Tuesday, March 3, 2015

Steve Keen on how Money is Created

Steve Keen has a summary of what money is and how it is created here:
Steve Keen, “What Is Money And How Is It Created?,” Forbes, 28th February, 2015.
Steve Keen points to the work of Augusto Graziani, the Italian monetary circuit theorist, and gives an interesting, if perhaps a little idiosyncratic, perspective on what money is and the nature of a monetary production economy.

I think the whole discussion would benefit from distinguishing (1) high-powered money from (2) credit money. Any private-sector agent can create credit money, including negotiable bills of exchange, negotiable promissory notes, negotiable cheques, or bank money. The trouble is having your credit money (which is simply a promise to pay in a higher money that can finally extinguish debt at a later date) accepted as payment in a transaction, because that money creates a debt/credit relationship that almost always must be extinguished by high-powered money. High-powered money can be either (1) commodity money or (2) state-issued fiat money.

As an aside, one of Graziani’s most important books was The Monetary Theory of Production (Cambridge University Press, Cambridge, 2003).

Sunday, March 1, 2015

The Germans Don’t Remember how the Allies Forgave 50% of their Debts in 1953 and Restructured the Rest

I am talking about the London Agreement on German External Debts of 1953, which is examined in the video discussion below.

After the Second World War, Germany still had a large burden of debt – owed to both external private banks and creditors and foreign governments – consisting of both the unpaid debt from the Treaty of Versailles (and subsequent renegotiations of that debt) and postwar debts incurred after 1945 from the US.

By 1953, the burden of this external debt was considered something of a crisis. In that year representatives of the various governments met, and in the London Agreement on German External Debts they eventually agreed to write off about 50% of Germany’s debts and the remaining debts were largely restructured in new, realistic long-term debt contracts.

This lesson from history puts Germany’s brutal treatment of Greece – and other Eurozone nations – into perspective. Despite idiots who want to dismiss this analogy as “demagoguery,” the analogy is real: the ordinary Greek people have now gone through a humanitarian catastrophe after years of austerity, just as the ordinary German people went through a humanitarian catastrophe in the years after 1945.

It is often alleged that Greece’s governments before 2008 were dishonest and profligate. Even if true, it hardly follows that the ordinary Greek people today must be collectively punished for this. Whatever crimes or irresponsible and immoral actions Greek governments before 2008 might have committed pale into utter insignificance compared with the unspeakable crimes of the genocidal Nazi regime that ruled Germany between 1933 and 1945 and that victimised most of Europe in those years. But still Germany got debt relief in 1953, even when some Nazi mass murderers and other war criminals who had escaped punishment were alive and well and living in Germany.

In truth, ordinary Greeks are not to blame for the alleged dishonesty and profligacy (even if true) of previous Greek governments, any more than ordinary Germans by 1953 were collectively responsive for the crimes of the Nazi government.

Finally, Noam Chomsky gives a nice perspective on the Eurozone (from an interview back in 2013) in the video below, with an interesting reference to this very issue, except that he is wrong to fall for the line that government debt is necessarily harmful in the long run. Frankly, he should read more Post Keynesian economics!