a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

The character here doesn't say "lend me your cowrie shells". Their statement, rather, implies the idea of "safe keeping" that has already been mentioned.

― the pinefox, Tuesday, November 15, 2022 8:14 AM (one hour ago)

yes, the construct of the world's first bank was meant to show how a bank built around safekeeping, rather than borrowing money from its customers, would go out of business

pinefox you are very wisely aren't saying online where you bank but i will say that i am 99% certain your bank offers more than one kind of account besides a current account (the others are usually called savings accounts)

while a current account doesn't always offer any kind of interest growth to speak of (tho dan worsley's apparently does), a savings accounts generally will -- so you will not have to switch away to some obscure bank to access such a feature. the interest is how the bank "pays you" to bank with them.

there can be drawbacks with the savings accounts offered (for example you sometimes don't get speedy access). generally you have read the fine print (no one does this) or speak to someone at the bank (risk of being subtly misled; possibly less than it was in the 90s in the UK)

there is much competition between high street banks so they all offer various nice-sound things and switch them up all the time -- which can be both confusing and annoying

i bank with the co op and here's why: https://www.mirror.co.uk/news/uk-news/former-co-op-chairman-paul-flowers-3016064

pour one out for the crystal methodist

Mark S -- thanks for your helpful comments. Basically I have a current account and a savings account with the same bank and they are connected, ie: money from one flows into another - thus, in theory, a little bit of my income (less than I would like, no doubt) goes into the savings account. Except that, from today (!!), it doesn't. They have turned off that feature, for some reason, which was the main feature that made this account somewhat useful to me.

But AFAIK the savings account doesn't really pay me any interest either!

You are correct, I think, that I should talk to a banker and say: I want an account that pays me some money, or I will take it elsewhere. But do I really feel able to take my money elsewhere, with the upheaval involved? No.

"yes, the construct of the world's first bank was meant to show how a bank built around safekeeping, rather than borrowing money from its customers, would go out of business"

I don't think I comprehended this.

Transferring to a new bank should be a painless process and there's several websites which will do it for you e.g. https://www.currentaccountswitch.co.uk/ or https://www.uswitch.com/

to compress that long post into a few sentences, a bank that does nothing with the money you've deposited to it will need to charge you money to cover its expenses and to make a profit, which means it will lose out to the bank that doesn't need to charge you anything because it is loaning out the money you've deposited with it on the side and generating profit from the interest it charges. why would you bank with bank #1 that charges you money and doesn't pay you anything when you could bank with bank #2 that doesn't charge you anything and in fact may pay you interest?

I see. That seems to make sense.

So do you state that when I use them, I am not loaning money to the first bank, but am loaning money to the second bank?

correct, pretty much all banks now are in the vein of bank #2! the system has a fancy name, 'fractional reserve banking' - https://en.wikipedia.org/wiki/Fractional-reserve_banking

Do you agree that banks do not state that customers loan money to them?

So, if this is indeed what we, the customers do, a massive amount of dissembling has been going on for a very long time?

I have never even heard of this concept before this thread began.

Re UNDERSTAND THE ECONOMY's claim about banks: "the money in your bank account is loaned to the bank"

it's true that this is an unusual formulation but it remains a fact: the money that you deposit in an account is money you can get back -- and (except in certain emergency circumstances) you can make trouble if they don't give it back. well that's a loan.

so why don't ppl routinely *describe* it as a "loan"? one possible reason (ie i'm guessing) is that within banking loan has become a technical term of art with legally relevant specific characteristics and requirements attached (which aren't attached when you PF loan me MS a tenner to fritter away at the dog track)

so despite being a subset of the ordinary-usage meaning, the technical-professional term has – by virtue of advertising and the financialisation that runs our lives – has swamped and perhaps even ended ordinary-usage term (which ppl now don't use bcz it seems confusing and even inappropriate)

is something shady going on here? well it's banking so possibly yes i guess! but i feel its more of a structural pressure towards sales clarity than a wicked plot (like how ppl purse their lips when you call every vacuumcleaner a hoover! it wasn't made by hoover! but in a deeper and more accurate sense be serious yes it's a hoover)

plus as i've said several time before i think there are two language-use worlds at work here with a subtle but firm barrier to understanding between them. ppl on this very thread (the estimable tracer hand for one) have used the term "loan" in the sense that alarms you.

I would think that the reason is: the idea of me giving the bank my money for safe keeping is appealing. The idea of me loaning the bank my money is not. So, in their own interests, they have dissembled for many decades.

I agree that a barrier to understanding exists.

You are also trying to compress 500+ years of history of the development of the banking system into a couple of paragraphs. There were developments that lead to a second development that lead to the present arrangements/terminology. Just because no one uses a term today doesn't mean it was for nefarious or obfuscating purposes. I would also point out from the wiki link above:

Fractional-reserve banking predates the existence of governmental monetary authorities and originated with bankers' realization that generally not all depositors demand payment at the same time. In the past, savers looking to keep their coins and valuables in safekeeping depositories deposited gold and silver at goldsmiths, receiving in exchange a note for their deposit (see Bank of Amsterdam).

money/valuables for a note = a loan

silversmiths seething at the lost trade

when i was a kid i got a Kid Account at a medium-sized local bank and they gave me a lil cartoon pamphlet w lil cartoon kids "letting the bank use" their money for loaning out to lil cartoon adults who wanted houses and things, in dutiful return for which the bank then dispensed to the cartoon kids interest in comic-book vocabulary bold, big smiles all round, from all the organs of civilization's diverse and harmonious corpus. the truth (this one anyway) has been out there

they have dissembled for many decades

it's still a loan whether or not they refer to it as loan?

i agree that "we will keep you money safe for your convenience!" is a cheerier sell than "lend us your money!" but you ARE lending them your money whatever they call it

a rose by any other name etc

pinefox, you're right that banks do not disclose upfront what they do with your money. but consider also - and I fully realize that banks are to be kept at arm's length, perhaps at a polearm's length, can't be trusted farther than you can throw them, etc. - that from a customer's perspective, what the bank does with the money deposited with them has absolutely no effect on the customer. banking products are designed so that you, the customer, can withdraw your entire account, or move it to another bank, or whatever you want, at a moment's notice, without any impact on the bank's activities. the bank doesn't need to call in any loans, because the bank keeps enough in reserve to pay out customers who do request this. furthermore, as discussed upthread, if you are worried that your bank is acting irresponsibly with your funds, that is definitely a valid worry, but one that the government solves for by providing deposit insurance. so that, even if the coop bank goes down in flames because the CEO has spent it all on K, you, as a customer of the coop bank, can be fully guaranteed to receive at least up to £85,000 of your account back.

another way to put it: other than the principle of it all, what bothers you about the fact that you are lending money to your bank?

"but you ARE lending them your money whatever they call it"

hence my suggestion that they are dissembling, by referring to one thing as another thing.

"the CEO has spent it all on K"

what is K?

k is the drug ketamine (龜 is referring to the story i linked abt the CEO of the co op where i bank)

it's both things (looking after your money and a loan)

this is the same as the table story in marx's commodity chapter -- something is two things at once which pull in different directions and also read very differently

Poster ― 龜, Tuesday, thanks for your contributions, which are interesting and appreciated, to me.

"what bothers you about the fact that you are lending money to your bank?"

Do you feel good about lending money?

If I lend Mark S £10 for his chocolates, I don't mind because I know I have more money than that, it's not such a big amount. (I'd like to add "I know he will pay it back soon" but I don't know whether that's true. I have an idea that he now lives in a different town from me. But some people, I think, would pay it back soon.)

If I lend him all the money I have, I don't feel so good about that. Just as I wouldn't feel so good about lending him all my books. Lending things is sometimes a good and generous thing to do, but it creates a precarious situation.

Mark S, actually I didn't look up your story and thought it was a beneficial story about why the co-op was good !!

Mark S: as we have noted before, I have read the commodity chapter several times, very closely, and ultimately I did not comprehend it. A worrying thing (probably also stated before) is that I have an idea that the rest of CAPITAL is *harder* than that chapter.

I do feel good about lending money to a bank, since as discussed before, the government has my back in case the bank fails.

lending to mark s is very different than lending to barclays!

Unlike you, I don't feel good about lending money to a bank. I didn't know I was doing it till about 3 days ago.

As for the government -- well, the UK government is corrupt, and I would not feel confident about getting any money out of it for anything.

Perhaps your government is better.

If it’s reassuring at all if the government didn’t make good on its deposit insurance commitments the money you didn’t get back would probably not be worth much anyway

For the bank, it is functionally a loan. For someone with a personal account, it functionally isn't a loan. Government regulation makes both of these statements true. The modern world is full of these matters of incommensurate perspective. If you truly want to use a bank to safely store your money and have it not be a loan, rent a safe deposit box and fill it with cash. But that strategy doesn't even simplify the transaction, really. Money isn't real. You're really just buying a different kind of risk.

re KAPITAL: i am not convinced that the rest of the book *is* harder that that chapter -- but i have only read small sections of it. it's a famously poetic chapter, which some may see as making it the hardest? personally i feel that the chapters preceding it (which are largely definitional) are *much* harder. they're certainly more boring.

there are later chapters that are both more entertaining and more straightforward as storytelling (albeit of pertinent examples in political economy and so on)

re governments: there's an ongoing story right now in south korea about the governor of a prefect who decided unilaterally not to pay for something his predecessor promised to pay for -- it has caused immense chaos and collapse in trust in governmment bonds!

https://foreignpolicy.com/2022/11/10/legoland-south-korea-bond-market-crisis/

One might gloss that with the advent of fiat currency “money” as such ceased to be a “thing” you can “have”, on some level money is all debt. (This may not be orthodox economics.)

"For the bank, it is functionally a loan. For someone with a personal account, it functionally isn't a loan."

Interesting statement! Might actually clarify things (... by ... making them less clear).

"The modern world is full of these matters of incommensurate perspective."

Can you give any more examples? Are they all about money?

what was money before the advent of fiat currency?

Mark S: I agree that it's very rhetorical, at least. I'm not sure that's why I find it incomprehensible. I think it's just the concepts. After reading it very closely I didn't know what it said.

This makes me think that Marx, in translation, as I have read him, is not a very clear writer. Though nor were any of the philosophers before him.

big sacks of precious-metal specie I guess xp

silby: yes, sorry, i was being dumb

forgot what fiat referred to

I mean it's hard to put my finger on exactly what the difference is between having a claim on the bank for a chest full of doubloons and having a claim on the bank for a database entry that says you have $69,420 but it has a different vibe. To the point that some crazy people are still mad about it!

If a bank really did lose all my money, then I would no longer have enough money to pursue a claim to recover it from the government (for instance, I couldn't use a mobile telephone or internet).

I cannot imagine being confident that the UK government would give me £85,000 in any circumstances.

Not to complicate the conversation by bringing in an entirely different financial instrument, but the collapse of the FTX crypto exchange is a nice illustration of why we have bank regulations and what they do. FTX more or less operated like a bank — people could deposit money there and then easily use it to buy whatever cryptocurrencies they wanted. Theoretically, FTX was supposed to make money by charging a tiny commission on each transaction (making it somewhat more like a credit card company than what we think of as a bank). But it turned out that in addition to that, FTX was actually lending out its customers' money — to a separate crypto trading company that was actually owned and controlled by the same guy who owned FTX. So he was functionally accepting people's deposits and then lending their money to himself — which is the kind of thing that regulated banks have a whole lot of limits and safeguards against.

The crypto world doesn't have any of that, and nobody realized what was going on until crypto tanked and all of that money he'd borrowed (about $10 billion) basically disappeared as his own investments via the other company tanked. And when people got panicked and came to get their deposits out of FTX, a lot of them couldn't because the money was no longer there. (He had essentially issued IOUs to FTX in the form of a cryptocurrency he created out of thin air, which had no collateral backing at all.) This kind of thing used to happen in real-world banking too, which is why most developed economies now have lots of rules about exactly how banks can use their customers' money and what kind of collateral they are required to keep, and they also have the backup of government insurance of their deposits up to certain amounts.

Of course, those regulations are still pretty fallible and corruptible too, as the 2008 crash illustrated. In that case, banks had made excessively risky loans in the form of mortgages that people were not actually going to be able to pay, and then resold those mortgages to other banks and investors with the (false) promise that they were "good" loans. Then the music stopped and there was no more cash coming into the system and people couldn't pay their mortgages and the banks and investors holding the loans were out gazillions of dollars, collectively.

As for the government -- well, the UK government is corrupt, and I would not feel confident about getting any money out of it for anything.

Perhaps your government is better.

― the pinefox, Tuesday, November 15, 2022 12:53 PM (thirty-one minutes ago)

interesting - and totally fine, a lot of people hold the same perspective - the banks are corrupt and the government is not that much better.

there is an interesting contradiction here though - you don't trust the government to stand behind their deposit insurance guarantee, yet you do trust the government to stand behind the pound that it has printed

xp but to flesh that^^^ out

pinefox i don't know when you last sat down and read the words on a (UK) bank-note: alongside various less pertinent legends (which perhaps refer e.g to the person depicted etc) it says "i promise to pay the bearer on demand the sum of ten* pounds" -- and across from this is a signature, currently of the chief cashier on behalf of the "governor and company of the bank of england"

well those guys are the government and that promise is what keeps all the balls in the air. because i guess it's kind of a fungible promise -- the bank of england makes it so every bank signs on and every shop and every company and more or less every person, even me. we do't just say "this is a bit of paper with writing on it" we say "ok it;s money"

and it's why politicians and others often talk about confidence (as you just did): because confidence wavering is basically ppl thinking "that promise? will they pay? is this still money"

if enough ppl conclude they won't and it isn't then things go south pretty fast :) 👍🏽🚀

*or however many pounds it is, it's ten on the jane austen

here, it is appropriate to introduce the concept of what constitutes 'legal tender' https://en.wikipedia.org/wiki/Legal_tender

the hoohah abt insolvenet pension funds from the liz truss era was the tale of the govt (in the shape of the sotra-kinda autonomous bank of england) promising to step in to stop a "bank run" on a pension fund (in fact several pension funds)

in the event this promise alone calmed things down i believe, and they didn't have to make good on the last-ditch purchase they promised if things got too bad

the political fall out is that (a) the liz truss govt fell instead of the pension funds and (b) there is beef that the BoE acted deliberately to topple her by intervening this way

ps in relation to pension funds i've been meaning to read the LRB piece abt academic pension funds that you talked abt upthread, when i have a moment i will and we can talk that through also

Mark S: yes, I have definitely often heard of those words / that aspect. I have never really understood it. Perhaps it means ten pounds (weight) of gold, or something. They will hand over this weight in gold if you give them the note?

You are convincing in noting that this is 'the government' in which we have ... confidence?

But there is much evidence of corruption in the UK government - this is a fact - take eg:

https://www.lrb.co.uk/the-paper/v42/n21/peter-geoghegan/cronyism-and-clientelism
https://www.lrb.co.uk/the-paper/v43/n09/peter-geoghegan/short-cuts

I agree that we continue to trust the state for many things - health care, for instance (I hope).

But as I said, would you trust the UK state to give you £85k, if you had no money to make any claim for it (eg to use the internet)? Seems unlikely.

there is a very easy, practical, fix for that problem - keep your money in two banks. the chances of both banks failing at the same time are pretty slim in the modern era - even during 2007/2008, I don't believe any commercial banks (i.e. the kinds of banks you'd have accounts with) failed (the ones that were taken out to the back of the shed and shot were investment banks, which aren't retail-facing.)