How the banks create money

[psionl0]

This dilbert cartoon explains the problem we have with our discussion webb5.

 

[psionl0]

You don't understand me because you have not done a proper study into the monetary system.

You need to study Modern Money Mechanics and make sure you understand it before you suggest any reforms.
Explain to me which part of Modern Money Mechanics I do not understand.
Then study the Monetary Reform Act as proposed by The Money Masters and if you understand all of its implications THEN you might be taken more seriously.

Does this mean you are against The Monetary Reform Act? From what I can see, it is pretty much the same sort of reform minus the Social Credit part where money should be created on the grounds of real wealth.

The term "social credit" is so poorly defined that it is almost meaningless. Near as I can tell, you are proposing that the government sets up a bank and borrows money from it using the same mechanism that the private banks use. This is almost identical to how the reserve banks work today and by trying to paint it as something different by calling it "social credit" you are merely obfuscating the issue.

You are also proposing that we take away the ability of privately owned banks to practise fractional reserve banking without compensation. Let me tell you, that ain't gonna happen. You are suggesting that it is OK to steal assets that banks have (up to now) legally acquired. We need to change the rules but we can't do it retrospectively.

If you have understood the Monetary Reform Act, then you should realize that it basically means two things. First, we do away with a central reserve bank. Governments creating money or governments borrowing money that was created by a government owned central bank amount to the same thing. (This is the "social credit" part that you think is missing). The government simply creates money when more is needed and if there is a need to reduce the money supply, the government runs a surplus budget.

The other part is that banks operate under full reserve. To implement this, the banks need to set up subsidiary lending institutions and all loans are transferred to these institutions. From then on, the lending institutions can only lend money that is in their bank accounts. The government also needs to create money that is deposited with the banks (not lending institutions) so that their reserves are back to 100%. This is non inflationary because under the full reserve system, money based on debt is simply replaced with government credit and no extra money goes into circulation.

Thus, the money/banking system operates almost the same way as it does now but with two advantages: bank customers' deposits are no longer at risk in the event of a bank run because of the full reserve system and the government gets to spend all of the new money created and not just a fraction as it does today.

Is this radically different to what you are proposing?

 

[webb5]

The term "social credit" is so poorly defined that it is almost meaningless.That is only your opinion Near as I can tell, you are proposing that the government sets up a bank and borrows money from it using the same mechanism that the private banks use. This is the part you have completely misunderstood. Under social credit this money is created without debt on the basis of real wealth. The government has in other words created new money without any need to go into debt. No borrowing has taken place. This is almost identical to how the reserve banks work today and by trying to paint it as something different by calling it "social credit" you are merely obfuscating the issue. Wrong again. Reserve banks may have this ability but they do not use it. Governments world wide are continuingly borrowing money. Look at their massive debts

You are also proposing that we take away the ability of privately owned banks to practise fractional reserve banking without compensation. Why should these thieves be compensated Let me tell you, that ain't gonna happen. You are suggesting that it is OK to steal assets that banks have (up to now) legally acquired. Repossess stolen wealth the banks have acquired by fraudulent means. We need to change the rules but we can't do it retrospectively.

If you have understood the Monetary Reform Act, then you should realize that it basically means two things. First, we do away with a central reserve bank. Governments creating money or governments borrowing money that was created by a government owned central bank amount to the same thing. (This is the "social credit" part that you think is missing). The government simply creates money when more is needed and if there is a need to reduce the money supply, the government runs a surplus budget.

The other part is that banks operate under full reserve. To implement this, the banks need to set up subsidiary lending institutions and all loans are transferred to these institutions. From then on, the lending institutions can only lend money that is in their bank accounts. The government also needs to create money that is deposited with the banks (not lending institutions) so that their reserves are back to 100%. This is non inflationary because under the full reserve system, money based on debt is simply replaced with government credit and no extra money goes into circulation.

Thus, the money/banking system operates almost the same way as it does now but with two advantages: bank customers' deposits are no longer at risk in the event of a bank run because of the full reserve system and the government gets to spend all of the new money created and not just a fraction as it does today.

Is this radically different to what you are proposing?

Not really, except a Monetary Policy Committee (National Credit Office) would be set up to ensure a correct money supply in the economy, by issuing or withdrawing of money in accordance with the country's production capacity and demand. A national dividend to the population could also be used to expand the money supply, very much like stimulus packages used lately to stimulate economies. The richer the country is in real wealth the less taxes if would require and the more buying power each person has in its currency.

Personally if it was up to me I would impose full reserve banking on the banks immediately. To do this the banks would have to sell their assets, (wealth they stole from the people!)

Below is a link to a proposal to Banking Reform in Britain, it is the best one I have seen to date
http://www.positivemoney.org.uk/how-it-works/creating-new-money/

 

[Sceptic-PK]

Give up psionl0, it's like speaking to a child with severe learning disabilities.

 

[JoelKatz]

Of course this is true, the difference is that the private banks are profiting by creating the worlds money supply as debt fraudently out of nothing using fractional reserve banking.

Could you explain where the fraud is exactly? I mean, surely you don't think that very many people believe that when you deposit $100 in a checking account, the bank puts that $100 in their vault with a tag indicating that it's yours. Obviously if they did that, they couldn't pay you interest.

 

[psionl0]

If, as a trustee, I took the money in a trust without the consent of the beneficiaries and invested it for personal gain I would be guilty of a crime for good reason: if my investments are successful then the beneficiaries get at best a cut of the profits I make while if I lose (and can't personally make good the losses) then it is the beneficiaries that lose out.

This is pretty much what a bank does. By "investing" the money you deposited, the bank can reduce or eliminate the fees it would otherwise charge (and maybe even offer a small amount of interest) but your deposit is at risk.

This is the reason that some people call the banks' activities "fraudulent" but I think it would be more accurate to call it a "breach of trust".

 

[Tippit]

A national dividend to the population could also be used to expand the money supply, very much like stimulus packages used lately to stimulate economies. http://www.positivemoney.org.uk/how-it-works/creating-new-money/

This is the part that essentially makes it "social credit". Instead of the profits of seigniorage going to the government and to banks, it goes directly to people in the form of a "social dividend". I think this, coupled with monetary reform, would be a vast improvement over the status quo, however, I still know that the stigma over the productivity norm (a deflation rate that mirrors productivity growth) is still that, just a stigma. We don't need inflation, we have merely been told we need inflation, over a long enough period of time such that everyone believes it without question. If we're going to have inflation, it may at least result from an equitable distribution of money though.

 

[JoelKatz]

This is pretty much what a bank does. By "investing" the money you deposited, the bank can reduce or eliminate the fees it would otherwise charge (and maybe even offer a small amount of interest) but your deposit is at risk.

This is the reason that some people call the banks' activities "fraudulent" but I think it would be more accurate to call it a "breach of trust".

For it to be fraudulent, the banks would have to be concealing this fact. However, it is in fact generally known. Also, every bank I've ever dealt with has made it perfectly clear to me through specific disclosures precisely what of my deposits are and are not at risk.

To call fractional reserve banking "fraudulent" you have to make up some new definition of fraudulent such that deception is not required. But deception is the very core of fraudulent conduct.

I, like most people, put my money in a bank account specifically because I want them to invest it and pay me interest. Otherwise, I would stuff it in my mattress or a safety deposit box.

 

[webb5]

Could you explain where the fraud is exactly? I mean, surely you don't think that very many people believe that when you deposit $100 in a checking account, the bank puts that $100 in their vault with a tag indicating that it's yours. Obviously if they did that, they couldn't pay you interest.

If banks only lent out money that was deposited in their banks (full reserve banking) it wouldn’t be a problem. They make money on the interest they charge on loans because that interest is higher than the interest they pay on depositors' accounts. This is what most people think happens when loans are made from banks. This is most definitely not the case.

Fractional Reserve Banking is a process that allows the banks the ability to create money out of nothing. A bank in the USA for example can create an extra $9,000 of new money from a $1000 deposit on a 10% reserve ratio. This is the part I refer as fraudulent. See link http://www.bleedingindebt.com/how-the-banks-create-money.html
Over 90% of new money is created this way. This money has been created as debt and this must be paid back with interest. The world has massive debt because of this and it will not be paid back. The world is bleeding in debt.

This is hardly a breach of trust. It is a criminal activity sanctioned by our governments. The banks are stealing our wealth and making us poor as a result. It is a high criminal activity that should match bank robbery and counterfeiting charges at the least. They make these people look like a bunch of amateurs in comparison. People are starving in this world and the banks have contributed greatly to this.

 

[Sceptic-PK]

Fractional Reserve Banking is a process that allows the banks the ability to create money out of nothing. A bank in the USA for example can create an extra $9,000 of new money from a $1000 deposit on a 10% reserve ratio. This is the part I refer as fraudulent.

I have repeatedly corrected you on this and you’re still unable to understand. This is why everyone in this thread disagrees with you, despite us all having varying opinions on this subject. A bank in the USA can create an extra $900 from a deposit of $1000. Stop getting this wrong, it illustrates just how poor your grasp of banking is.

Over 90% of new money is created this way.

On your example, it is a mathematical impossibility for more than 90% of money to be created this way. Again you display your lack of understanding.

The world has massive debt because of this and it will not be paid back.

As has been explained to you repeatedly, this is incorrect. These debts are paid back by money that is generated at a future date (ie in my case its my future salary payments). There is no need for actual, physical currency to equal the amount of electronic money, unless everyone wished to use physical money for every single transaction they ever make, which they don’t. I’m sorry, but economics has proven too difficult a subject for you.

May I suggest (again) that you take a few university classes to help you with your understanding?

 

[psionl0]

I, like most people, put my money in a bank account specifically because I want them to invest it and pay me interest. Otherwise, I would stuff it in my mattress or a safety deposit box.

Most people have a bank account because it is virtually impossible to live without one nowadays. If you want to earn interest on your money then you don't leave it in an at call trading account, you make a fixed term deposit or put it in some cash management account or make some other investment (but then you don't have instant access to the money). How much interest you make depends on how much risk you are prepared to take on.

Many might believe that the risk associated with a bank account is worth it because it minimizes the fees we might otherwise have to pay to operate a bank account. The point is the we don't have a choice about this matter. We must operate the bank account on the bank's terms because we are a captive market.

BTW I don't call the banks' activities fraudulent. On the other hand, few people are aware of how money is created by fractionalism because bankers and financial analysts rarely spell it out for the public.

 

[psionl0]

If banks only lent out money that was deposited in their banks (full reserve banking) it wouldn’t be a problem.

Wrong! This is the very definition of fractional reserve banking because at the same time as banks lend out money that was deposited, they are telling their depositors that they can all get their money out any time they wish. This of course is not possible (although people can transfer their money to other peoples' bank accounts).

I have repeatedly corrected you on this and you’re still unable to understand. This is why everyone in this thread disagrees with you, despite us all having varying opinions on this subject. A bank in the USA can create an extra $900 from a deposit of $1000. Stop getting this wrong, it illustrates just how poor your grasp of banking is.

You are not telling the whole story either Sceptic-PK. It is true that if a new bank started up with $1000 in deposits that it couldn't simply write out a cheque for $9000 and lend it out because it wouldn't have the reserves to cover it. This is why MMM shows the money creation as an incremental process.

On the other hand, if the bank is a member of a banking cartel or operates within an umbrella organization like the Federal Reserve, then there is nothing to stop it making loans greater than what it has in reserves - as long as the reserve ratio is not breached.

 

[Sceptic-PK]

You are not telling the whole story either Sceptic-PK. It is true that if a new bank started up with $1000 in deposits that it couldn't simply write out a cheque for $9000 and lend it out because it wouldn't have the reserves to cover it. This is why MMM shows the money creation as an incremental process.

I don’t think my repeated explanations over the many, many pages of this thread should need repeating. I’ve even pasted the MMM graph on at least 2 occasions in order to help people.

 

[psionl0]

On your example, it is a mathematical impossibility for more than 90% of money to be created this way. Again you display your lack of understanding.

You did not refer either to the MMM graphs or cartel-like behaviour in this instance because you wanted to highlight webb5's "lack of understanding".

Since the end result is 90% of money being created, you didn't help anybody who hasn't read the "many, many pages of this thread" to understand either.

 

[Sceptic-PK]

You did not refer either to the MMM graphs or cartel-like behaviour in this instance because you wanted to highlight webb5's "lack of understanding".

And because I get tired of repeating myself to someone who lacks even the basics.

Since the end result is 90% of money being created, you didn't help anybody who hasn't read the "many, many pages of this thread" to understand either.

It’s not necessarily the “end result”. It’s the theoretical maximum. There is no guarantee that there will be a 9x increase via successive lending/borrowing. Since Webb’s statement referred specifically to 1 bank I saw no reason to explain everything to him for the 10th time.

 

[webb5]

I have repeatedly corrected you on this and you’re still unable to understand. This is why everyone in this thread disagrees with you, despite us all having varying opinions on this subject. A bank in the USA can create an extra $900 from a deposit of $1000. Stop getting this wrong, it illustrates just how poor your grasp of banking is.

A single bank can create $900 but this money will go to another bank account and the process of fractional reserve banking continues until eventually the banks have created in unison $9,000 from a initial deposit of $1,000


On your example, it is a mathematical impossibility for more than 90% of money to be created this way. Again you display your lack of understanding.

90 % of new money is created from fractional reserve banking!


As has been explained to you repeatedly, this is incorrect. These debts are paid back by money that is generated at a future date This debt is a vicious cycle of debt generating more debt. It is not getting smaller it is getting bigger you fool!
(ie in my case its my future salary payments). There is no need for actual, physical currency to equal the amount of electronic money, unless everyone wished to use physical money for every single transaction they ever make, which they don’t.
What’s you point?

I’m sorry, but economics has proven too difficult a subject for you.
May I suggest (again) that you take a few university classes to help you with your understanding?

Better stay clear of the ones you went to then.

 

[webb5]

Wrong! This is the very definition of fractional reserve banking because at the same time as banks lend out money that was deposited, they are telling their depositors that they can all get their money out any time they wish. This of course is not possible (although people can transfer their money to other peoples' bank accounts).


Read the post again

 

[Sceptic-PK]

A single bank can create $900 but this money will go to another bank account and the process of fractional reserve banking continues until eventually the banks have created in unison $9,000 from a initial deposit of $1,000

Then say that you insufferable twit. Specifics matter.

 

[psionl0]

Read the post again

I read the post again. It still says "If banks only lent out money that was deposited in their banks (full reserve banking) . . ." and it is still wrong.

 

[JoelKatz]

Fractional Reserve Banking is a process that allows the banks the ability to create money out of nothing. A bank in the USA for example can create an extra $9,000 of new money from a $1000 deposit on a 10% reserve ratio. This is the part I refer as fraudulent.

The part of this that is correct is something generally understood and that banks clearly disclose. So how is it fraudulent?

This is hardly a breach of trust.

I don't understand how or why this is a breach of trust. When I deposit money in my bank account, this is *exactly* what I'm asking the bank to do and I receive the agreed upon cut of the profits made by doing so.

There is simply no way a business doing exactly what everyone expects it to do, understands it does, and is specifically commanded to do by regulation, can be "fraudulent".