Capital and Money

Just a quick note of clarification. What is (financial) capital? And what is money? And which part of money is cash?

'Capital'
in this context means net worth - i.e. the difference between the assets of a bank and the liabilities of the bank. I appreciate this might be confusing since it is an entirely different definition than physical capital - factories and such like.

'Cash': more precisely, 'Monetary Base' or M0. Cash or deposits of the Bank of England that can be freely convertible into cash. I refer to 'monetary base' colloquially as 'cash', because that is what it is!

'Money':
'Broad money' or M3. This definition contains bank deposits as well as 'monetary base'. Bank deposits are liabilities on the banks to pay the depositor cash on demand. I refer to 'broad money' colloquially as 'money'. Tim Joslin calls deposits 'electronic money' as far as I am aware.

N.B. Banks have two requirements governing their operation: they must have enough cash and they must have enough capital in order to lend.

4 comments:

Robin Smith said...

I'd like you to consider the following:

1) Try to resist inventing new economic terms. Economics was confused beyond reason a long time ago, is confusing you, me and everyone else.

2) Financial capital? What is this. I assume you mean money. This has always been called money. No need to change it or invent new words

3) Money is the power to command wealth. It is not wealth. It is a common means of exchange and a common measure of value. Thats it. A very useful invention of society indeed

4) Capital is wealth devoted to the production of more wealth. It is not money. Why confuse it. Keep it simple

5) A banks capital is its buldings, infratructure and business operation. It is not money. Neither is a banks stock wealth nor money. That is yet more indebtedness

TheClimatePhilosopher said...

I deeply sympathize with the previous commenter. There is no more confusing concept as Capital, which we perhaps shouldn't use at all.

However, I'm not reinventing new terms. The term financial capital is widely used in banks, in Basel banking regulations.

The important concept is the bank's net assets. I'll leave it at that for now.

Personally, I'm thinking of avoid using the phrase 'money' at all. It confuses banknotes ('cash') with high-street bank IOUs. These are in principle different things.

So in the above post I have used common usage, so that what I am saying maps (ie uses the same definitions) as articles in the press etc. Some people oppose common use. To them, I suggest 'non-confusing' terminology.

So if you want to avoid common use and use non-contentious definitions I would maybe use the following phrases:

1) bank net asset value

2) cash

3) cash + deposits

This avoids the disputed terms 'capital' and 'money' altogether

Robin Smith said...

Appreciate your efforts to "come to terms". The problem with terms like financial capital is that 1) as you say capital is in dispute by those who dont like its meaning so it becomes corrupted with terms that define something else. Money is the classic substitute 2) they have gone on regardless to concatenate it with "financial" creating further confusion

I dont have a problem with capital or money. They problems arise when economist reach a roadblock and invent a term that helps them around it, without resolving the blockage. i.e., using net asset value to describe money. That is not science. Then again economics is not science in the mainstream we all know.

A banks net assets are money from what you are saying. Yet money is not capital. How can money be wealth. Then lets see what banks actually own, that they can use as collateral for loans, their capital in other words, which must be the product of their enterprise? Buildings, the process they use to run the business, computer systems. Anything else?

The terms Capital and Money are only disputed because the imperatives drawn out by reason when defining them make them unpalettable to those in dispute. They are very straight forward and simple to describe. Lets stick to them rather than avoid the uncomfortable?

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