the goldsmith "fraud" story June 20, 2008 Richard, I quite accept that there is no antisemitic intent to your version of the goldsmith "fraud" story. Please note that I didn't accuse you of antisemitism. I used the word "seems." You must be aware that there are hundreds of websites that tell essentially the same story, but that also closely associate bankers with Jews. I agree with you that not only "many" but most bankers historically were not Jews. Today, only a minority of bankers are Jews. Even Deuteronomy that you cited figures prominently into the antisemitic characterization: "23:19 Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: "23:20 Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it." - The antisemitic spin is that the Jews know that usury is inherently wrong, but see nothing wrong in inflicting usury upon non-Jews. Jews are therefore evil. This is not the case at all and is a perverse interpretation of the Scriptures. The ancient Jews saw their race as being a family. It has to do with charity to members of your family. If your literal brother comes to you in time of need, you wouldn't take advantage of the situation in trying to profit from his distress. But outside your family, there's nothing wrong with profiting from commercial transactions. In fact doing so benefits society as a whole. This is the proper interpretation of Deuteronomy 19 and 20. The point I am trying to make is that when you tell your version of the story, you must preface it emphatically with the fact that most bankers are not nor have ever been Jews, to disassociate yourself from the antisemites who tell a very similar story. You must emphasize this every time you tell the story. Bill -------------------------------------------- June 20, 2008 William, Can you please remove all postings referring to our exchange? Including on the creditlist and the below link. I have not given permission. Thank you. Richard ------------------------------------------------------ June 20, 2008 I think it is very sad that your reply has to resort to the 'anti-semitic conspiracy theory' accusation. This is utter nonsense. As you well know many leading bankers and banking dynasties past and present are not Jewish or semitic. I have nowhere referred to such things and I refuse to be lumped together with such nonsense. I would have expected higher standards from you. --------------------------------------------------------- June 19, 2008 Richard, I've archived some of our interesting dialog at http://www.geocities.com/new_economics/werner/goldsmith.txt To keep this conversation from becoming interminable, I've attempted to keep my replies inserted below [Reply] very brief and to the point:- Bill ------------------------------------------------------- William, You are falling for the propaganda of the bankers. Usury means interest. The Bible forbids it. The bankers managed to convince the Bible scholars between the 16th and 17th century to suddenly see things differently, and came up with the idea of distinguishing 'excessive interest' from 'interest', and only calling usury the former. Convenient. A fairly see-through plan, but it has worked. ------------------------------------------------------- [Reply] Whether or not the Bible actually forbids it is open for discussion. But this seems suspiciously like the anti-semitic conspiracy theory that the Jewish bankers conspired with the Calvinist reformers and Cromwell to introduce the fractional reserve banking system for some nefarious purpose. I'm not even sure that the goldsmiths were Jews or descended from Jews. The Jews had previously been expelled from England and I do not think they had re-entered in great numbers by the seventeenth century. I quoted from two citations, the first from a scholar at Utah State University summarizing Calvin's letter from 1645, and the second from an Islamic scholar at an Islamic website, that say that there were two words in the Semitic languages that were translated into English as the one word, "usury." This goes to the argument that the Bible was written originally in Aramaic, then translated by a non-native Aramaic speaker or speakers, first into Greek, then from Greek to Latin. So errors were introduced when first translated into Greek nearly two thousand years ago, that have been carried forward into the modern translations that we now use. - You certainly seem to have bought it, as you seem to think the modern distinction is the accurate one. You also seem to think that before medieval times people had it right, but the knowledge was temporarily lost. ------------------------------------------------------- [Reply] Actually, much knowledge from antiquity was lost by the Middle Ages, which is one reason why they are sometimes called the "Dark Ages." - Actually, the further one goes back in time the clearer it becomes that virtually all cultures and civilizations banned interest/usury. (e.g. Hindu Sutras, Buddhist Jatakas, etc.). Obviously the biggest problem with this elastic and convenient new interpretation is that the distinction is entirely flexible concerning what is considered excessive and what not... ------------------------------------------------------- [Reply] It would certainly require value judgments on particular circumstances. - the present-day 'expert' interpreters of the Bible would no doubt say that no interest charged nowadays is 'excessive' hence there is no usury at all! ------------------------------------------------------- [Reply] There are indeed extreme ideologues who say there should be no intrusion into the market whatsoever. I do not believe in laissez faire in matters of finance. I believe that the free market in goods and services requires public oversight and regulation of the financial sector so that the natural monopoly of finance is not abused. - Interesting that you seem to think the Koran allows interest. I know quite a few Muslims who spend more time reading it than I do, and perhaps than you, who think about this differently, based on their reading of the Koran. ------------------------------------------------------- [Reply] My citation was from an Islamic website. - Your interpretation is not convincing, though. Why would Islamic Banking then exist? (Although it is anyway only a fig leaf, similar to the invention of discounting in Europe several centuries ago to circumvent the ban on interest/usury). ------------------------------------------------------- [Reply] Economic progress required subterfuges to get around the pinheaded legalists. Discounting was effectively charging interest, but the legalists were too stupid to know that. The same is true in Islamic communities today, which seem to have a preponderance of pinheaded legalists. "Islamic Banking" in the pure sense cannot exist, since a mass production economy that does not charge and collect interest is an impossibility except in the minds of ideologues. - Actually the Bible is also quite clear about it: any kind of interest is forbidden, see e.g. Deuteronomy 23:19: "Do not charge your brother interest, whether on money or food or anything else that may earn interest." ------------------------------------------------------- [Reply] It does not say that any kind of interest is forbidden. 23:19 goes on to say, "unto a stranger thou mayest lend upon interest." - The subtle distinction between usury and increase can be made, but this is not fruitful, since the Bible condems both: Ezekiel 18:8: "He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniquity, hath executed true judgement between man and man." ------------------------------------------------------- [Reply] From "John Wesley's Explanatory Notes": "Increase — Illegal interest. "Iniquity — Injustice of every kind." http://www.christnotes.org/commentary.php?com=wes&b=26&c=18 - That's of course also why the Jubilee cancels ALL debt, not just the debt with 'excessively high interest' or debt to the poor, but also the loans from the professional 'money lenders' (bankers). This is also the case in the Babylonian debt amnesty. ------------------------------------------------------- [Reply] It was, for the time, a rationally applied accounting adjustment to compensate for exponentially expanding debt that was however harmful to creditors, regardless how they obtained their relationship with debtors, whether just or unjust. Some of the debt was undoubtedly just, which means its cancellation was unjust to the creditor. It is however possible to apply an adjustment in such a way that it doesn't harm creditors, so that trade and commerce might continue without disruption. I wish you would take up my offer to discuss the Douglas A + B theorem which is predicated on something other than the fallacious "debt virus" theory that you favor. - Jesus was also pretty clear about his views of bankers and their fraudulent activity: he threw them out. (In ancient times, bankers operated not only in temples, but often as part of the temple administration - temple banks - which were a commercially attractive proposition for those who controlled the temple, since they could not resist the temptation to expand the role of deposit-taking to one of fraudulently creating fictional deposits). ------------------------------------------------------- [Reply] I don't think the money changers were bankers in the modern sense. They were people who were haggling and selling the temple tokens that were acceptable for sacrifice within the temple. Their haggling was undignified within the temple, so Jesus threw them out. They had no relationship to fractional reserve banking. - Concerning the crucial issue of deposits: you wrote: " the existence of deposits infers that someone must have deposited them". Do I understand you correctly that you are saying that all deposits have actually been deposited by someone? ------------------------------------------------------- [Reply] That is not my position; I was summarizing a portion of your argument. - If so, then you seem blissfully unaware that through credit creation individual banks have the ability to create new money out of nothing, ------------------------------------------------------- [Reply] The theorem that I accept is that loans create deposits. - and this takes the form of creating fictional deposits which were not deposited by anyone. The fiction is, of course, that the bank pretends to have 'deposited' the money, but the reality is that nobody, not even the bank actually made a payment for the deposits when they come about through credit creation. Yes, the bank writes the figures into people's bank accounts, but this is not equivalent to 'making a deposit', because no money is transferred from anywhere else in the economy to this deposit account. Hence no money was actually deposited. These fictional or counterfeit deposits ------------------------------------------------------- [Reply] They are neither fictional or counterfeit. - are then presented by the holders and their banks - who are the accountants and settlement system of the economy - as being totally equivalent to deposits that were actually paid up. ------------------------------------------------------- [Reply] They are completely equivalent to any other deposits inasmuch as all of them are equivalent and fungible liabilities of the banks. - Since the public is not aware that fictional deposits have been created (in large scale), the public has been misled about the working of the financial system. This is why I argue that the practice of banking is based on what historically was a fraudulent process, and which has not materially changed today (although the banking laws, sponsored by the bankers themselves, ensure that technically this formerly fraudulent process is now not illegal). ------------------------------------------------------- [Reply] Since the inception of the process it has never been fraudulent in law or in fact. When granting loans, the goldsmiths did not give warehouse receipts signifying that so much gold denominated in pounds was being held in deposit in their vaults, but promissory notes promising to pay so much gold denominated in pounds on demand. These were contracts calling for future performance. Innes informs us that trade and commerce was primarily creditary or contractual, rather than monetary in the commodity sense, from the earliest times. See the Innes essays at http://www.geocities.com/new_economics/innes/ - Since you were unaware of this fact I now understand your reluctance to recognize the fraudulent historical origin of banking and continued dubious practice today. First you need to become aware of this reality. I explain it in chapter 12 of New Paradigm. ------------------------------------------------------- [Reply] I have read it and continue to read it. Thank you for writing it and making it available. - June 18, 2008 Richard, I've inserted some brief comments [Comment] below:- Bill ------------------------------------------------------------- This is certainly not bizarre and I am puzzled why you think so. If somebody figured out a clever way of organizing the economy, but is doing it in an illegal and immoral way, then one should put a stop to his activity under his aegis, but this does not necessarily mean that the way of organizing the economy has to be abandoned. It may be decided that this is a good way for democratically designed and transparent institutions to run the show. -------------------------------------------------------- [Comment] I'm sorry but this appears to be contradictory. If it is decided that it is a "good way...to run the show" by "democratically designed and transparent institutions" how can it also be inherently an "illegal and immoral" practice if performed by "clever" people for private gain? I think it becomes a matter for regulation and not prohibition. - I do not necessarily favour 'hundred percent reserve banking'. This would depend on a number of other variables, but certainly the credit creation system, as it is today, could be utilized in more appropriate fashion for the benefit of society without the many drawbacks of the current set-up. Please refer to the latter chapters in my book New Paradigm... -------------------------------------------------------- [Comment] Will you please briefly summarize how this could be done? Thanks. - On usury: your abuse of those who considered it bad and thus virtually all religious texts who ban it is inappropriate. -------------------------------------------------------- [Comment] Usury is condemned but it does not appear that interest per se is condemned. It appears that, as in modern English, interest and usury are separate words with distinct meanings in the Semitic languages in which the Scriptures were written originally. The knowledge of this appears to have been lost in the Middle Ages until its revival during the Reformation:- "John Calvin's letter on usury of 1545 made it clear that when Christ said 'lend hoping for nothing in return,' He meant that we should help the poor freely. Following the rule of equity, we should judge people by their circumstances, not by legal definitions. Humanist that he was, Calvin knew there were two Hebrew words translated as 'usury.' One, neshek, meant 'to bite'; the other, tarbit, meant 'to take legitimate increase.' Based on these distinctions, Calvin argued that only 'biting' loans were forbidden. Thus, one could lend at interest to business people who would make a profit using the money. To the working poor one could lend without interest, but expect the loan to be repaid. To the impoverished one should give without expecting repayment." http://eh.net/encyclopedia/article/jones.usury "The Quran forbids usury, not interest. Quite a few states in USA have laws against usury. Usury is defined as excessive interest. A Dictionary defines usury as 'an excessive or inordinate premium for the use of money borrowed', 'extortionate interest', or 'the practice of taking exorbitant or excessive interest.' The Arabic language also makes distinction between interest (Fa'eda) and usury (Reba). The Quran forbids Reba or usury." http://www.submission.org/islam/interest-usury.html - Usury has significant flaws as it is not in line with economic principles. You may not have noticed, but it is a concept derived purely from mathematics, without any reference to the fundamental laws of thermodynamics which determine the actual functioning of our world, and without reference to ethical principles which we can institute in response to our innate sense of justice. This is why those who introduced usury first (the Babylonians) also offered the right answers to deal with the inevitable problems a system based on usury will create (such as jubilees etc). I recommend you read Michael Hudson's work on the Babylonians on the latter point. -------------------------------------------------------- [Comment] If there is compounding debt, one logical way to deal with it is to periodically cancel it, which would be a type of accounting adjustment imposed on and to the detriment of creditors. The question is: What is the underlying cause of the compounding debt? There is a highly sophisticated though poorly understood alternative to the fallacious "debt virus" theory that it is caused by interest (that you seem to favor) called the "A plus B theorem," which I would be glad to discuss with you. In the understanding of the theorem, the monetary authority (or central bank) would grant credits to final consumers. This would offset the compounding increment (which has nothing to do with interest per se) in such a way that it does not harm creditors. You will see that the theorem is the theoretical repudiation of Say's Law. - You are still evading the issue. The deposits are fictional. Yes, they are true liabilities of the bank, no doubt about that. But who deposited them? Why can they be called deposits? This is the crux of the fraudulent system. -------------------------------------------------------- [Comment] This is purely a linguistic argument, the existence of deposits infers that someone must have deposited them, that I do not find persuasive. - June 16, 2006 "Whether or not there are benefits to society from credit creation is a totally separate issue and should not be confused with the issue of the legality or propriety of credit creation as a system..." ----------------------------------------------------------- This is a rather bizarre statement. Whether or not there are benefits or detriments to society as a whole should have everything to do with its legality. If something is beneficial it certainly should not be made illegal or prohibited. Propriety often has more to do with prejudice than rational science. The medieval legislators who outlawed interest because it was "usury" were neither good theologians or economists but prejudiced ignoramuses. They were incompetent in both fields and retarded the progress of civilization by centuries. - "...and whether it could be organized more efficiently for society than it currently is." ----------------------------------------------------------- Please clarify something for me. From your comments it appears that you oppose fractional reserve banking on fundamental principle and would favor something like one hundred percent reserve banking to replace it. Is that correct? - "It is like saying that the counterfeiter is not doing anything wrong, because he counterfeited promissory notes and thus might just live up to his promises...!" ----------------------------------------------------------- This is a false analogy if I've ever seen one. The counterfeiter is not making promises but forging the promises of someone else. - "Or do you not think Ponzi or MMM in Russia more recently (or any of the modern Ponzi scheme operators) did anything wrong? After all, they merely engaged in your favourite game of 'contracting' and making contractual promises..." ----------------------------------------------------------- Ponzi schemes pay investors not from profits from the ordinary business activities that they claim to be engaged in, but from money collected from new investors. It has been a settled principle of law for centuries that it is illegal to pay dividends from paid-in capital. This is not contracting but fraud per se. By contrast, the banker's promissory note represents his contractual obligation to redeem it on demand, if and when that demand is made. He ascertains actuarially when that will be, in a manner closely related to insurance. Corporations are established to pool resources and share risks. Each of them therefore has insurance and financial aspects, with insurance companies being specialists in the insurance function and banks being specialists in the financial function. Both insurance and finance operate on the basis of fractional reserves. - "Since banks are the social accountants of the economy and society assumes proper accounting, these fictional deposits are treated as actual ones. No matter what 'paper' is issued (nowadays of course none - it is instead the banks' books which show the deposits - hence the irrelevance of the promissory note distinction) fictional deposits are given the appearance of real deposits." ----------------------------------------------------------- The deposits are not fictional but actual liabilities of the banks. - "...whether you call them 'receipts' or promissory notes or promises." ----------------------------------------------------------- It's not just what I call them; they are fundamentally different things. - "What separates us from animals is free will and free choice, including between right and wrong. And it is indeed such ethical judgments that are at stake here." ----------------------------------------------------------- Well, "ethical judgment" shouldn't trump what science is telling us is actually happening. When "ethical judgment" trumps fact we are engaging in a type of idolatry, exhibiting a Taliban-like mentality in our sublime prejudice. Like condemning Galileo when he expressed the Copernican view. By the way, I do personally believe in the existence of free will and free choice, but they are hypothetical constructs, which go to philosophical perspective. Impossible to verify empirically. Contracting for future performance is observable behavior that humans engage in, and is distinctly something that separates us from the animals. It also has everything to do with economics. Bill -----------------original message-------------------- Dear William, Whether or not there are benefits to society from credit creation is a totally separate issue and should not be confused with the issue of the legality or propriety of credit creation as a system and whether it could be organized more efficiently for society than it currently is. I see you sent this message to a social credit list - if that's your interest, the case for social credit is infinitely stronger if one follows my argument... I don't really see your response to my points. You repeat your interpretation that the deposit receipts were promissory notes. Even if that was always and truly the case, it would not materially alter the argument. It is like saying that the counterfeiter is not doing anything wrong, because he counterfeited promissory notes and thus might just live up to his promises...! Or do you not think Ponzi or MMM in Russia more recently (or any of the modern Ponzi scheme operators) did anything wrong? After all, they merely engaged in your favourite game of 'contracting' and making contractual promises... Credit creation is about the process of how the deposits come about, as I explained. When the loan is granted, the deposit account of the borrower is 'credited' - although no deposit has taken place. Since banks are the social accountants of the economy and society assumes proper accounting, these fictional deposits are treated as actual ones. No matter what 'paper' is issued (nowadays of course none - it is instead the banks' books which show the deposits - hence the irrelevance of the promissory note distinction) fictional deposits are given the appearance of real deposits. I did not see your counter-argument to that. The goldsmith fraud story is not mythical. There is widespread evidence, including from parallel cases in other time periods and locations that do not involve goldsmiths, but in all cases involve deposit takers who issue receipts - whether you call them 'receipts' or promissory notes or promises. The earliest example is the Babylonian banking system in the third millennium BC. Regards, Richard PS: What separates us from animals is free will and free choice, including between right and wrong. And it is indeed such ethical judgments that are at stake here. - June 16, 2008 Richard, I am familiar with these arguments. They are carefully though deceptively crafted to support the claim of fraud. For example, the clever usage of the term "deposit receipts." In modern usage the term refers to the proof from your bank that you made a deposit with your bank in the amount indicated. That's all it is. It is non-negotiable and does not circulate in trade. In the mythical goldsmith fraud story the deposit receipts were circulated from person to person in trade. In actuality, as demonstrated in my last posting, it appears that the goldsmiths issued deposit receipts in something similar to the modern sense but also issued promissory notes that circulated from person to person in trade. A promissory note is nothing more than a contract for future performance. The ability to contract is a unique human characteristic and is something that separates us from the animals. Modern banknotes and transferable deposits descended from the goldsmith promissory notes which were their prototype. The goldsmith practice seems to be fraudulent only to those unfamiliar with the process involved. - "...as banks issue more ownership claims but the amount of physical matter remains the same, these ownership claims cannot be but fraudulent." ---------------------------------------------------------- The following is a statement from the "new economics" of the 1920s and 1930s. Understandably it doesn't mention consumer credit since it was mostly a post World War 2 development. - "[1] Loan credit arises from the private contract between banker and entrepreneur, [2] creating a generalized claim against the community as a whole, [3] enabling the entrepreneur to organize the factors of production into their most efficient combination, [4] as ultimately judged by the consumer through the democracy of the market, [5] the feedback mechanism being profit and loss. "[6] Investment is the process of improving the quantity and quality of capital; [7] it is facilitated by credit, [8] and driven by entrepreneurial initiative, [9] the discovery of resources, and [10] the invention of technology. "[11] Saving is the process of acquiring beneficial ownership claims against capital, [12] which generate increasing income in the form of dividends or their functional equivalent, [13] as capital accumulates." - Assertions 1-3 contradict your assertion that "amount of physical matter remains the same." Loan credit is an essential component of the dynamic process that increases the quantity of consumable wealth. Simply because most people do not even today understand the process does not make it fraudulent. Not all entrepreneurial projects succeed. Those that fail contribute to the phenomenon of inflation. The concept is statistical, meaning that on balance consumable wealth is increasing. Bill Ryan ------------------original message------------------ Dear William, Banks act as the accountants of the economy and the public assumes honest accounts. This means that if there is a deposit in the banking system, it is assumed by the public that it was actually deposited by somebody. In actual fact, banks create deposits out of nothing and issue deposit receipts (or the modern form of them) when they grant so-called loans. But in actual fact these deposits appear without any money having been deposited. This seems pretty fraudulent, and there are many scholars who argue that it is fraudulent. Another argument is the comparison with the physical reality - as banks issue more ownership claims but the amount of physical matter remains the same, these ownership claims cannot be but fraudulent. There are academic papers on that as well. I don't see why you are averse to the argument. Do let me know. Regards, Richard - May 29, 2008 For those who are interested, there's a twenty minute video of an interview with Professor Werner on the Internet, broken into two parts, at Youtube and Google Video: http://youtube.com/results?search_query=Richard+Werner&search_type= The 1841 Friedrich List book that he mentions in his email below (*The National System of Political Economy*) can be found in English translation at http://www.econlib.org/library/YPDBooks/List/lstNPEtoc.html - The double entry accounting was handled in the ancient banking systems in the form of grammar: genitive for liabilities and dative for assets. I am quite sure a footnote to chapter 12 mentions this. In my view, this is the key feature of double-entry bookkeeping. The equity bit does not materially change this: just think of a system where paid-in equity is very small (such as the old Japanese, Korean, German systems etc) and you would still get all the benefits of double entry accounting. -------------------------------------------------------- [Reply] It is note number 10 to chapter 12. However, the term "double entry" is not found anywhere in the book that I can see. As to the "equity bit," without it the one benefit you would definitely not have is the ability to calculate profit and loss. Double entry accounting is the only known system for calculating profit and loss with any degree of accuracy. I don't know of a single accounting historian who dates this very important invention before the twelfth or thirteenth centuries. - Double entry accounting was of course not in itself the marvelous invention, but did its wonders only in connection with its use by fraudulent deposit taking institutions that operated and used this system to 'cook the books' and issue deposit receipts that were not actually based on any net new deposits. -------------------------------------------------------- [Reply] Whether or not they were actually fraudulent would depend on how the deposit receipts were worded, I should think. I think the fraudulent spin derives from nineteenth century anti-bank Greenbacker propaganda, and is a concoction. I have as my authority the book *The Rise of the London Money Market 1640-1826* by W. R. Bisschop, available for free download from http://2020ok.com/books/43/the-rise-of-the-london-money-market-1640-1826-10043.htm It appears that the notes that were loaned were contracts and not "warehouse receipts." They were promises to pay on demand. From the first chapter of the book: "Second amongst the goldsmiths' notes rank their 'promissory notes.' It seems very probable that the latter were the precursors of the banknote of a subsequent period. Pepys' entry in his diary on February 29, 1667–8 is one of the earliest records in which reference is made to such promissory notes: 'Wrote to my father and sent him Colvil's note for £600 for my sister's portion.' "Among the Promissory Notes of Messrs. Child & Co. which are still in existence, is one of the year 1684, which runs as follows: "'Nov. 28, 1684. I promise to pay unto the Rt. Honble. Ye Lord North and Grey or bearer, ninety pounds at demand. For Mr. Francis Child and myself Jno. Rogers.' "The oldest note of the Bank of England which has been preserved also contains the words: "'I promise to pay Mr. John Wright or Bearer on Demand the surnme of two hundred Pounds. London the 23 day of Jan. 1699 200 pd.st. For the Govr. and Compy. of the Bank of England Joseph.'" - --- Richard Werner wrote: Hi William, The double entry accounting was handled in the ancient banking systems in the form of grammar: genitive for liabilities and dative for assets. I am quite sure a footnote to chapter 12 mentions this. In my view, this is the key feature of double-entry bookkeeping. The equity bit does not materially change this: just think of a system where paid-in equity is very small (such as the old Japanese, Korean, German systems etc) and you would still get all the benefits of double entry accounting. Double entry accounting was of course not in itself the marvelous invention, but did its wonders only in connection with its use by fraudulent deposit taking institutions that operated and used this system to 'cook the books' and issue deposit receipts that were not actually based on any net new deposits. Now that's the miracle that created modern capitalism - and it came about in Babylonia in the 3rd millennium BC. Since then, as the author of proverbs said a few thousand years ago, 'there is nothing new under the sun'. The Romans, for instance, had efficient mass production. The degree of mechanization has gradually increased, but mass production, mechanization and 'technology' has been around for several thousand years. Ancient Rome had elevators, taxis with meters, etc. And this is of course without saying anything about ancient Chinese technology. Concerning free markets I misunderstood you then. With the most important market, namely that for the creation and allocation of credit in the hands of bureaucratic decision-makers - currently not supervised by appropriate authorities - free markets are a pipedream. Often we forget that mainstream economics has established that the conditions required for free markets to be Pareto efficient, or efficient and competitive, or to render government intervention inefficient, are so unrealistic that we can be sure that they do not hold in this world. This also applies to an even more fundamental fact concerning the functioning of markets, namely the question whether they even clear. Again, economics has established that the conditions required for mere market clearing (equilibrium) are so unrealistic that we know they cannot ever exist. Hence all markets are rationed. Talk of free and efficient markets is thus irrelevant for our world, but it clearly is excellent propaganda that serves a useful purpose... Just to keep the dialogue going: Here's another qualifier to the statement that "Quite organized societies with large populations existed before [the Industrial Revolution], but could not advance beyond peonage, slavery, and war." How far removed from such a world are we even today? (sex slaves, the Iraq war, etc. come to mind). Let alone at the time of the Industrial Revolution, when a globe- spanning, commercially-operated British Empire dominated commerce, and rigorously enforced the rules it invented for its own benefit through government sanctioned troops? (Including earlier 'visits' to Iraq and the 'tribes with flags'). No peonage, slavery and war? I recommend Friedrich List's analysis of British economic development policy and the creation of suitable propaganda (called classical economics), published in 1841. Warm regards, Richard - Entrepreneurs can pay for factor services through retained earnings - which is indeed corporate funding source no. 1 in most countries, and this is not linked to credit creation. ----------------------------------------------------- [Reply]: The concept is macroeconomic, in that it is meaningful only when applied to the economy as a whole. It becomes less meaningful when applied to subsets, such as subsets of the firms sector, which may individually behave in deviation from the general behavior. The proposition is that, in an expanding economy with increasing trade and commerce, in the statistical sense, disbursements are exceeding receipts by any profit-seeking transactor at any point in time. You will therefore find that disbursements in total are exceeding disbursements from retained earnings. That is possible only if there is an external source of financing, which is provided by the banking sector in modern economies. For certain national economies, it is provided in substantial part by a "favorable balance in foreign trade." - I am also surprised that you make statements that might suggest that you agree with the orthodox fiction economics about 'free and competitive markets'. Do you also assume perfect information as well? ----------------------------------------------------- [Reply]: I do not assume that markets are free and competitive, but that markets should be free and competitive, with the definite exception of natural monopolies that require public oversight and control. I believe that the premier natural monopoly is the financial system, under which markets concatenate. Markets cannot be free and competitive absent a rationally operating financial system. To the extent that the financial system is not rationally operating, free and competitive markets are impossible. Of course I do not assume perfect information. I adhere to the "profit theory" that financial policies that increase the general rate of profit will stimulate production and consumption, and that financial policies that decrease the general rate of profit will depress production and consumption. Generally, "easy money" policies are stimulative, and "tight money" policies are depressive. The problem becomes one of how to deal with effects, such as inflation. The school of thought that I subscribe to is that economies are best stimulated by controlling though not eliminating bank credit being introduced through loans, so that debt does not tend to pile upon debt, but through credits to final consumers, thereby increasing the rate of profit through sales without adding commensurately to the costs of production. In such an economy, of course, more and more investment will derive from retained earnings. - Also, you say that "The invention of double entry accounting is what enabled the Industrial Revolution." If this is true, why, then, did it take almost five thousand years for the Industrial Revolution to take place? (Double entry bookkeeping has been around as long as credit creation, which is 5000 years... ----------------------------------------------------- [Reply]: In the past few days I've read your chapter 12 three our four times, and the 5000 years figure is mentioned several times. I failed to see any reference specifically to double entry accounting. I don't know of a single accounting historian who dates the invention of double entry accounting before the twelfth century. Pacioli's book in which he describes what he called "the method of Venice" is dated 1494. You may be confused by the fact that debits and credits have been used for thousands of years. It is merely a method of tabulation that avoids negative numbers. The singular feature that differentiates the system from more primitive accounting systems is the inclusion of the capital account, such that debits and credits are posted to three fundamentally different kinds of accounts--assets, liabilities and capital. The rule is that for every debit there must be a credit-- hence the name, double entry. The theorem of accounting is that assets - liabilities = capital, expressed operationally that sales - expense = profit. In any case, the availability of double entry accounting was a necessary condition for the Industrial Revolution, but not a sufficient condition. The standard history is that it took six hundred years. It could have taken five thousand. - --- Richard Werner wrote: Dear Bill, (and Dirk, this is also relevant to our discussion recently on 'newly created credit' vs. all credit). I don't see the what your statement below means in terms of credit creation. All transactions can be split into those that are paid for by newly created credit, and those that are paid for by the mere transformation of already existing purchasing power (which of course was created earlier as credit creation, but we already measured it then, and do not wish to double-count it: credit already created in the past will not have the same impact as newly created credit, as it is a zero sum game; for every dollar somebody receives, another has given a dollar in the case of the transfer of existing purchasing power. So no net impact on most variables. In your statement you seem to conflate new credit creation and the transfer of existing purchasing power by making no attempt to distinguish between them. Entrepreneurs can pay for factor services through retained earnings - which is indeed corporate funding source no. 1 in most countries, and this is not linked to credit creation. So, quite clearly, no, these bank payments, if paid for by newly created purchasing power, are not equivalent to entrepreneurs' payments for services etc. I am also surprised that you make statements that might suggest that you agree with the orthodox fiction economics about 'free and competitive markets'. Do you also assume perfect information as well? Because if you do, then you do not need money, and in fact in such a world there would not be money - or credit. ("the information that directs entrepreneurs in organizing the factors of production toward their most productive combination, as ultimately judged by consumers in free competitive markets."). Surely since we do not have perfect information, no market is in equilibrium. Thus forget about free competitive markets - markets do not clear and work quite differently to the fiction economics of the textbooks. Also, you say that "The invention of double entry accounting is what enabled the Industrial Revolution." If this is true, why, then, did it take almost five thousand years for the Industrial Revolution to take place? (Double entry bookkeeping has been around as long as credit creation, which is 5000 years. Please do take a look at my chapter 12 in New Paradigm in Macroeconomics, Macmillan, 2005, which I am plugging unashamedly of course. Warm regards, Richard -----Original Message----- From: william_b_ryan@yahoo.com Sent: Wednesday, May 21, 2008 8:32 PM To: gang8@yahoogroups.com Subject: Gunnar's Question I've inserted some comments [Comment] below:- ------------------------------------------------------- Dear Richard. Payments by banks to suppliers of factor services are strictly analogous to payments by entrepreneurs for factor services to be transformed into goods and services through the production process. ------------------------------------------------------- [Comment]: True - The sum total of such payments by banks and entrepreneurs = Aggregate Nominal Factor Supply Cost of Final Goods and Services. ------------------------------------------------------- [Comment]: It may be defined that way. - And the question remains: How can Aggregate Nominal Demand for Final Goods and Services exceed such Aggregate Nominal Factor Supply Cost? ------------------------------------------------------- [Comment]: The answer is that in terms of cash flow, it can't; in the normally expanding economy, with increasing trade and commerce: the flux in spending always exceeds its reflux through sales as instantaneously measured. But it doesn't have to "exceed" the "aggregate nominal factor supply cost" with double entry accounting, which is the only known algorithm for estimating real profit, the information that directs entrepreneurs in organizing the factors of production toward their most productive combination, as ultimately judged by consumers in free competitive markets. What we call economic democracy. It doesn't directly measure profits--there is no direct measurement of profits--but estimates profits in terms of operationally increasing net worth. The invention of double entry accounting is what enabled the Industrial Revolution. Without that invention, the Industrial Revolution was impossible. Quite organized societies with large populations existed before, but could not advance beyond peonage, slavery, and war. It is not "cost" but "expense" as defined by the rules of double entry accounting that is charged against sales. See the attached diagram also archived at http://www.geocities.com/socredus/compendium/accounting_profit.gif --- GUNNAR TOMASSON wrote: [snipped] - May 25, 2008 Entrepreneurs can pay for factor services through retained earnings - which is indeed corporate funding source no. 1 in most countries, and this is not linked to credit creation. ----------------------------------------------------- [Reply]: The concept is macroeconomic, in that it is meaningful only when applied to the economy as a whole. It becomes less meaningful when applied to subsets, such as subsets of the firms sector, which may individually behave in deviation from the general behavior. The proposition is that, in an expanding economy with increasing trade and commerce, in the statistical sense, disbursements are exceeding receipts by any profit-seeking transactor at any point in time. You will therefore find that disbursements in total are exceeding disbursements from retained earnings. That is possible only if there is an external source of financing, which is provided by the banking sector in modern economies. For certain national economies, it is provided in substantial part by a "favorable balance in foreign trade." - I am also surprised that you make statements that might suggest that you agree with the orthodox fiction economics about 'free and competitive markets'. Do you also assume perfect information as well? ----------------------------------------------------- [Reply]: I do not assume that markets are free and competitive, but that markets should be free and competitive, with the definite exception of natural monopolies that require public oversight and control. I believe that the premier natural monopoly is the financial system, under which markets concatenate. Markets cannot be free and competitive absent a rationally operating financial system. To the extent that the financial system is not rationally operating, free and competitive markets are impossible. Of course I do not assume perfect information. I adhere to the "profit theory" that financial policies that increase the general rate of profit will stimulate production and consumption, and that financial policies that decrease the general rate of profit will depress production and consumption. Generally, "easy money" policies are stimulative, and "tight money" policies are depressive. The problem becomes one of how to deal with effects, such as inflation. The school of thought that I subscribe to is that economies are best stimulated by controlling though not eliminating bank credit being introduced through loans, so that debt does not tend to pile upon debt, but through credits to final consumers, thereby increasing the rate of profit through sales without adding commensurately to the costs of production. In such an economy, of course, more and more investment will derive from retained earnings. - Also, you say that "The invention of double entry accounting is what enabled the Industrial Revolution." If this is true, why, then, did it take almost five thousand years for the Industrial Revolution to take place? (Double entry bookkeeping has been around as long as credit creation, which is 5000 years... ----------------------------------------------------- [Reply]: In the past few days I've read your chapter 12 three our four times, and the 5000 years figure is mentioned several times. I failed to see any reference specifically to double entry accounting. I don't know of a single accounting historian who dates the invention of double entry accounting before the twelfth century. Pacioli's book in which he describes what he called "the method of Venice" is dated 1494. You may be confused by the fact that debits and credits have been used for thousands of years. It is merely a method of tabulation that avoids negative numbers. The singular feature that differentiates the system from more primitive accounting systems is the inclusion of the capital account, such that debits and credits are posted to three fundamentally different kinds of accounts--assets, liabilities and capital. The rule is that for every debit there must be a credit-- hence the name, double entry. The theorem of accounting is that assets - liabilities = capital, expressed operationally that sales - expense = profit. In any case, the availability of double entry accounting was a necessary condition for the Industrial Revolution, but not a sufficient condition. The standard history is that it took six hundred years. It could have taken five thousand. -