In my paper I said there is some capital to finance a vault and a shop. Of course bank’s creditors can seize the vault and the shop but that is a very small warranty. Now you said capital could be much higher and there vould contitute a true warranty. That could be right from a microeconomic point of view ((I mean for the relations between a peculiar bank and its creditors), but as I show in the second part of my paper that would entail macroeconomic disorders, namely a bad financial situation for the firms.

Certainly I have wrongly exprimed my thought. When I write that banks (the public agencies for monetary creation) are obliged to finance all marketable projects, I want to say that there are other judges of the “marketability” of the project that its iniataors. I agree that these other judges are difficult to define and that “marketability” include a lot of anticipations and subjectivity, but that I want to say is that it would be the only criterium, while in the present system a banker may say to an entrepreneur “you project is very interesting, i.e. marketable, but I have no money to finance it” (because I have a too small part of the global quantity of money predefined)

I might not get something, but I have trouble accepting the claim that capital has “nothing” to do with money creation. “Very little” I could accept. That more capital makes the loans safer that a bank accepts, including the deposits it takes, is not an invention of the Baselers and the media. If a bank with significant capital fails and is closed, creditors will recover a higher share of their money, compared to a bank with little or no capital. The differences of recovery rates might be rather trivial in practice at current capital ratios, but it is not zero, and it might become quite significant at capital ratios of say 50%.

I take your point that inflationary consequences of failed projects are the same at any r > 0 as at r = 0. My point refers to your suggestions that deposit banks “are obliged to finance all of them”, i.e. all marketable production. The difference in comparison to the ecurrent system would be that banks cannot reject credit demands by over-optimistic borrowers who think they will make proft of at least zero with whatever marketable production they intend. Under such a requriement, the share of failed projects and fraudulent borrowers is likely to be much higher.

In the present system, there is a selection of projects by their rates of return. Every project that has a rate of return higher than the interest rate (r) of the market is financed. Following the standard synthesis theory, there is the link M =kY + L(r)).between the quantity of money and r, the monetary policy is supposed to fix either the good M or the good r But if the anticipation of the rate of return of a given project turns out to be wrong, the project will fail and there will be a creation of money without production and therefore some inflation. On this point there is no difference between the present system and the one I suggest.
What I have in mind is that the present system may lead to underemployment, although it should not following the pure neoclassical theory. For this theory r is determined by the market and measures the preference for the present without any link between M and r, since MV = PT. If r is high, there are few investments, but high consumption and full employment. But for Keynes r is not determined by the market but by the Central bank and does not measure the preference for the present. In these conditions there is no reason to have a rate higher than 0. The only reason to have a rate higher than 0 comes from the quantitative theory: one must limit M to limit inflation and if there is a link between M and r, the monetary policy had to fix M and r. But Postkeynesians reject the quantitative theory, and therefore we may have r = 0. What we want is full employment, and there is no reason to reject marketable project with a rate of return 0. But as in the present system the anticipation of the rate of return may be wrong and the project fails. So there is no difference with the present system except that the rate of interest is 0 and the quantity of money is not limited. And there is a positive point which is not in the present system: creation of money is reserved for production and forbidden for any form of speculation, The speculation itself is not forbidden, it may be regulated, but financed only with money already created.
I thank you very much for your comments and would be very pleased to receive replies.

I have some difficulties to understand your second to the last paragraph You mean that a bank buys an asset with its own money i e. its capital. I do not know what you mean by “its own money”, because by definition the money issued by a given bank is the property of some one else (by definition the money issued by the bank A is a claim on the bank A, and the bank A cannot have a claim on itself). The only thing that a bank can do is to debit an asset account and credit a deposit account. This operation is money creation and has nothing to do with capital as I have shown in my first part.
But if a bank cannot own it own money, it can own the money (and some other bills) issued by other banks. This money and bills are assets, written in the assets column of the balance-sheet. If the bank owns them truly, they are financed by its equity capital written in the debts column and effectively the bank can use the bills as collateral to lend from the central bank. It seems to me you want to speak of that money and you mean that larger will be equity capital larger will be these assets and therefore the loans from the central bank.
Nevertheless that cannot be considered as a new source of money creation. Indeed I have shown in the third part of my paper, that, except for the light part that comes from the interests perceived, banks finance their equity capital through the conversion of shareholder’s deposits and everything boils down to the elementary creation of money as studied in my first part.

In the first section of my paper I remind that bank capital has nothing to do with money creation. You agree on this point but in
your first comment you add that trust in banks increases with their capital, and that trust attracts deposits and therefore increases money creation.

But the fact that an increase of bank capital entails an increase of trust comes from the opinion that strengthening bank capital is good, this opinion has become common since it has been invented by the Basel agreements and spread by the media. If the media spread the reverse opinion, the strengthening of bank capital would entail a decrease of trust.

All of that is matter of opinion and one cannot rely on opinions.

But in the second part of my paper I have objectively shown that strengthening of bank capital is bad, because long funding for banks weakens the financial situation of non-banks, which is exactly the reverse of the financial situation of the banks.Therefore strengthening of bank capital may initially increase trust, but eventually it will weaken non-banks and therefore decrease trust.

You may compare with austerity. Maybe it will initially increase the trust of the creditors in the debtors, but it will eventually weaken the debtors and destroy trust.
Bernard Vallageas

If banks are obliged to fund all investment projects at a zero interest rate, some of these will fail. Income produced by these projects and funded by the loans will circulate, while the goods producing capacity that was intended, will not come to pass, meaning that more income will chase fewer good, leading to hihger prices. Is this correct, and will thus the percentage of investment failure be a major factor determining the rate of inflation? The banks will make losses, correct?

The same in a fiat system. The author states:
“In both systems, the ratio that matters is a link between the reserves (in green) and the money created, therefore the item “capital” (in red) of the balance sheet does not appear. In both systems, the reserves do not belong to the banks but are borrowed either from a depositor (a depositor of gold in the gold regime and as a result of a State’s supplier or employee depositing central bank money in the modern system) or from the central bank in the modern system.

Hence, despite the uselessness of capital for money creation and for the security of banks deposits, the Basel committee wants to strengthen capital requirements in implementing Basel III.”

However, a bank can and will buy some assets with its own money (capital) and use these assets as collateral to obtain central bank loans. To the extenit does that, capital is involved in the multiplier. These assets can be seized if the bank fails and will mitigate the loss of creditors. this is arguably the reason why credit rating agencies and investors tend to demand a higher bank capital to assets ratio in bad times.

The main argument will probably still hold, since these own assets financed by capital will emprically be rather small in relation to those financed by debt. However, if the capital ratio demanded by Basel III were to go up to very high values (e.g. 70%), it seems quite clear that this would impact the money creation process and the riskiness of banks.