Posted on 03/29/2008 6:48:20 PM PDT by ovrtaxt
How is Money Created? |
The Federal Reserve Bank of Chicago used to publish a pamphlet entitled Modern Money Mechanics, which explains M1, M2, and M3. It is a truly fascinating read. That pamphlet is no longer in print, and the Chicago Fed has no plans to re-issue it. However, electronic copies are available (see link).
In it, the process by which the Fed creates money "out of thin air" is detailed. Consider the opening paragraph:
"Money is such a routine part of everyday living that its existence and acceptance ordinarily are taken for granted. A user may sense that money must come into being either automatically as a result of economic activity or as an outgrowth of some government operation. But just how this happens all too often remains a mystery." (Modern Money Mechanics, Federal Reserve Bank of Chicago, page 2)
Really read that paragraph.
The USFed, in one of its own publications, is stating right there in black and white that money is not created from economic activity, nor from a government operation. How then is it created?
"The actual process of money creation takes place in the banks." (Modern Money Mechanics, Federal Reserve Bank of Chicago, page 3)
The pamphlet uses an example of $10,000 being deposited from the Federal Reserve Bank to "Bank A" and shows how that develops into an increase in assets to the amount of an additional $90,000.
Essentially the Federal Reserve simultaneously creates an asset and liability of the same amount with a private bank. The net sum is zero. This money is "deposited" in the bank's federal reserve account. The private bank can then use this money as a reserve through which they can lend out additional money to the public. This reserve rate is generally 10%. Thus, a "deposit" of the USFed of $10,000 will transform into the private bank being able to loan out $90,000.
A couple of points.
Firstly, if I loaned your company $10,000 would the net worth of your company increase by that amount? The answer is no, because while assets went up by $10,000 so did the liability. It would be fraudulent for you to report an increase in net worth of $10,000.
Secondly, your company could not lend out $90,000 from the initial $10,000 you borrowed from me. You simply would not have the funds and if you claimed to have them, again you would be committing fraud.
Thirdly, I would like to take a quote from another Reserve Bank publication, this time from page 8 of Philadelphia's The National Debt:
"The Federal Government, with the cooperation of the Federal Reserve, has the inherent power to create money - almost any amount of it. This power makes technical bankruptcy out of the question."
So not only are the banks committing fraudulent activity in the sense that they claiming asset value from their debt and secondly loaning out more than they have borrowed, they are protected from any risk of bankruptcy courtesy of the public! You and I would pay more for prices of goods and services should the Fed have to dilute the money supply further by printing sufficient money to prevent bankruptcy of a bank!
This is nothing short of outrageous.
Published on http://DollarDaze.org - Jun 6, 2006.
Ya know? When you get pressed you seem to lose some math and reasoning skills. Take a breath, dude!
I already told you, their employees are illegals, they need cash.
Hard to argue that the contractor doesn't have 100% illegal employees. Are all his suppliers on a cash only basis? Does the lumber yard demand cash only? How about the gas station? When he gets a delivery of concrete does he pay in cash? Can't he cut a net 30 purchase order to the plumbing supplier for fixtures?
Have you ever actually run a real business??? You sound like a government drone who has spent their entire life insulated from reality by the beltway!
Fine, let's go back to your original claim. The borrowers all put their checks in another bank.
All of them? That's realistic.
I suppose I'm not allowed to accept deposits written on checks issued to other banks, either?
Think that one through. I run a bank no one puts money (in the form of checks) into, but I make loans, which I only give in cash, and don't get payments for those loans, except in checks drawn on my own bank, or in cash?
That sounds like a good business model!
How does your bank give the money to the other bank?
It can't. They assumptions you are imposing on my bank make operations impossible.
You assume that I never get checks from any other institutions.
You assume that all of my customers are on a cash only basis.
You assume that I only have one depositor.
That sounds more like I'm running a home, not a bank. Hmmmmm,
I get one paycheck? check.
I never get checks from elsewhere? check.
I have to pay for everything in cash? Nope. even I get to use a credit card and write checks.
Wow! Your fantasy bank is in even worse shape that me!
I'd like to close my account, now, and cash only please...
(Let's continue this later when you've had a chance to think, and when FR isn't quite so balky)
It’s true, with all your tap dancing, I’m laughing too hard to keep all your numbers straight.
I suppose I’m not allowed to accept deposits written on checks issued to other banks, either?
Be patient. Your bank just opened. Plenty of time to expand, if you manage to stay out of jail.
Think that one through. I run a bank no one puts money (in the form of checks) into, but I make loans, which I only give in cash, and don’t get payments for those loans, except in checks drawn on my own bank, or in cash?
Your first deposit for $10,000 was a check. Or it was cash. It doesn't matter for your case. The customer bought a 5 year CD. You made $100,000 in loans and you have $10,000 in cash in the vault. I’m still waiting for you to explain how the other bank ever gets their money from your bank when your checks are deposited.
How does your bank give the money to the other bank?
It can’t. They assumptions you are imposing on my bank make operations impossible.
Please, give me your assumptions that make your operation possible.
You assume that I never get checks from any other institutions.
Right. If you can’t explain your initial position, why make it more complicated?
You assume that all of my customers are on a cash only basis.
Cash, check, please explain a scenario that works for you.
You assume that I only have one depositor.
Right. If you can’t explain your initial position, why make it more complicated?
(Let’s continue this later when you’ve had a chance to think, and when FR isn’t quite so balky)
Take your time. I’ll wait.
You might find the chart under the heading “cumulative effect” interesting; under a 20% reserve requirement a $100 deposit creates $357 in new money via loans:
http://en.wikipedia.org/wiki/Fractional-reserve_banking
A lower reserve requirement allows even greater credit expansion.
The one that shows a 10% reserve requirement magically turning a $100 deposit into a hair less than $1000?
I get it. Would you 'splain that to the Toddster for me?
I'd do it myself, but clearly my teaching skills aren't up to the challenge.
| Table:[7] Fractional-Reserve Lending Cycled 10 times with a 20 percent reserve rate (sources: The Principle of Multiple Deposit Creation[8], Federal Reserve Bank of New York[9], Bank for International Settlements[4]) | ||||
|---|---|---|---|---|
| individual bank | amount deposited | amount lent out | reserves | |
| A | 100 | 80 | 20 | |
| B | 80 | 64 | 16 | |
| C | 64 | 51.20 | 12.80 | |
| D | 51.20 | 40.96 | 10.24 | |
| E | 40.96 | 32.77 | 8.19 | |
| F | 32.77 | 26.21 | 6.55 | |
| G | 26.21 | 20.97 | 5.24 | |
| H | 20.97 | 16.78 | 4.19 | |
| I | 16.78 | 13.42 | 3.36 | |
| J | 13.42 | 10.74 | 2.68 | |
| K | 10.74 |
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total reserves: | |
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89.26 | |
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total amount deposited: | total amount lent out: | total reserves + last amount deposited: | |
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457.05 | 357.05 | 100 | |
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commercial bank money created + central bank money: | commercial bank money created: | central bank money: | |
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457.05 | 357.05 | 100 | |
If you can follow the math, you'll see that subtracting total loans from total deposits gives you the reserves.
In your bank example, deposits are $10,000 loans are $100,000 and reserves are $10,000.
Let me know how you managed to make $10,000 - $100,000 = $10,000.
Do you work for the government? LOL!
I'd do it myself, but clearly my teaching skills aren't up to the challenge.
Your thinking skills need some help too. LOL!
I know your sources are good but isn’t there one step missing? For instance, Bank A loans out $80. But bank A does that by crediting the customer’s checking account with bank A. NOW bank A has deposits of $180 and a reserve requirement of $36 and $144 dollars for another loan. Voila! Money out of thin air.
Since the chart with the 10% reserves yielded over $900 of created money (Which was what we were talking about in the first place, a bank creating money, something you have steadfastly refused to acknowledge) you ignored that part.
Now you are sighting a table that shows $357.05 of something called "commercial bank money created" to prove that commercial banks don't create money.
To be fair, my understanding of the underlying mechanism banks use to create money was overly simplistic and a bit flawed. They add a few more steps of shuffling the money back and forth between each other using customers as proxies to pump it up.
I didn't quite have the mechanism right, but I did have the results nailed. A hundred bucks of 'new' money is multiplied by banks into approximately a thousand bucks of useful money.
Do I work for the government? Only as a taxpayer.
I didn't slide it in. It was from Pelham's link.
You realize your math still doesn't work? LOL!
Hmmmm.
$100 into the system at 20% reserves yields over $350 of money coming out of the system.
$100 into the system at 10% reserves yields over $850 of money coming out of the system.
Either way, the banks created money. That was my point.
Your point was that banks cannot create money.
My estimates were a heck of a lot closer (I missed by $150) than yours (you missed by $860).
Yeah, I guess I made a math error after all...
My point is that you can't. Unless you prove you can.
I've only been asking since post #11. Take your time. LOL!
See paragraph 4 of post #167.
Gads you are dense. I’ve already surrendered on that point.
You OTOH, are still arguing that loans are less that deposits, yet you cite an example where even the most casual take shows that $100 of new money yields a total of $357 in loans. Further you biased your selection by selecting an example at 20% reserves, while ignoring the 10% chart when throughout this entire thread we’ve agreed on the reserve requirement being 10%.
My math skills show me that even at 20% reserves $357 is more than $100. What do yours show you?
Just as a reminder the chart at the same source, the one you are so studiously ignoring, has a 10% reserve requirements line that shows an initial $100 deposit allows banks to create $860 in new money.
I think $860 is more than $100. What do you think?
You’ve said the banks can only loan out $90 on that $100. I think +$860 is more than -$10. Do you agree?
Applause
;-)
*snicker*
Yes, loans are less than deposits.
where even the most casual take shows that $100 of new money yields a total of $357 in loans.
Yes, $357 in loans from $457 in deposits.
Further you biased your selection by selecting an example at 20% reserves,
I simply copied the example from Pelham's link.
My math skills show me that even at 20% reserves $357 is more than $100. What do yours show you?
My skills show that $357 is less than $457.
Just as a reminder the chart at the same source, the one you are so studiously ignoring, has a 10% reserve requirements line that shows an initial $100 deposit allows banks to create $860 in new money.
The formula is m=1/r. So if carried to the end, $100 in new money is loaned and redeposited until you have $1000 in deposits, $900 in loans and $100 in reserves.
You should notice that $900 is still less than $1000.
You’ve said the banks can only loan out $90 on that $100.
And I'm absolutely correct.
Gads you are dense. I’ve already surrendered on that point.
Finally. Banks cannot "create" money out of thin air. $10,000 in the vault does not allow $100,000 in loans to materialize because checks are "good as cash".
Banks work together to get $10,000 worth of use out of a $1,000 deposit.
That yields $9,000 of created worth, or if you will, created money.
Understanding of the inner mechanism is not required for an understanding and use of its results. Indeed, one can patent a process with a totally flawed explanation of why it works. A doctor can prescribe a medicine without understanding exactly how that medicine works. You do know that the underpinnings of how aspirin works are still under intensive study, don't you?
You are somehow able to look at the same data and selectively not see that banks cause any wealth creation.
It's actually rather Marxist of you to insist that bankers are mere parasites who add no value to the economy. Is that where you got the idea?
Excellent! That's been my point. See post #11, #45, #53, #67 etc.
You are somehow able to look at the same data and selectively not see that banks cause any wealth creation.
I wouldn't equate deposits and loans with wealth creation. Some loans could lead to wealth creation. Some to wealth destruction.
So what? That hasn't been any part of my posts.
It's actually rather Marxist of you to insist that bankers are mere parasites who add no value to the economy.
That's funny! Who said that?
Understanding of the inner mechanism is not required for an understanding and use of its results.
I'm just glad that you aren't going to loan $100,000 that you invented out of thin air.
I'm very pleased to see that you can be so gracious in victory. That speaks highly of your character.
That's funny! Who said that?
That would be you. Indeed in the same post you said:
I wouldn't equate deposits and loans with wealth creation.
You said in that sentence that you would not equate what the banks do with wealth creation, did you not? You said earlier that banks charge interest. That is the definition of a parasite: an entity that consumes without contributing.
I'm just glad that you aren't going to loan $100,000 that you invented out of thin air.
I'm happy for you...
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