The Nature of Money part 2: Access to the Payment System

A response to the following two Bank of England videos: 

Money in the modern economy: an introduction - Quarterly Bulletin article

Money creation in the modern economy - Quarterly Bulletin article 

When the person in the intro video outlines the two forms of money (deposits 97% and notes 3%), the only thing I really take issue with is the language.  

"If you have 200 pounds in your current account that means that your bank owes you 200 pounds and that money functions just the same way as the currency in your wallet does."

This language isn't precise enough.  Your current (bank IOU) account is a digital form of money.  There is no "in" anywhere.  The banking system isn't a giant wallet.  A person doesn't withdraw notes, a person exchanges a digital form of money, deposit balance, for a physical form, notes.  As both videos work to express, government guaranteed electronic balances (balances which are less than a specific amount) are the equivalent of notes.  In some respects guaranteed bank deposit balances are actually superior to physical notes.  Try mailing physical notes to make a payment in another part of the network!    

Secondly the deposits have value not only because others accept them as a means of payment in exchange for goods/services, but because they are used to settle tax obligations and debt contracts.  As new deposit balances are created when banks create debt contracts (lending), a demand for money exists immediate as there is a need to eventually settle the debt contract at a specified future date.  

There are only two ways in which deposits or bills come into existence.  As the second video explains, banks create the bulk of money we use when they lend.  The lending creates new digital account balances which can then be exchanged for bills (although 97% of the broad money supply exists in digital bank IOU form).  The government (treasury and CB together) can create deposits through the banking system by issuing treasury securities which the CB buys (as explained in the first video).  Loans and the CB purchased treasury securities both create deposits within the private banking system.

So if deposits are bank IOUs and notes are Central bank IOUs, what do the banks and CB "owe you?"  

Access.  Accounts are “keys” which provide access to the entire payment network which allow us to transact with one another as we look to fulfill our needs/wants.  If a person does not have access to the network via a bank balance or physical notes, it would be almost impossible to survive unless you are entirely self-sufficient.  

Access is an intangible social relationship and it is being sold at a price (the interest rate).  Moreover access to the payment system is far cheaper for some (differential rates of interest) than for others.  This interest rate differential creates the shadow or parallel banking system where entities will purchase access at a specified rate and then sell it to others at a higher rate (dealers).

As some economists have warned against (Ann Pettifor) selling access at a price is unfair and creates a social hierarchy.  She (and I agree) is that the institution of government is supposed to protect individuals from the abuses which can arrive from restricting access to individuals over others.  This is why she urges that everyone be given some level of access in order to create a more equal opportunity society.  Otherwise it creates an imbalance between those that distribute access (the banking and financial system) and those who desperately need it.  This can create predatory behavior which leaves large groups of the population permanently indebted.  

As some have mention (Perry Mehrling) tougher restrictions on the banking system in their ability to distribute access to the network will work to empower the shadow banking (unregulated) system as this forces those that need access to pay higher rates (prices) for it.  This is why rather than restrict the regulated banking system’s ability to provide access via lending; perhaps the government should play a more explicit role by creating and distributing a minimum degree of equal access to all citizens.

See:  Macroeconomic Policy and Economic Stability - Adair Turner Keynote at INET Hong Kong

Regardless, these are political decisions that radically affect social life. 

When access to a network that helps to organize society is distributed at a price by an elite group of individuals, how does this affect the democratic process?