Promissory obligations to each other (a)

(some additions 30 June)


In my article Interest back into circulation I quoted Mike Montagne, founder of PFMPE (People for Mathematically Perfected Economy), as writing:

[...] the banking system merely publishes further representations of our promissory obligations *to each other* [...]

This statement fascinated me and I have long wanted to write a targeted article about it, because I think this is one the fundamental misunderstandings in MPE. There are similar quotes, from Mike Montagne’s disciples, in other articles I wrote, as you can see by looking up the word “promissory” on my site.

I also wondered, if what banks offer to make payments is so wrong in the eyes of MPE people, what exactly do they propose as a replacement? The answer seems to be CMF, Common Monetary Foundry.

I wanted to find out exactly how that works, to see if it makes sense and how and why it might be better than traditional banking. I looked on Mike Montagne’s site (he also owns the domain but there is no connected website). However I didn’t find much.

Then I turned to the Youtube videos that Google came up with, although I prefer text. I can read text quickly or slowly, as I prefer, but a video forces me to adapt to the speaker’s tempo, which in the case of Mike Montagne is s o    t e r r i b l y    l o w.   It takes him ages to come to the point, if any.

Videos also have the disadvantage that I have to make transcriptions of what is said in order to quote bits from it. I don’t like that, it’s an unnecessary waste of valuable time. And I can’t listen to music at the same time.

Anyway, Google suggested video no. 98 (are there really that many? there are!). It’s in the subseries entitled “Understanding Implementation”. That and the next one I think quite nicely contain all the misunderstandings that Mike Montagne has about banks and money. So they are quite useful for me as a handle for explaining why I think they are misunderstandings.

The videos contain recordings of a radio programme, broadcast (on internet or really on air?) by Irish station TNS Radio on 27 November 2010.

True creditor

The first 3m25s contain only a ticking clock, music and an irrelevant introduction. So they can be skipped. Then finally the video is about the implementation of MPE and CMF, as the title promised. And I quote:

In our preceding programs, we covered the serious issues that the purported banking systems, which have been imposed upon the world, are not truly issuers of credit. That they are not actual creditors at all.

Now this is interesting semantically. Mike Montagne clearly has a much richer English vocabulary than I have (I noticed that before, and in 3m05s I just learnt the word “negotiate” in a sense I didn’t know existed, although it does!), which has the advantage that I write more clearly than Mike, because I simply do not know enough difficult words to be able to obfuscate my true intentions.

That’s one of the reasons why I write these financial articles in English first, and only then translate them to my native language Dutch, not the other way round. I hope my linguistic limitations in English will force clarity.

To come to the point: the word ‘creditor’ to me means a company who supplies goods or provides services to another company (so it’s business to business trade), sends an invoice for that some time after, and then accepts it that the other party, the debtor, pays that invoice only after some time from invoice date, say 30 days or 60 days later. (Creditors are also known as accounts payable, and debtors as accounts receivable.)

A creditor to me is not someone (like a bank) who grants somebody else a credit as a sum of money. Perhaps that’s because in my language, there is a spelling difference: crediteur vs. krediet.

Mike Montagne apparently accepts the first sense of the word ‘creditor’ (the same sense that I accept) and then complains that in the second sense, the bank does not supply goods in exchange for establishing a debt, for demanding later pay-back by the borrower (who in my view is not a debtor).

My simple solution: even though the bank doesn’t supply goods, it does supply money, which is a claim by the borrower on the bank. Money also has a value, just like goods (articles, products, commodities, services, etc.) can.

To each other

My quote continues at 3m44s, where Mike Montagne says about banks:

How they merely intervene upon our commerce, to merely publish evidence of our promissory obligations to each other.

This is fundamentally wrong, for a lot of reasons:

  1. Banks don’t intervene upon our commerce, but those who take part in commerce themselves seek banks’ services.

    It is perfectly possible and allowed to restrict yourself to barter and never use any money. It is very impractical, but it can be done. Also, one could use only coins and no other type of money, and never deal in any way with central banks (by using the banknotes they issue) nor deal with any other banks by opening a bank account.

    It makes life hard and I do not recommend it, but it is feasible and legal.

  2. Banks do not publish (in the sense of ‘to make generally known’ or ‘to disseminate to the public’) any information about their clients, if only because of privacy rules.

  3. Banks do record, do register, information (evidence if you will) about financial obligations. Not about obligations between their clients, but about obligations between them and their clients: they record what clients (borrowers etc.) owe them, and what they owe clients (savings account holders and checking account holders, etc.)

    The type of clients a bank has and the kind of business they do with them is specific to banking, but otherwise there is nothing special about banks: other companies too must hold records of their assets (including financial assets) and liabilities (including financial liabilities).

  4. Like any other largish company, a bank does and must publish grand totals of the abovementioned figures, but not details of individual clients. Those totals are in annual reports, checked by internal and external accountants.

  5. A bank supplies information of what it owes a client, or what that client owes the bank, and how and why that changed over time. But only to that client, to that one account holder, not to other clients or non-clients.

    (An exception is in tax regulations in some countries, which require banks to disclose some info to tax authorities.)

    This supplied, but unpublished information to the client is in the form of printed bank statements, or in modern times increasingly also, or only, by electronic means.

What is so strange is that Mike Montagne, in a tweet on 16 June 2013, claimed that he “was the top student in my accounting course in college.”, and nevertheless doesn’t understand the basic and rather simple things about accounting that I just explained above.

Copyright © 2013 R. Harmsen. All rights reserved.