I've been spending even more time than usual reading about peak oil and climate change recently, and I think I've had a bit of a moment of clarity regarding why the government (despite everything announced in the last couple of days) seems unwilling/unable to actually do anything much except make promises about what they will be doing in the future. Also, why the general population is still, despite all they have been told about these problems, in almost total denial about the consequences.

Anyway, that's just to let you know where I'm coming from.

What I'd like to check out (by tapping into the Singletrack hive mind) is my understanding of the answer to this question:

Where does money come from?

Stoner to the thread please.

thatcher?

Maybe somebody else could give me an answer first?

Start here http://distributedresearch.net/blog/2008/10/11/how-is-wealth-destroyed-and-where-does-wealth-come-from

this is quite a good article on the Greek philosophy around money.

I would say wealth comes from knowledge. If you know more than you need to know, you are in positive equity.

ahem.

First things first.
This is an excellent book on how money works

The Oil/Climate change thing is a whole big argument, but my own opinion on it is that you can either leave the issue well alone until the market for utility of a non-f***ed world makes it worth while for people to pay for the world to NOT get any more damaged or you manipulate the relevant markets to encourage substitution. As you can imagine the greenies are not a huge fan of the former, using the argument that by then it's all too late and any environmental damage done will be irreversible.

The problem with the latter is that the total cost to the economy of encouraging substitution is usually higher than the total cost of leaving things alone assuming that the full cost of environmental damage continues not to be paid for under the status quo (which it generally isnt. See "polluter pays" principals of economics and the fact that they often dont). Increasing the total costs to the economy has the effect of sending it backwards (tax receipts fall, the wealth of the nation and individuals in it also falls). It will take real bravery to make economies take on the full burden of an environmentally conscious structure.

This is where the guilt trip approach comes in, but its all a bit prisoners dilemma (http://en.wikipedia.org/wiki/Prisoners_dilemma) and so there's no individual incentive to wear the hairshirt.

On the money thing, the book is good at answering that. But as simply as possible think of money being the mechanism of liquidity – translating objects, services, utility, desire…anything, into a transferable concept. Money allows people to compare value and worth, to bargain for finite supplies of goods and utility, to give and receive, and to trade all of this with anyone else that they want to.(^)

What some people object to (particularly Muslims* for example or indeed anti-bankers) is the making of money from money. (http://en.wikipedia.org/wiki/Usury)

To reject "usury" though is to reject one of the key elements of liquidity. Liquidity is vital, in that it is the mechanism of redistribution of wealth by commercial process (capitalism) rather than the state (socialism)…and that takes us into a whole other thread… 🙂

(^) gold is still the base derivative of all global money since it is the one physical manifestation which is consistent and ubiquitous yet sufficiently scarce and so easier to settle accounts with.

* that's a bit unfair, as Islamic banks have worked on ways of allowing for "loans" but doing it by sleight of hand so that it is not contrary to their religious guidance. As a matter of fact Im off to do some work in Tripoli soon…and I assure you my field of work is very usurious 🙂

Is this not a more historical question, as in where does the concept of money come from?

If so, it's merely a construct to allow a more sophisticated form of batering than, "I will give you one pig in exchange for half a cow, now let us quaff ale!"

confidence and a lack of it equals a recession either way it is NOT real.

in what way is it not "real"?

I would agree if what you really mean is that money itself has no value, but then that has never been the idea. Money is little more than the promise to settle a value. What makes money so valuable is that it is a transferable promise.

If you are trying to say that value is ephemeral, then you are probably narrow-mindedly focussing in the current fashion on just the "bubble" element of asset values and not the greater function of money which is trade and allocation of resources.

Just to clarify, as we seem to be heading off on some tangents already. What I am asking is; if there is more money in the world today than yesterday, then where did that money come from? What mechanism brought it into existence?

presumably by the production of commodities.

surely money is just a way of lending someone elses wealth, be it in the form of actual goods or the promise of some form of return for profit

In the short term loads of huge printing presses 🙂

i do need to get me one of those 🙂

two main reasons to my mind.

first is inflation
second is "added value".

In the first case, more money exists from one day to the next because prices generally rise as global overall demand is constantly (except in a recession, natch) rising. i.e. there is greater demand for what is usually a scarce resource, which means the marginal price at which it can be bought will go up. (see supply/demand curves)

In the second, growing economies that are productive increase the total value of their "assets" by increasing the individual value of a given resource, often by refining, or manufacturing or enhancing somehow.

mrmw –

surely money is just a way of lending someone elses wealth, be it in the form of actual goods or the promise of some form of return for profit

That is the act of liquidity, not an act of "money". Money makes it possible, but money is just as important to many other economic actions as investment and liquidity.

Yes, money is just a token.

The pig seller doesn't always want ale.

So the pig seller gets a token to the value of said pig and he can go out and buy the wheat he wants with the tokens.

The wheat seller uses the tokens to buy ale.

And the pig seller uses the wheat to make ale, for which he exchanges for a greater number of tokens, creating a free marketplace.

SIMPLES.

simples indeed,
and nothing to do with lending for profit either 😉

i see

i think Nick has it though really (the answer, not money)

give me a tenner and I'll tell you

To be honest though – have any one of you ever wished for a return to such a simple life. All living in little villages, with our trades and bartering for stuff.

I would have been a village idiot. Not sure how much bartering tokens that would get me…

Just to clarify, as we seem to be heading off on some tangents already. What I am asking is; if there is more money in the world today than yesterday, then where did that money come from? What mechanism brought it into existence?

5 people each deposit 10 pounds with bank.

Bank then lends 10 pounds out to 6 different people.

Money didn't come from anywhere. Wealth did.

Money is a token in the same way time is a unit of measurement.

5 people each deposit 10 pounds with bank.

Bank then lends 10 pounds out to 6 different people.

Not quite, that's essentially it but the banks are not allowed to lend more than what is deposited. In fact they can't actually lend the full amount of deposits. I'm not sure what they are called here but there is legislation as to what proportion of deposits banks can re-lend.

person 1 deposits £10
person 2 borrows £9

Collectively they now have £19 where there was previously only £10. When everyone 'actually' wants theirs back that is what causes banking collapses – like Northern Rock last year.

Basle II rules dictate capital adequacy ratios.

This set requirements for asset holdings ranked by their liquidity as a proportion of all assets, and then what proportion of Assets can be used in value terms to issue to borrowers.

http://en.wikipedia.org/wiki/Basel_II

A nice article in the LRB on banking and the city

Some people will tell you that Marx is worthless (badum-tish) but he was actually pretty astute in his analysis of commodity capitalism – it was his 'solutions' that were a bit iffy – a great deal of his analytical work is still useful. Ernest Mandel's summary of his theory of money is quite good.

Edit: Oh! And Marx himself

Stoner – Member
in what way is it [momey]not "real"?

in the sense that if we all went to the bank and tried to withdraw it it would not be there you know MLR , velocity of money and all that stuff.

Banks are essentially relending the same money over and over
Do I need to do a table now?

Sam said:

Not quite, that's essentially it but the banks are not allowed to lend more than what is deposited.

Are you *sure* about that?

geoffj,

Haven't had time to read the article yet but I will – it looks interesting. In the meantime I'll keep stabbing around in the dark.

I said:

if there is more money in the world today than yesterday, then where did that money come from? What mechanism brought it into existence?

Stoner said:

two main reasons to my mind.

first is inflation
second is "added value".

In the first case, more money exists from one day to the next because prices generally rise as global overall demand is constantly (except in a recession, natch) rising. i.e. there is greater demand for what is usually a scarce resource, which means the marginal price at which it can be bought will go up. (see supply/demand curves)

In the second, growing economies that are productive increase the total value of their "assets" by increasing the individual value of a given resource, often by refining, or manufacturing or enhancing somehow.

So how does inflation *create* more money?

And in your second example – what's the mechanism? If country A mines some gold how does that actually *create* money? Why doesn't the presence of more gold in the economy just reduce the price of gold?

junkyard – if we all went to the banks to withdraw money reflective of the value of our holdings of course it wouldnt all be there. See the capital adequacy stuff further up. Money is the promise to pay, not the value itself.

Imagine if a bank had to hold 100% of its deposits just in case all its creditors wanted their money back all in one go? Then there's be no capacity to lend would there.

RPRT – banks cannot lend more than a proportion (its lee than 100%, but Im not sure how much less) of their asset base. If they do, they are bankrupt. At some points in time when markets are highly stressed, the value of some of the bank's assets may be substantially depressed (potentially as far as 0) – it's not that their loans have got bigger but that there assets have got smaller (see Bear Stearns etc)

Inflation creates more money, it doesnt create more value. Money is just the reflection of relative worth between various entities. The creation of money comes through growth in economies and, as nickc pointed out, the printing of more cash. The printing bit is relatively small proportion of the production of "money". The vast majority is the issuance of new government bonds. (see Quantitative Easing in the news currently)

If a country turns more of its iron ore into windmills it has increased value and the monetary worth of the country.

Gold supply does effect gold price but it is a fine interplay between two markets – one is the use of gold as a monetary tool, the other in manufacturing (electronics, jewellery, space ships etc)

junkyard – if we all went to the banks to withdraw money reflective of the value of our holdings of course it wouldnt all be there. See the capital adequacy stuff further up. Money is the promise to pay, not the value itself.

What use is the promise to pay then if it has no value ?
It is not real as long as we have faith that the tokens equate to something it is fine I shall call that BOOM
Once we realise that some people cannot repay the money we dont have that we lent them and those whose money it really is want it back as they realise we dont have it i shall call BUST

person 1 deposits £10
person 2 borrows £9

Collectively they now have £19 where there was previously only £10.

person 2 pays that £9 to person 4, who deposits it.

person 5 borrows £8.10, and pays it to person 6, who deposits it.

person 7 borrows £7.29, and pays it to person 8, who deposits it.

person 9 borrows £6.56, …

…and so on.

Collectively the depositors now have (almost) £100.

Thus is the magic of banking.

It is not real as long as we have faith that the tokens equate to something it is fine I shall call that BOOM
Once we realise that some people cannot repay the money we dont have that we lent them and those whose money it really is want it back as they realise we dont have it i shall call BUST

well done youve passed 101 in risk and return, but have missed your own point.

Investment bears risk
Deposits dont (search for an earlier thread where all this was explained)
The creditor ranking between depositors recovering the value of their funds versus shareholders in banks not recovering the investment gamble is distinct and usually well protected.

There is a marked difference between the two that you have got yourself confused over with your run-on-the-bank analogy and then the bank going bust analogy.
In both cases money is the mechanism through which value is transferred, it is not the value itself.

person 2 pays that £9 to person 4, who deposits it.

person 5 borrows £8.10, and pays it to person 6, who deposits it.

person 7 borrows £7.29, and pays it to person 8, who deposits it.

person 9 borrows £6.56, …

…and so on.

Collectively the depositors now have (almost) £100.

Thus is the magic of banking.

good grief.
If you really believe that then you should stick to shells and goats.

Well of course the money lent out won't all end up back in deposit accounts. Some (after being spent) goes to servicing other debts, some more ends up under a mattress somewhere. But the rest has to be deposited or invested in some sort of instrument or institution from where it'll inevitably get recycled…

shells and goats

Dunno about that, but I've got a fortune locked up in Flainian pobble beads, know anywhere I can exchange them? 😉

I would say wealth come from work

and work = force * displacement

Well kind of people doing work creates wealth

epiliptic – its not the location of the loans that matters, you're missing a big point:

If £10 is deposited in Bank A, Bank A can now lend, say 80%, or £8.

The borrower can spend it or deposit it.

If the borrower deposits the £8 back in Bank A, then the Bank A can lend another £8 to another borrower (as long as total lending based on that class of deposits does not exceed 80%). Net Assets = £10 – £8 + £8 – £8 = Net Assets of +£2.

If the borrower deposits the £8 in Bank B, then Bank B can lend 80% of it, or £6.40. Net Assets = £8 – 6.40 = +£1.60. And Net assets in the system = £10 – £8 + £8 – £6.40 = +£3.60.

The total amount owed is never greater than 80% of the total amount deposited.

If the borrower deposits the £8 back in Bank A, then the Bank A can lend another £8 to another borrower (as long as total lending based on that class of deposits does not exceed 80%). Net Assets = £10 – £8 + £8 – £8 = Net Assets of +£2.

If the borrower deposits the £8 in Bank B, then Bank B can lend 80% of it, or £6.40. Net Assets = £8 – 6.40 = +£1.60. And Net assets in the system = £10 – £8 + £8 – £6.40 = +£3.60.

The total amount owed is never greater than 80% of the total amount deposited.

What if the assets are junk based on mortgages that will never be paid back taken out on properties that are now declining in value because they were only worth the previous price when banks were effectively creating money to throw at US/UK/Irish consumers because Chinese/German businesses needed to invest the profits they made from selling things to US/UK/Irish consumers who'd borrowed money to buy the things made by the Chinese/German businesses?

What then? 😉