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Rethinking banking. Debt discounting and the making of modern money as liquidity

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  • Stefano Sgambati

Abstract

The article radically challenges the conventional view of modern banking as financial intermediation and rejects the mutually related notion, firmly entrenched in both the mainstream and alternative imaginary, of fractional reserve banking. By contrast, it argues that modern banks are peculiar financiers which, far from banking other people's money, are originally and primarily involved with making money by creating a most fundamental institution of capitalism: liquidity. Crucially, central to the bank-engendered creation of liquidity is a negotiation of value that does not involve any formal lending of cash by a creditor – in fact, it does not require a creditor at all. Instead, it relies on a quid pro quo of debts performed by means of discounting whereby a regime of fluid property relations of mutual indebtedness, commonly known as debt finance, is established. In this regime of liquidity, money is constructed as entirely a debtors’ money: it is the outcome of a process of monetisation of bank debts entangled with a capitalisation of other people's debts.

Suggested Citation

  • Stefano Sgambati, 2016. "Rethinking banking. Debt discounting and the making of modern money as liquidity," New Political Economy, Taylor & Francis Journals, vol. 21(3), pages 274-290, May.
    • Handle: RePEc:taf:cnpexx:v:21:y:2016:i:3:p:274-290
    DOI: 10.1080/13563467.2016.1113946
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    References listed on IDEAS

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    1. L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
    2. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, volume 1, number 9929.
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    Cited by:

    1. Antonio Bianco & Claudio Sardoni, 2018. "Banking theories and macroeconomics," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 41(2), pages 165-184, April.
    2. Braun, Benjamin, 2016. "Speaking to the people? Money, trust, and central bank legitimacy in the age of quantitative easing," MPIfG Discussion Paper 16/12, Max Planck Institute for the Study of Societies.
    3. Koddenbrock, Kai, 2017. "What money does: An inquiry into the backbone of capitalist political economy," MPIfG Discussion Paper 17/9, Max Planck Institute for the Study of Societies.

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