I’m going to do one more example. This is the real disease.
This is from a recent thread:
You preach about bank accounting, but you’d never opened an accounting book in your life, not even the most basic intro text. This was not five years ago. This was not the distant past. This was last month. This was September. Next is one more sentence from this thread. “But anyway, banks make meet payroll out of profits, not by creating new money.”
This is, of course, completely wrong. You might as well be wearing your underpants on your head.
In the previous thread, I advised you to finally read an accounting book before you started talking about accounting.
We can see now that you didn’t take my advice.
The first most obvious point is that unprofitable banks cannot pay their payroll “out of profits” because they haven’t got any. This might be an established bank having a bad month, or a new bank just starting operations which means it has significant upfront expenses without yet having a lot of revenue. Regardless, they still have their payroll to meet. It can’t come out of profit if those profits don’t exist. More than that, even in the more ideal situation that payroll comes “out of profits”, it will still be the case that a bank meeting payroll is creating money.
I’m going to write that again: Even if the bank pays its salaries “out of profits”, the bank will still be creating money.
We can look at accounting videos or articles that explain the process. They’ll explain the process in a lot of depth, including the various accounts to be debited and credited for taxation, or external payroll services. We really don’t need all that detail for our purposes, but it’s useful to see at least once in your life. We can see this article from the same online accounting textbook that you didn’t bother to read. We want to get the JOURNAL ENTRY FOR PAYROLL (easy to find with your browser’s search function). Ignoring all the taxes for simplicity, we get:
DEBIT Salaries ExpenseCREDIT CashA normal company meets its expense by crediting “cash”, thereby reducing the amount of cash they have available. But we have to remember that this is the accountant’s definition of cash:
Checking accounts are included in this accountant’s definition.
What a normal company is doing is debiting its salaries expense, and crediting cash. They cut a check for payroll, and they reduce their checking account balance (“cash”) by the amount of the check. A normal company loses their cash asset by crediting their cash. But a bank is obviously different from a normal company. A bank doesn’t need to keep a bank account at another bank to meet payroll or other expenses. They’re not going to bother with that sort of bullshit. A bank is going to do this:
DEBIT Salaries ExpenseCREDIT Deposit LiabilitiesA bank doesn’t cut a check by decreasing their asset at a different bank. A bank cuts a check by increasing their deposit liabilities. This is in exactly the same way that a bank can buy a security, or issue a new loan, by increasing their deposit liabilities. By definition, a bank’s deposit liabilities are a form of money included in the M1. This means that a bank meeting payroll is creating money. That is the meaning of the ledger entry. It will the same ledger entry regardless of whether the bank is meeting payroll “out of profits” or not. Profits have nothing to do with anything. Sure, every bank would like its revenues to be sufficient to meet its expenses, but that doesn’t always happen. It’s the same ledger entry regardless of how good a month they’re having.
I’ve alluded to this process before.
And this is still a single snapshot. A ledger entry is a snapshot. It’s only the beginning. If in ten or fifteen years you finally bother to learn about bookkeeping before you shoot your damn mouth off, you still won’t be done. The actual interesting part of money is not the creation of the new deposit liability, but what happens next.