account [bank liability]
That is, Alice has £25 less to spend in her current account, and nobody else has a corresponding increase. It's a contraction of the bank's balance sheet: assets↓ and liabilities↓.
What you showed would be correct if Alice pays the interest by handing over £25 of cash. But that would be unusual.
As I've said, if you pay your creditor using the creditor's own IOU, it destroys the IOU (as well as your own IOU). If you pay a creditor with a third party IOU, it *transfers* that IOU (and destroys your own IOU).
This should not be controversial: there is no other accounting which makes sense. You're not claiming that Alice paying the bank using her current account balance can increase how much cash the bank has are you? I'm sure the central bank would want a word about that. ;-)
I certainly agree that we should think of credit as non-material, which is what I've done consistently throughout this blog. A debt is conceptually different from the medium used for evidence of the debt, which is of little significance economically. If I hand over £10 cash to the Bank of England as a gift, its liabilities are *immediately* reduced by £10, whether it incinerates the plastic note now or later, or retains it to reissue. The creation/destruction of the *representation* (the physical banknote) isn't interesting economically. What really matters is the point at which the BoE becomes a debtor for a new debt (which is evidenced by the issuance of a note, or simply crediting a liability account) or stops being a debtor for an existing debt (which is evidenced by the receipt/destruction of a note, or simply debiting a liability account).
You know more about BoE internal workings than I and I appreciate your insight into money and credit creation/destruction. Your “IOU destruction” comments are also valid (but irrelevant here), and my journal entry, “£25Dr Cash or Bank account”, shows options open for Eve to accumulate her loot; it obviously can’t dictate how Alice opts to pay the interest.
You seem to have forgotten that Alice can’t pay the interest because her current account is empty, having repaid her £1,000 loan. “Alice … doesn’t have any money” undermines your alternative journal entries; so, my “definitely wrong” trumps your “absolutely correct” 😉, and Eve’s “£25 Dr interest” is accumulated in a bank asset account, not destroyed. Only Alice’s “£25 Cr payment” is erased in the payment process.
But that’s getting away from the “Money as Debt” filmmaker’s point you’re determined to debunk here.
Eve calculates I = £25 and books that to Alice’s loan account, posting it in the LH column as “Accrued interest”. Alice’s debit balance grows from £0.00 Dr to £25.00 Dr. The matching £25.00 Cr is posted to “Accrued Interest” [E], the account that will, one day, contribute to whichever account ends up being debited to pay Eve’s £25 dividend; but that will only happen after a dividend has been declared.
And right here, at this precise moment, there’s a physical and logical “Catch 22” that you refuse to recognise.
Eve is not allowed to declare that dividend unless she has the wherewithal to pay it. Bank regulators require sensible, as well as honest, accounting. Eve would be unwise to promise shareholders a dividend payment on the strength of an “accrued [but UNPAID] interest” accounting item. You’ll see why when you think through this physical situation logically. Please don’t speculate about what you think Eve MIGHT be able to do, hypothetically. I simply assume she wants to keep her banking licence.
Eve can’t (and would be foolish to) act on the ASSUMPTION that Alice will pay that interest, for a very simple reason; Alice has no money and cannot pay it! That’s a physical fact built into your model description! It’s not a fantastic story made up by those “Money as Debt” filmmakers.
That’s why regulators enforce that rule, unless you believe bank regulators are also part of a conspiracy by those filmmakers against your theory. So, Alice MUST pay Eve the interest BEFORE Eve can even declare (let alone pay) her shareholders a dividend [assuming a real bank with real shareholders, for the purposes of my argument].
It seems you’ve been determined to prove those “Money as Debt” filmmakers wrong, and that interest can be created some “other way besides lending”, since 2008. Yet I think you agree that when the principal of Alice’s loan was repaid, the £1,000 Dr in Alice’s loan account was digitally erased when her £1,000 Cr was mathematically added to it. And that necessarily implies she can’t pay that interest UNLESS you can find a legitimate way for Eve to put £25 in Alice’s possession, either as credit or cash [without lending it to her!!!].
At the moment she can’t, logically, physically, and legally, and you are, as they say, in logical and physical checkmate. With no money to her name, Alice can’t pay interest, so Eve can’t even declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice can pay the interest Eve needs to declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice ….
That looks like a “vicious circle”, from which there is only one logical escape route. After ~17 years, you must be nearing the point of giving up this quest?
Two quick thoughts, which might be wrong. The bank made no profit if Alice’s £25 of interest was “destroyed” when she paid it. So, didn’t Eve’s £25 "dividend" have to come from [E]? That's why the bank is going to fail.
It's important to recognise that profit doesn't mean an increase in the amount of cash. It's an increase in *equity*. If a borrower has a £25 balance in their current account (which is a liability of the bank), and the customer agrees that this balance can be destroyed as payment of the interest due, then the bank's liabilities decrease by £25, so its equity *increases* by £25.
Now it's true that the interest due (bank's asset) also decreases by £25 at that point, but that's only undoing the charging of the interest when interest due increases by £25, so overall the bank's equity increases by £25 due to the interest on the loan. This £25 increase allows Eve to take a £25 dividend.
So, point 3. in your simplified “money creation” scheme [Money and Banking (5)] was a mistake? You didn’t mean money? And it simply wasn’t destroyed, in the literal sense of that word?
“3. The borrowers use the money to pay the interest (which actually destroys the money). The outcome is identical to the 5-stage process.”
I wouldn't say it lends credit. I'd say it lends by crediting the borrower.
Can you confirm that you are fine with a bank lending $1,000 by handing over $1,000 in currency (in exchange for the borrower's promise to repay)? Are you fine with the the borrower then depositing that $1,000 in their current account at the lending bank?
That’s a good response. Your description of the accounting action is correct but incomplete - and you still believe banks can “lend” whatever [it] is. The full description is crediting a liability account in the borrower’s name plus the other end of the transaction: debiting an asset account in the customer’s name. The latter is where the fraudulent deception happens and is concealed.
Do I need to answer your last question? I also prefer the convenience of “credit”, but [it] never, ever belonged to any bank and pretending to “lend” us what we already own, as creditors, is based on demonstrable accounting fraud, the evidence of which I've published at https://patcusack.substack.com/.
Yes, I made a mistake. Eve maintained [E] unchanged. But she acquired £25 worth of wheat without paying for it. That’s the malfeasance. [Even so, “withdrawing” £25 of equity, to enable Alice to replenish it for her later, does seem “unreal”.]
I’ve tried to “understand exactly what’s happening in every step” of this “much simpler problem” but remain puzzled by its complicated “simplicity”.
I've never understood, for example, how Bob might get hold of Eve’s "spare" car in the original scenario, where: “Eve actually has a spare car, and she’d be prepared to exchange it for £1,000 if Bob can’t use it to buy wheat.”
Now, I don’t understand how Eve ever “risked losing her car” to anyone [above]. She had an interest-free loan from her own bank, which pays it off for her by declaring a dividend, equal to the interest Eve is charging Alice for her £1,000 “loan”. [No car needed.]
This caused Eve’s equity [E] to INCREASE [thanks to Alice], after it had DECREASED [thanks to Eve paying Eve, so Eve could buy wheat from Alice, so Alice could pay Eve the interest she owed Eve].
Now, admittedly, that’s much simpler than “the whole economy”, but I never imagined any such goings on in any bank. If this were operating in reality, it would be obvious to everyone that every bank was obtaining goods from the community to the value of the interest we pay for “credit” - which we already own as creditors - and still maintain its [E] unchanged.
When people notice her bank is acquiring wheat without incurring a commensurate expense, Eve will be lucky if she remains alive, let alone in charge of her bank.
It may be that Bob’s <not being able to buy Alice’s wheat with Eve’s car> has had something to do with it, but became lost somewhere in your “Continuity Department”. Please don’t bother trying to explain; I truly don’t want to know.
Yes - in fact I don't think there was even a problem to eliminate. Equity is a record of how much of the firm's assets would be left if all the liabilities were paid, and it belongs to the shareholders. Paying a dividend is just distributing some of this excess without having to wind up the firm.
You won’t distinguish them on a balance sheet unless they’re described as such in the accounts.
I make three main points: there’s no ambiguity in money consisting of notes and coins; credit is an alternative to money (not part of it); and cash is always an asset of its rightful holder (excluding the central bank [CB] which is not involved here). By contrast, the economist’s M1 definition introduces an illogical complication by merging these two mutually exclusive categories, cash and credit. Absent counterfeiting (or CB intervention), the money supply can only be increased by creating “new credit”, so we should instead talk about increasing the “credit supply”.
Banks increase the “credit supply” by “lending”, i.e. making a double-entry to create a “new credit” in [L] with a matching “new debit” in [A]. But a “transfer of credit” is not a “creation” process; it can only proceed from an account where a credit balance already exists, and it also consists of a double-entry. While the former increases the “credit supply” by increasing both [A] and [L] equally, the latter leaves the “credit supply” {[L] + [E]} unchanged because it affects either [L1] and [L2], or [L] and [E], equally but in opposite ‘directions’, i.e. one ↑, the other ↓. This is simple logic: the creation and transfer of credit are mutually exclusive processes, both of which rely implicitly on the double-entry process, with no logical possibility of overlap: “created” implies “not transferred”, and vice versa, “transferred” implies “previously created”.
This distinction is the missing key you need to unlock a riddle that clearly troubles you, and M1 is hiding the key from you.
Neither of us is confused about what “a transfer of credit” is; you described one perfectly [18 Feb] as follows: “… when the bank pays the $1K dividend to Eve, it credits her current account [L] and debits equity [E]”. But you then added, “It's not actually a transfer of money, even though it looks like that in the accounting abstraction”, which correctly says the transferred credit isn’t “actually … money” but “looks like” money, thereby demonstrating how the M1 definition introduces confusion, and (unintentionally) justifying my terminology. I agree, “It's not actually a transfer of money”, simply because it is “actually a transfer of credit”.
That brings me to your foundational error, which I call your “naked credit” hypothesis, apparently inspired by Frances Coppola, and represented by a “single green arrow”. This implies that banks don’t make a double-entry when they purchase a $10,000 coffee machine (using EFT), or pay a shareholder her $1K dividend, or give an aspiring young economist a free £20 Cr gift as an incentive. This faulty hypothesis leads you and Coppola to imagine “money creation” is occurring in these three “credit transfer” processes. This is pure supposition, based on imagination, with no evidence to support it and is logically self-contradictory. If such a “naked credit” policy was ever implemented by any bank, that bank’s balance sheet won’t balance and the practice will be exposed every time, as a $10,000, $1,000 or £20 “accounting error”. Your “naked credit hypothesis” (or “green arrow” description of Eve’s dividend payment) is an unrealistic imaginary supposition.
Logic alone gives the lie to Coppola’s claim that the electronic funds “transfer” of $10,000 for JP Morgan’s Coffee Machine was “newly created”, and her claim seems to be the only independent basis for your claim that “… a bank also creates [credit] when it pays employees or suppliers, buys financial assets (such as government bonds), or pays dividends to its owners” [Creating Money: A Free Lunch?, 2023], apparently reflecting Coppola’s claim that “… [banks] also create [credit] when they spend” [JP Morgan’s Coffee Machine, 2021].
But Coppola’s “Coffee Machine” article shows how easily pairs of Dr and Cr items (which do “look like” matched balance sheet items) can be combined with a complex narrative that can’t be reconciled with basic accounting rules or simple logic, and your claim regarding Eve’s dividend [5 Mar], which you believed would increase the “credit supply” by $1K, contradicts your earlier [18 Feb] correct description of the “credit transfer” which actually occurs.
Finally, if you believe the shareholder’s interest [$2k Cr] was not “newly created”, you are now in a position to consider a simple logical question very clearly: “From which account was the $2K Cr transferred?” If you are correct, and the $2k Cr was not “newly created”, that means it was “transferred” (from another account that must have had a “credit balance”). So, you need to identify an account with a credit balance greater than or equal to $2K Cr from which the credit was transferred. If you can’t identify such an account, the $2k Cr was “newly created” (together with its matching $2K Dr) and the “credit supply” increased by $2K as a result of that “new creation”. The “transfer” of $1K Cr from [E] to Eve’s current account [L] cannot “create” new credit.
Understanding the factual basis of that logical question, you should be able to resolve the riddle that has troubled you for so long regarding that “Money as Debt” documentary, finally and conclusively.
I agree our 'correspondence' is becoming unmanageable, so I’ll restrict myself to brief and sharp comments and questions.
First, I sincerely want to understand what supports your rebuttal of my statement that, "The bank is lending a liability", viz., "The bank isn't 'lending a liability'. It's lending by *creating a liability*".
You imply the bank is "lending something", but what that "something" is (or might be) escapes me. If NOT "a liability", what is the bank lending? That’s it for now.
Second, thank you for reading my #6 article and agreeing that ANZ Bank lied to its customer (Bill).
I think reducing the dialogue a bit is best. It was getting a bit out of hand.
I'm using the term "lending" just to describe the transaction (borrower and lender each write the other an IOU), not to imply that any particular asset is transferred from the bank to the borrower. I think we agree with each other and with Richard Werner that the transfer from the bank to the borrower is the bank gaining a liability rather than losing an asset. But the borrower is still able to exchange the bank's IOU for cash. And as I always say, the outcome is identical to the bank lending cash and the borrower immediately depositing that cash at the bank.
I wouldn't say ANZ Bank is lying any more than I'd call a chemistry teacher a liar for describing a solar system model of the atom. In the same way, the cash-flow model is a simplification, but for most customers it's a perfectly reasonable abstraction.
Re footnote 1: “interest paid” on a bank loan is not “destroyed”; it sticks to the banker’s fingers, like the 25 bushels of wheat that end up in Eve’s hands in your scenario.
Alice may have had her loan interest offset by Eve’s purchase of wheat, but she ultimately paid the bank’s interest with wheat worth £25.
I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it.
As I summarise the outcome of your scenario, Eve spent the bank’s profit (her £25 dividend) to repay the interest-free loan she used to buy £25 worth of Alice’s wheat, so that Alice could pay the £25 interest on the £1,000 loan from the bank, thus replacing the “profit” previously extracted by Eve as a dividend.
Do you mean that the bank [Eve] gave Alice the £25 so she could pay the bank the £25 interest she owed it? And did that £25 come out of the bank’s “equity”?
If so, that would mean “everyone is definitely better off” except the bank, which won’t survive if Eve’s malfeasance persists. Does Eve go to jail for snaffling £25 of bank equity under false pretences?
On reflection, your “breakthrough” doesn’t prove “that banks charging interest can be sustainable”. It sounds more like the perfect argument for ABOLISHING interest charges on all loans of credit – and jailing self-serving, sociopathic bankers.
I address when money (or other debts) are destroyed here:
https://www.economics21st.com/i/154262075/does-paying-interest-really-destroy-the-money-used
Basically, if you pay someone with their own IOU, the IOU is destroyed. (It becomes their debt to themself, which is meaningless). So if you use your current account balance to pay interest, it's just destroyed. Deposits decrease and the interest is no longer owed.
"Alice [...] ultimately paid the bank’s interest with wheat worth £25"
Yes, ultimately it all comes back to the real economy. But the focus of the article is that banks charging interest doesn't make it impossible for borrowers to pay their debts to banks.
"I don’t believe a real bank would allow Eve to do what you propose. In the end, she seems to have extracted 25 bushels of wheat from the economy without paying for it. "
She's the sole owner of the bank. She can call an EGM where she tables a motion for the dividend to be paid, and then vote in favour of it.
Yes, she's received 25 bushels of wheat, but that is her profit for owning the bank which provided the liquidity service to Alice. Without providing that service, everyone would have ended up worse off.
I can't understand why you think there's malfeasance and false pretences by Eve. As sole shareholder, she's entitled to the difference between the firm's assets and liabilities. How can it be "snaffling" to have the bank pay that to her as a dividend? And why would you think the bank won't survive?
And what's all this about "jailing self-serving, sociopathic bankers"? What have you got against Eve? She's provided a useful service to Alice, risked losing her car, and she gets to eat some bread as a result.
If interest were abolished on bank lending, banks would have literally no income. All operating costs and all defaults would be losses to the bank. That doesn't work, and is unjust.
Your “Footnote 1” is definitely wrong. The £25 interest is not destroyed when repaid (but it is created, ex nihilo, in the beginning!).
As a non-material form of “credit” in the bank’s records, it always has “two faces,” one looking towards the bank and the other towards Alice, until every “aspect” of it is finally “deleted” from all records.
Journal entries when it’s “created”:
£25 Dr Alice’s loan account [bank asset]
£25 Cr Interest Income [bank equity]
Journal entries when it’s “paid”
£25Dr Cash or Bank account [bank asset]
£25Cr Alice’s loan account [bank asset]
When paid by Alice, both of its “faces” change. The £25Cr cancels the £25Dr on Alice’s Loan Account statement. The bank has it recorded as “a [£25Dr] asset in its books” or “[£25 cash] in its vault”. The interest debt no longer faces Alice, and the bank has “captured” the value of it in its hands in whichever form Alice paid it.
Interestingly, rather than “destruction” at the end of the process, the beginning of this process appears to be another form of “credit creation” [From the bank's perspective that means "debit creation";)].
Perhaps we should think of credit as non-material all the time and use appropriate words to enhance that thought. I’d suggest using “erased” [for accounts on paper] or “deleted” [for accounts on computer], “defaced” or “melted” [for coins] and “incinerated” [for paper/plastic money].
Footnote 1 is absolutely correct in the most common case of Alice paying the interest with £25 of the balance in her current account. If you're right that interest charged is normally accumulated in Alice's loan account, the accounting in your representation would be:
£25Cr Alice’s loan account [bank asset]
£25Dr Alice's current account [bank liability]
That is, Alice has £25 less to spend in her current account, and nobody else has a corresponding increase. It's a contraction of the bank's balance sheet: assets↓ and liabilities↓.
What you showed would be correct if Alice pays the interest by handing over £25 of cash. But that would be unusual.
As I've said, if you pay your creditor using the creditor's own IOU, it destroys the IOU (as well as your own IOU). If you pay a creditor with a third party IOU, it *transfers* that IOU (and destroys your own IOU).
This should not be controversial: there is no other accounting which makes sense. You're not claiming that Alice paying the bank using her current account balance can increase how much cash the bank has are you? I'm sure the central bank would want a word about that. ;-)
I certainly agree that we should think of credit as non-material, which is what I've done consistently throughout this blog. A debt is conceptually different from the medium used for evidence of the debt, which is of little significance economically. If I hand over £10 cash to the Bank of England as a gift, its liabilities are *immediately* reduced by £10, whether it incinerates the plastic note now or later, or retains it to reissue. The creation/destruction of the *representation* (the physical banknote) isn't interesting economically. What really matters is the point at which the BoE becomes a debtor for a new debt (which is evidenced by the issuance of a note, or simply crediting a liability account) or stops being a debtor for an existing debt (which is evidenced by the receipt/destruction of a note, or simply debiting a liability account).
You know more about BoE internal workings than I and I appreciate your insight into money and credit creation/destruction. Your “IOU destruction” comments are also valid (but irrelevant here), and my journal entry, “£25Dr Cash or Bank account”, shows options open for Eve to accumulate her loot; it obviously can’t dictate how Alice opts to pay the interest.
You seem to have forgotten that Alice can’t pay the interest because her current account is empty, having repaid her £1,000 loan. “Alice … doesn’t have any money” undermines your alternative journal entries; so, my “definitely wrong” trumps your “absolutely correct” 😉, and Eve’s “£25 Dr interest” is accumulated in a bank asset account, not destroyed. Only Alice’s “£25 Cr payment” is erased in the payment process.
But that’s getting away from the “Money as Debt” filmmaker’s point you’re determined to debunk here.
Eve calculates I = £25 and books that to Alice’s loan account, posting it in the LH column as “Accrued interest”. Alice’s debit balance grows from £0.00 Dr to £25.00 Dr. The matching £25.00 Cr is posted to “Accrued Interest” [E], the account that will, one day, contribute to whichever account ends up being debited to pay Eve’s £25 dividend; but that will only happen after a dividend has been declared.
And right here, at this precise moment, there’s a physical and logical “Catch 22” that you refuse to recognise.
Eve is not allowed to declare that dividend unless she has the wherewithal to pay it. Bank regulators require sensible, as well as honest, accounting. Eve would be unwise to promise shareholders a dividend payment on the strength of an “accrued [but UNPAID] interest” accounting item. You’ll see why when you think through this physical situation logically. Please don’t speculate about what you think Eve MIGHT be able to do, hypothetically. I simply assume she wants to keep her banking licence.
Eve can’t (and would be foolish to) act on the ASSUMPTION that Alice will pay that interest, for a very simple reason; Alice has no money and cannot pay it! That’s a physical fact built into your model description! It’s not a fantastic story made up by those “Money as Debt” filmmakers.
That’s why regulators enforce that rule, unless you believe bank regulators are also part of a conspiracy by those filmmakers against your theory. So, Alice MUST pay Eve the interest BEFORE Eve can even declare (let alone pay) her shareholders a dividend [assuming a real bank with real shareholders, for the purposes of my argument].
It seems you’ve been determined to prove those “Money as Debt” filmmakers wrong, and that interest can be created some “other way besides lending”, since 2008. Yet I think you agree that when the principal of Alice’s loan was repaid, the £1,000 Dr in Alice’s loan account was digitally erased when her £1,000 Cr was mathematically added to it. And that necessarily implies she can’t pay that interest UNLESS you can find a legitimate way for Eve to put £25 in Alice’s possession, either as credit or cash [without lending it to her!!!].
At the moment she can’t, logically, physically, and legally, and you are, as they say, in logical and physical checkmate. With no money to her name, Alice can’t pay interest, so Eve can’t even declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice can pay the interest Eve needs to declare the dividend you want her to pay herself, so she can pay Alice that “missing £25”, so Alice ….
That looks like a “vicious circle”, from which there is only one logical escape route. After ~17 years, you must be nearing the point of giving up this quest?
Two quick thoughts, which might be wrong. The bank made no profit if Alice’s £25 of interest was “destroyed” when she paid it. So, didn’t Eve’s £25 "dividend" have to come from [E]? That's why the bank is going to fail.
It's important to recognise that profit doesn't mean an increase in the amount of cash. It's an increase in *equity*. If a borrower has a £25 balance in their current account (which is a liability of the bank), and the customer agrees that this balance can be destroyed as payment of the interest due, then the bank's liabilities decrease by £25, so its equity *increases* by £25.
Now it's true that the interest due (bank's asset) also decreases by £25 at that point, but that's only undoing the charging of the interest when interest due increases by £25, so overall the bank's equity increases by £25 due to the interest on the loan. This £25 increase allows Eve to take a £25 dividend.
The bank's not going to fail.
So, point 3. in your simplified “money creation” scheme [Money and Banking (5)] was a mistake? You didn’t mean money? And it simply wasn’t destroyed, in the literal sense of that word?
“3. The borrowers use the money to pay the interest (which actually destroys the money). The outcome is identical to the 5-stage process.”
As bank "lending" of credit is fraudulent, they'd better get used to it.
I wouldn't say it lends credit. I'd say it lends by crediting the borrower.
Can you confirm that you are fine with a bank lending $1,000 by handing over $1,000 in currency (in exchange for the borrower's promise to repay)? Are you fine with the the borrower then depositing that $1,000 in their current account at the lending bank?
That’s a good response. Your description of the accounting action is correct but incomplete - and you still believe banks can “lend” whatever [it] is. The full description is crediting a liability account in the borrower’s name plus the other end of the transaction: debiting an asset account in the customer’s name. The latter is where the fraudulent deception happens and is concealed.
Do I need to answer your last question? I also prefer the convenience of “credit”, but [it] never, ever belonged to any bank and pretending to “lend” us what we already own, as creditors, is based on demonstrable accounting fraud, the evidence of which I've published at https://patcusack.substack.com/.
Yes, I made a mistake. Eve maintained [E] unchanged. But she acquired £25 worth of wheat without paying for it. That’s the malfeasance. [Even so, “withdrawing” £25 of equity, to enable Alice to replenish it for her later, does seem “unreal”.]
I’ve tried to “understand exactly what’s happening in every step” of this “much simpler problem” but remain puzzled by its complicated “simplicity”.
I've never understood, for example, how Bob might get hold of Eve’s "spare" car in the original scenario, where: “Eve actually has a spare car, and she’d be prepared to exchange it for £1,000 if Bob can’t use it to buy wheat.”
Now, I don’t understand how Eve ever “risked losing her car” to anyone [above]. She had an interest-free loan from her own bank, which pays it off for her by declaring a dividend, equal to the interest Eve is charging Alice for her £1,000 “loan”. [No car needed.]
This caused Eve’s equity [E] to INCREASE [thanks to Alice], after it had DECREASED [thanks to Eve paying Eve, so Eve could buy wheat from Alice, so Alice could pay Eve the interest she owed Eve].
Now, admittedly, that’s much simpler than “the whole economy”, but I never imagined any such goings on in any bank. If this were operating in reality, it would be obvious to everyone that every bank was obtaining goods from the community to the value of the interest we pay for “credit” - which we already own as creditors - and still maintain its [E] unchanged.
When people notice her bank is acquiring wheat without incurring a commensurate expense, Eve will be lucky if she remains alive, let alone in charge of her bank.
It may be that Bob’s <not being able to buy Alice’s wheat with Eve’s car> has had something to do with it, but became lost somewhere in your “Continuity Department”. Please don’t bother trying to explain; I truly don’t want to know.
Another unnecessary adverb: "banks would have *literally* no income". Have you heard about fees-for-service and account-accommodation fees?
If Eve were lawfully entitled to the 25 dividend, would that then eliminate the problem as identified?
Yes - in fact I don't think there was even a problem to eliminate. Equity is a record of how much of the firm's assets would be left if all the liabilities were paid, and it belongs to the shareholders. Paying a dividend is just distributing some of this excess without having to wind up the firm.
My reply to your comments (18 Feb & 5 Mar) is posted as a “new comment” to avoid losing track of it at the bottom of this chain.
I’ve outlined my basic observations on money (i.e., cash, or notes and coins) and credit here: https://patcusack.substack.com/i/150504024/mapping-the-word-jungle.
You won’t distinguish them on a balance sheet unless they’re described as such in the accounts.
I make three main points: there’s no ambiguity in money consisting of notes and coins; credit is an alternative to money (not part of it); and cash is always an asset of its rightful holder (excluding the central bank [CB] which is not involved here). By contrast, the economist’s M1 definition introduces an illogical complication by merging these two mutually exclusive categories, cash and credit. Absent counterfeiting (or CB intervention), the money supply can only be increased by creating “new credit”, so we should instead talk about increasing the “credit supply”.
Banks increase the “credit supply” by “lending”, i.e. making a double-entry to create a “new credit” in [L] with a matching “new debit” in [A]. But a “transfer of credit” is not a “creation” process; it can only proceed from an account where a credit balance already exists, and it also consists of a double-entry. While the former increases the “credit supply” by increasing both [A] and [L] equally, the latter leaves the “credit supply” {[L] + [E]} unchanged because it affects either [L1] and [L2], or [L] and [E], equally but in opposite ‘directions’, i.e. one ↑, the other ↓. This is simple logic: the creation and transfer of credit are mutually exclusive processes, both of which rely implicitly on the double-entry process, with no logical possibility of overlap: “created” implies “not transferred”, and vice versa, “transferred” implies “previously created”.
This distinction is the missing key you need to unlock a riddle that clearly troubles you, and M1 is hiding the key from you.
Neither of us is confused about what “a transfer of credit” is; you described one perfectly [18 Feb] as follows: “… when the bank pays the $1K dividend to Eve, it credits her current account [L] and debits equity [E]”. But you then added, “It's not actually a transfer of money, even though it looks like that in the accounting abstraction”, which correctly says the transferred credit isn’t “actually … money” but “looks like” money, thereby demonstrating how the M1 definition introduces confusion, and (unintentionally) justifying my terminology. I agree, “It's not actually a transfer of money”, simply because it is “actually a transfer of credit”.
That brings me to your foundational error, which I call your “naked credit” hypothesis, apparently inspired by Frances Coppola, and represented by a “single green arrow”. This implies that banks don’t make a double-entry when they purchase a $10,000 coffee machine (using EFT), or pay a shareholder her $1K dividend, or give an aspiring young economist a free £20 Cr gift as an incentive. This faulty hypothesis leads you and Coppola to imagine “money creation” is occurring in these three “credit transfer” processes. This is pure supposition, based on imagination, with no evidence to support it and is logically self-contradictory. If such a “naked credit” policy was ever implemented by any bank, that bank’s balance sheet won’t balance and the practice will be exposed every time, as a $10,000, $1,000 or £20 “accounting error”. Your “naked credit hypothesis” (or “green arrow” description of Eve’s dividend payment) is an unrealistic imaginary supposition.
Logic alone gives the lie to Coppola’s claim that the electronic funds “transfer” of $10,000 for JP Morgan’s Coffee Machine was “newly created”, and her claim seems to be the only independent basis for your claim that “… a bank also creates [credit] when it pays employees or suppliers, buys financial assets (such as government bonds), or pays dividends to its owners” [Creating Money: A Free Lunch?, 2023], apparently reflecting Coppola’s claim that “… [banks] also create [credit] when they spend” [JP Morgan’s Coffee Machine, 2021].
But Coppola’s “Coffee Machine” article shows how easily pairs of Dr and Cr items (which do “look like” matched balance sheet items) can be combined with a complex narrative that can’t be reconciled with basic accounting rules or simple logic, and your claim regarding Eve’s dividend [5 Mar], which you believed would increase the “credit supply” by $1K, contradicts your earlier [18 Feb] correct description of the “credit transfer” which actually occurs.
Finally, if you believe the shareholder’s interest [$2k Cr] was not “newly created”, you are now in a position to consider a simple logical question very clearly: “From which account was the $2K Cr transferred?” If you are correct, and the $2k Cr was not “newly created”, that means it was “transferred” (from another account that must have had a “credit balance”). So, you need to identify an account with a credit balance greater than or equal to $2K Cr from which the credit was transferred. If you can’t identify such an account, the $2k Cr was “newly created” (together with its matching $2K Dr) and the “credit supply” increased by $2K as a result of that “new creation”. The “transfer” of $1K Cr from [E] to Eve’s current account [L] cannot “create” new credit.
Understanding the factual basis of that logical question, you should be able to resolve the riddle that has troubled you for so long regarding that “Money as Debt” documentary, finally and conclusively.