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.
Excellent! Thanks that explains WFC having only 4% reserves.
The side effects are that the bank makes more money, and the depositor takes more risk.
Typical.
You forgot to include the $90,000 you had to borrow to make all those loans. Unless you still think a bank can "create" money or write bad checks?
Both scenarios have 10% cash reserves.
No they don't.
Any further questions?
Yes. Did you figure out your error yet?
That explains how banks can lend more. That doesn't mean they'll make more.
How is the depositor taking more risk?
Ah, once again you have stumbled over the truth, picked your self up, dusted yourself off, and wandered away from it. Again.
The whole nub of this conversation is precisely the fact that the banks can and do "create" "money".
Go back to your WFC link. Look at their borrowings. Maybe you should explain to them that they'd save money if they wrote bad checks and sent bad wires, instead of borrowing?
The whole nub of this conversation is precisely the fact that the banks can and do "create" "money".
LOL!
Because the bank loans nearly alla his money out.
They way you describe the system, 90% of his money isn't even in the vault, remember? It's loaned out.
Now you've sited a reference that says all of his money could be loaned out.
If enough loans default, the bank goes out of business.
Anything above what the FDIC insures simply evaporates. I'd say that's taking more risk, wouldn't you?
Oh, and that FDIC guarantee? Where does that money come from, hmmmm?
Why do you keep insisting that WFC doesn’t have any reserve requirements?
Sometimes they have to borrow to cover their reserve requirements.
Remember, they cannot create an infinite amount of money, only an amount that is firmly anchored in what they have in deposits.
Only a government can create an infinite amount of cash, but that isn’t quite the same as creating an infinite amount of money/value.
Ask Mugabe if you doubt that.
Because the bank loans nearly alla his money out.
They way you describe the system, 90% of his money isn't even in the vault, remember? It's loaned out.
If your system, 100% of his money is loaned out and 800% more. Which is more dangerous?
Oh, and that FDIC guarantee? Where does that money come from, hmmmm?
You're joking, right?
Where did I ever say that?
Sometimes they have to borrow to cover their reserve requirements.
What good is a reserve requirement if they can loan out 900% of deposits?
Remember, they cannot create an infinite amount of money, only an amount that is firmly anchored in what they have in deposits.
Right. 9 times deposits. LOL!
Nope. ALL of his cash is in my vault. I've loaned out 10X as much in checks and bookkeeping entries in my records.
When he comes for cash, I go to the vault, and give it to him. Then I scramble like hell to replace it to maintain my reserve requirements. I might even have to pay the Fed Funds rate to borrow enough until I can attract more deposits.
YOU on the other hand have a REAL PROBLEM.
In your bank, when he comes for his money, you only have 10¢ on every dollar he deposited in your vault. It takes him all of 20 minutes to tell everyone he knows that they'd better get down to the bank RIGHT NOW and get what little they can before it folds! They're outa money!!! I could only get a dime onna dollar!!!!
Panic is a terrible thing, It makes people say If, when they mean In, and 800% when they mean 900%, as in your post...
Nope. Some of it is from the insurance premiums the banks pay. Under normal circumstances that's plenty to cover the occasional folding of the Last National Bank of Podunk and its ilk.
In a major crash, guess what? The taxpayers are on the hook!
"Rich people know this."
A long time ago a teacher taught me a valuable lesson about money and what it is.
He explained to really find the value of something place you and the item on a deserted island with the idea you will never leave that island nor will anyone ever come to that island, in other words totally cut off from the world.
Now what will One million Dollars do for you, or stacks of gold bars worth a million?
Other than making good fire starters out of the cash or stacking the gold bars up for shelter, not a damn thing.
The above example illustrates the point that its not Money we all want, rather it is what money gets us.
He went on to explain the same about a shovel. No one wants a shovel really, what they want is a hole, the shovel gets you the hole when put into the right context, (Shovel+capable digger+proper ground=hole)
Shovels are tools and so is money. But too many people think money is the object of the exercise and so on pay day they spend the money.
When they should put that "tool" to work for themselves.
Toddster ~ Where did I ever say that?
Here:
Post # 145: Maybe you should explain to them that they'd save money if they wrote bad checks and sent bad wires, instead of borrowing?
Maybe I read that wrong, but that sounded like you said they didn't need deposits to cover the checks and wire transfers they made?
Excellent!
I've loaned out 10X as much in checks and bookkeeping entries in my records.
When one of those checks is cashed, how do they get the money from you?
My Mortgage company doesn't even accept a cash payment. They don't even have a system in place to deal with it. Do you really think they take every check to the bank and CASH it???
Seriously, when was the last time you CASHED a check for more than a couple hundred dollars? Depositing it and getting a couple hundred back as walking around money doesn't count. I'm talking about getting a couple thousand IN CASH from a bank.
Do you routinely walk around with your entire pay check in your pocket?
Great. Someone deposits one of your checks in their account at another bank. How does the other bank get the money from you?
Seriously, when was the last time you CASHED a check for more than a couple hundred dollars? Depositing it and getting a couple hundred back as walking around money doesn't count. I'm talking about getting a couple thousand IN CASH from a bank.
4 of the $3000 loans you made were for people who were getting work done on their homes. They signed the checks over to their contractors who need cash to pay their illegal employees.
You now have four 250 pound guys with toolbelts in your lobby and they want to know where the cash is.
We trade the bunch of checks drawn on my bank that they have for the bunch of checks drawn on their bank that I have. On the average it works out about even, in any event even when the balance tips one way or the other, we don't send an armored car full of cash back and forth, we just bill each other for the balance!
If it doesn't even out, then we transfer funds in the form of ones and zeros from one bank to the other. Worst case, we borrow money at the Fed Funds rate from each other.
4 of the $3000 loans you made were for people who were getting work done on their homes. They signed the checks over to their contractors who need cash to pay their illegal employees.
You now have four 250 pound guys with toolbelts in your lobby and they want to know where the cash is.
Ooooooooo big scary monsters! I have 4 guys I out weigh who want, hmmm, let's see, $7.50/hr 8 hrs/day 5 days/week 4 guys... $1,200 total cash...
I have all of that $10,000 deposit in the vault, I supposes I could, oh, uh, I dunno, give them cash???
BTW, You loaned out $9,000 of your $10,000 deposit. You only have $1,000 in your vault, and need to pay out $1,200...
You cashed some checks from another bank? With what?
we just bill each other for the balance!
Great. Another bank billed you for $3,000. How do you give them the money?
I have all of that $10,000 deposit in the vault, I supposes I could, oh, uh, I dunno, give them cash???
Yeah, you have 4 guys with your $3000 checks in your lobby. They want $12,000 in cash.
BTW, You loaned out $9,000 of your $10,000 deposit. You only have $1,000 in your vault, and need to pay out $1,200...
Did I say you had 4 guys who wanted $3,000 each? I meant you had 40 guys who want $3,000 each.
Cash. That's why I have cash reserves. That's also why I have 10 times as much cash in my vault as you do!
BTW, have you ever walked into a bank you don't have an account with and tried to cash a check there? You might try it some time.
Great. Another bank billed you for $3,000. How do you give them the money?
I give them 300,000 pennies.
Yeah, you have 4 guys with your $3000 checks in your lobby. They want $12,000 in cash.
Really?
They're paying all their employees and suppliers in cash? In what universe?
Did I say you had 4 guys who wanted $3,000 each?
Yes you did.
I meant you had 40 guys who want $3,000 each.
Ah. 4 guys didn't work, let's imagine the entire economy has lost the ability to use a credit card or write a check, and everyone needs cash money up front. That'll prove nully's wrong wrong wrong!
Yeah, that's great. The problem you have is that while the people who borrowed $9,000 from my bank all have their money, none of the people who borrowed $100,000 from your bank ever got their money.
They're paying all their employees and suppliers in cash?
Yes.
In what universe?
I already told you, their employees are illegals, they need cash.
Ah. 4 guys didn't work, let's imagine the entire economy has lost the ability to use a credit card or write a check, and everyone needs cash money up front.
Fine, let's go back to your original claim. The borrowers all put their checks in another bank.
How does your bank give the money to the other bank?
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