How the banks create money

[Sceptic-PK]

The limiting factor is the materials, the know how and man power to do these things. Once it was shown that these resourses were available the money was immediately allocated without debt. In reality the war could have been financed this way many times over if they had to, because they had so many reserves in materials.

This is complete nonsense of course. The money created during the early part of the 20th Century wasn’t based on a “reserve of materials” at all. Webb doesn’t understand his favourite statement regarding the CBA, Denison’s “it is backed by the entire wealth and credit of the whole of Australia” which was really just a tongue-in-cheek way of saying the bank did not have any assets. At no stage did the CBA or Australian government tie anything the CBA did to any amount of resource(s).

 

[dudalb]

Is it inflationary to create money? Would we end up like Germany with hyper inflation? Obviously the creation of money must be regulated. It is vital that the supply of money is kept in check and in line with production of goods and services. The government elected by the people, should be the only body allowed to responsibly create money. It should not be created as debt!

The international banks have financed the world’s money supply with their ‘funny money’. They have created this money out of nothing, representing nothing of value. It is the seller of goods and services that actually puts any value into this money. The people have been tricked into risking their assets (real wealth) and future earnings as collateral in order to borrow this monopoly money. It is truly a confidence trick on the people

The banks have turned the financial state of the world’s economies into a house of cards. By controlling the world’s money supply, they control the parliaments of any nation and thus the people. Our sovereignty is at stake.

We are told by economists that basically the debt problem is a production problem and that we can all get out of debt by increasing exports to other countries that will magically fix all our debt. Unfortunately this does not add up, as every nation is told to do the same thing, export more and import less. All nations of the world - are trying to do the impossible; to BORROW their way out of DEBT!

Of the largest 100 economies of the world, 51 are corporations and only 49 are countries. Multi national corporations exert enormous economic influence and are impacting dramatically on employment and government tax revenues. These gigantic organisations are set to cut their work force with the use of new generation of automated machines and technology, we are already seeing this happen. As unemployment is growing, countries are also see their tax base shrinking as multicorporations, banks and wealthy individuals are increasingly shifting their incomes off-shore into low tax havens and by transfer- pricing. Is it any wonder why the world is in the state it is!

God created this world with everything we would ever need in abundance. It is the Greed and lust for world power that has inflicted so much suffering on mankind.

And your solution is.......

 

[Sceptic-PK]

And your solution is.......

Free money for all!

 

[psionl0]

Free money for all!

A classic illustration of why you need to make your posts a lot simpler webb5

 

[Sceptic-PK]

A classic illustration of why you need to make your posts a lot simpler webb5

In this thread Webb has stated that he thinks that money should be lent at extremely low interest rates all the time.

 

[Saggy]

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

Sorry to be coming in late, and I need to catch up .... but .... I think your understanding of FRB is not quite right.

Banks only lend money that was deposited in them.

If they have deposits of X dollars, they must hold a fractional reserve of those X dollars, and can lend the remainder.

If they had to hold all of the money in reserve there would be no money for them to lend. I.e., full reserve banking is an oxymoron !

 

[psionl0]

Sorry to be coming in late, and I need to catch up .... but .... I think your understanding of FRB is not quite right.

You might need to update your understanding of FRB yourself.

Checkout Modern Money Mechanics.pdf

 

[psionl0]

In this thread Webb has stated that he thinks that money should be lent at extremely low interest rates all the time.

I would argue that if I understood webb5 better.

Near as I can make out, webb5 is saying that if a government borrows from its own bank or if a government owned bank lends out money (at low interest) for essential public works then it is not fractional reserve banking - it is "social credit".

Get it? Got it? Good!

 

[Saggy]

You might need to update your understanding of FRB yourself.

Checkout Modern Money Mechanics.pdf

My post was exactly correct. If you think otherwise, why not explain why?

 

[webb5]

This is the problem with fiat money - the inflation tax is used to finance unpopular wars, and has been throughout history. If governments and bankers couldn't inflate the currency as a way of taxing their constituents in order to pay for unpopular wars, the wars couldn't happen otherwise. This is the problem with the status quo, and the system you just described. Of course, a social credit scheme could be implemented with various statuatory requirements limiting money creation.

Money created by social credit is not fiat money. It is created on the credit of the nation in other words it represents something of value. Social credit will not cause inflation if managed correctly. Most wars in history were financed by the banks. The action of creating money through fractional reserve banking is very inflationary.

 

[webb5]

I would argue that what is really vital under a fiat money regime, is who decides who receives the new money. You are aware that the global model for central banks at present is for the bank to return most of their profits to their country's Treasury, right? To the extent that this actually happens, the profits of debt money accrue to the state, which is more or less what you're advocating. Granted, if I had to choose the lesser of evils, I would rather politicians made these decisions rather than autocratic quasi-private central bank chairman.

As I have said before Social Credit is not fiat money. The majority of this new money is to fund government expenditure when revenue falls below certain levels. The other is supplied as dividends to consumers at no cost if the money supply to the economy falls below acceptable levels. The money supply is thus maintained to cover the supply and demand of production and the costs associated with it.

Central banks are not designed to make profit, however in their regulating role as reserve banks they do make a profit. It is also true that they can also make a loss. The profits they do make are a drop in the ocean compared to commercial banks. It is a poor representation of what I am advocating with social credit.

 

[webb5]

The effect of governments creating money is not inflationary as long as the created money results in more goods and services being produced (what you would hope to happen if the government builds a road or factory) or the government recovers the created money through taxation.

Since governments tend to run budget deficits mainly to maintain current expenditure (rather than capital growth), inflation will always be a fact of life.

Very true

 

[webb5]

And your solution is.......

1/ Obviously we must first remove fractional reserve banking and return to full reserve banking.

2/ All national debt to be removed slowly at a rate that does not affect volatility in the markets. Fiat money will be used to pay off debt. (The same stuff the commercial banks used to indebt us)

3/ Social Credit reforms put into place.
Under social credit, private banks will no longer be able to create money. Only the government will have this function. Trading banks have a valid place in free society. Those starting new enterprises or building new homes need to borrow to get started. But borrowing has inherent dangers. Given too much powers, lenders can dictate terms that are unfair and tyrannical to others. The tyranny is called usury. The best safeguard is to have a competitive system in the lending arena. A government monopoly would be just as dangerous as the existing private monopoly.
But lending is a function quite distinct from the creation of additional money, where this is required. That should be a government function, tied to a properly-audited model. Government should not have the right to claim ownership of such money increases as are necessary. They belong to the members of the community as a whole, and should be credited, rather than loaned into existence.

4/The banks and multinationals continue to void their tax obligations to countries. This loophole must be removed. If a multinational corporation has factories or other interests in a country, they must pay the same full tax obligation as the citizens of that country. This parasite law must be removed so domestic industries have a fair go to compete. We must have a true level playing field. We need to rebuild our own industries.

5/ Full employment is no longer possible. We must understand this as industries every where are finding ways to reduce labour with new technology. This is not really a problem for us but a gain for all humanity. It’s just we need to think differently on this.

Credit Creation
The production of modern times is vastly different from early times. We have now leaped ahead with giant steps in mass production. We have massively increased our capacity to build, grow and manufacture things with an increasingly lower work force required. This progress is passed on from one generation to another and It is a heritage we should all benefit from. Unfortunately this is not the case.

A Dividend to Everyone
Because production is no longer the result of labour only, it is a farce to believe that production can be distributed only through the reward of labour. It is the fruit of progress and not labour which is providing these great achievements. There for we must look at this in a different light. As new production methods expand, less labour is required resulting in a rising number of permanently unemployed people. It would also be true that working hours of the work force as a whole is reducing. If people only got paid by the hours they worked their wages would fall. To recognise this progress as a national heratage for everyone, a dividend could be used to supplement these lost wages. This heratage should be shared and not lost in the hands of a few. A Dividend could also be issued to the whole population when the money supply needs increasing.

Social Credit is certainly a possibility to stabilizing the Global Recession we are now experiencing. It is important that nations around the world look at this model for real possibilities in ending the cycle of debt. The poorest nations of the world are in dire straits. If we do not take an effective action against this type of debt, nation after nation will go under. We cannot keep borrowing forever without going bankrupt, it’s a situation we must all get out from. The Governments of the world need to take action against this practice of fractional reserve banking. The fictional reserves are not there and it is the basis of so much instability.

 

[lomiller]

My post was exactly correct. If you think otherwise, why not explain why?

He misinterprets a single line discussing the fact that banks don't typically hand out cash when they make a loan and instead credit a borrowers bank account.

He insists the bank is simply creating the money deposited from nothing when in reality it's simply a condensed version of the lend - deposit - lend cycle normal used to explain fractional reserve banking. It's certainly identical on the banks books.

 

[psionl0]

He misinterprets a single line discussing the fact that banks don't typically hand out cash when they make a loan and instead credit a borrowers bank account.

He insists the bank is simply creating the money deposited from nothing when in reality it's simply a condensed version of the lend - deposit - lend cycle normal used to explain fractional reserve banking. It's certainly identical on the banks books.

That's not how MMM describes it. From page 6 of MMM:

Of course, they do not really pay out loans from the money
they receive as deposits. If they did this, no additional
money would be created. What they do when they make
loans is to accept promissory notes in exchange for credits
to the borrowers' transaction accounts.​

 

[Saggy]

That's not how MMM describes it. From page 6 of MMM:

Of course, they do not really pay out loans from the money
they receive as deposits. If they did this, no additional
money would be created. What they do when they make
loans is to accept promissory notes in exchange for credits
to the borrowers' transaction accounts.​

Wow. Amazing coming from the MMM. In fact they do pay out loans from the money they receive as deposits as I explained. It has to be that way.

But, even doing so they can create money, as follows ..... this is just FRB basics .... but since it contradicts the MMM I think it's a good idea to make it explicit ...

I waltz into my bank and deposit $10,000 cash money. (As a previous post noted, there is a difference between cash money and Fed money, which is 'hot' money, and bank account money, so I must deposit cash or other hot money. Otherwise, if I deposited bank account money, the bank I drew the money from would have to tap into its reserves, and reduce it's outstanding loans, negating the whole money creation process).

Let's say the reserve ratio is 10%, then the bank has to hold 10% and can lend $9000 dollars.

So, let's say it does so, to X, and X deposits the money in the bank. Now I have 10000 in the bank, and X has 9000 in the bank.

The bank has created an additional $9000 dollars, but it still has loaned only money deposited in it.

And, it can repeat the process, as it must retain $900 of the $9000, but can loan $8100.

And so on. The bank is able to create an additional $90,000 (approx., you could follow the procedure above for about 10 steps to see the exact amount), even while lending only money deposited in it.

 

[drkitten]

Wow. Amazing coming from the MMM. In fact they do pay out loans from the money they receive as deposits as I explained. It has to be that way.

Er, no. You're making the same mistake psion10 is.

They don't pay loans from the money received as deposits. They credit the borrowers' accounts, a transaction that involves no "money" at all.

 

[Saggy]

Er, no. You're making the same mistake psion10 is.

They don't pay loans from the money received as deposits. They credit the borrowers' accounts, a transaction that involves no "money" at all.

Read it again, there is no mistake. It is basic FRB. Of course they credit his account, but, if he asked for cash they would give it to him. You're making a distinction that is not material.

 

[Mr.D]

Finally, after various setbacks and considerable opposition, the adherents of State money carried the day and in 1816, 4,000 notes of £1 each were printed by the Government and paid out for the most urgent repairs.

...

These Government notes were redeemed, as the economic circumstances of the island justified, from earnings derived from the collection of market rents, customs duties, etc., and in 1836, when the scheme ended, there was a balance outstanding of £55,000 Government notes.

Forgive me for not following, as I am not an economist.

Is the above scheme what you've been calling "social credit?"

 

[psionl0]

In fact they do pay out loans from the money they receive as deposits as I explained. It has to be that way.

What you described is accurate if cash is being used as a medium in the lending process. However, it is rare for a bank to lend out cash directly. The banks bypass the borrow/deposit cycle and deposit the money directly into your bank account.

It is true that you could withdraw this money as cash but whatever you were going to purchase with the money you borrowed, you are far more likely to pay for with a check, bank check or some form of electronic transfer (ie: directly transferring the money in your bank account to someone else's account).

(As a previous post noted, there is a difference between cash money and Fed money, which is 'hot' money, and bank account money, so I must deposit cash or other hot money. Otherwise, if I deposited bank account money, the bank I drew the money from would have to tap into its reserves, and reduce it's outstanding loans, negating the whole money creation process).

Again, inter-bank transfers of money from one account to another are done directly and no cash (reserves) is involved at all.