How the banks create money

[psionl0]

They credit the borrowers' accounts, a transaction that involves no "money" at all.

Thanks for the warning! Some of us might have been foolish enough to believe that we can make a cash withdrawal of this "no money at all".

 

[JoelKatz]

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.

Far from a financial scheme, this is simply a government power scheme. It suffers from the same evil as inflation -- the government can decide the priorities for the allocation of precious fixed resources without having to own up to the costs it imposes.

 

[drkitten]

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.

No, they are making a distinction that is not material.

And that's the problem. Psion10 is picking up on this distinction and completely confusing himself.

 

[Tippit]

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.

What you are describing is fiat money. Where does the money come from to fund the expenditure, and to pay the social dividend? In order to "maintain" the money supply as you suggest requires fiat money, money that only has value due to government decree. In other words, we have to trust the government to maintain the value by limiting the supply, as well as not creating it for the express purpose of enriching their cronies.

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.

You realize that short of the fixed dividend that the central bank pays to its member banks, the bank profits are typically remitted back to the Treasury, right? This has been pointed out to you several times but I'm not sure you acknowledged it. This means the government gets most of the profits. Of course, this doesn't address the problem with how the government spends the money, and it doesn't address the socializing of private bank losses using the central bank's balance sheet.

 

[Tippit]

Far from a financial scheme, this is simply a government power scheme. It suffers from the same evil as inflation -- the government can decide the priorities for the allocation of precious fixed resources without having to own up to the costs it imposes.

The difference being that it can confiscate real goods and services opaquely via the inflation tax and blame it on the wealther, or supply issues, as opposed to hiring IRS agents to directly separate you from your money.

It is precisely this difference that allows the funding of wars more easily than they would be funded otherwise.

 

[psionl0]

No, they are making a distinction that is not material.

And that's the problem. Psion10 is picking up on this distinction and completely confusing himself.

You want to dismiss a simple statement of fact in MMM just so you can be at odds with me? That is unbelievably petty and stupid.

Money creation occurs whether banks lend cash from their reserves (not customer deposits) or directly credit a borrower's account. However, the distinction is not "immaterial". When lending out cash a bank is physically limited to lending out less than it holds in reserves at any one time. This limit doesn't hold if banks credit a customer's account instead because very few loans are ever cashed out (and even then, only partially).

Without a central bank or a cartel, the amount that an individual bank could lend out would still be limited because of the possibility that the lent money would be transferred to a different bank. With the Fed in place, this is not an issue.

The simple fact is that banks do not lend out cash and to suggest otherwise or dismiss this as immaterial is plain dishonest.

 

[Sceptic-PK]

Money creation occurs whether banks lend cash from their reserves (not customer deposits) or directly credit a borrower's account. However, the distinction is not "immaterial". When lending out cash a bank is physically limited to lending out less than it holds in reserves at any one time. This limit doesn't hold if banks credit a customer's account instead because very few loans are ever cashed out (and even then, only partially).

The distinction is immaterial. Regardless whether a bank is lending our cash or crediting a customer’s account, they are still limited by what they can lend via the reserve requirement.

 

[respect]

Most wars in history were financed by the banks.

You might want to brush up on your history.

 

[psionl0]

The distinction is immaterial. Regardless whether a bank is lending our cash or crediting a customer’s account, they are still limited by what they can lend via the reserve requirement.

If you are saying that the distinction does not change the final result (how much money ends up being created) then that is a reasonable definition of "material". It still doesn't make MMM wrong.

Saggy's reason for calling the distinction immaterial is different to yours. He claimed the distinction was not material because the bank would give cash to the borrower if asked. If the bank had to operate under the assumption that everybody who borrowed money would withdraw it from their bank account then there would be no distinction at all. (Of course, if the banks had to operate under the assumption that everybody might withdraw money from their bank account at the same time then we couldn't have fractional reserve banking).

On the other hand, if crediting a borrower's bank account involves "no money at all" then there is a very material distinction.

 

[Saggy]

If you are saying that the distinction does not change the final result (how much money ends up being created) then that is a reasonable definition of "material". It still doesn't make MMM wrong.

Saggy's reason for calling the distinction immaterial is different to yours. He claimed the distinction was not material because the bank would give cash to the borrower if asked. If the bank had to operate under the assumption that everybody who borrowed money would withdraw it from their bank account then there would be no distinction at all. (Of course, if the banks had to operate under the assumption that everybody might withdraw money from their bank account at the same time then we couldn't have fractional reserve banking).

On the other hand, if crediting a borrower's bank account involves "no money at all" then there is a very material distinction.

Study the detailed explanation I gave earlier. This is the way it works. The MMM is wrong. Skeptic-PK is right, it's the reserve requirement that limits what can be loaned. But, it's easier to understand when you realize that only money THAT HAS BEEN DEPOSITED can be loaned. That's the essential thing to understand, then it all falls into place.

Here the distinction elucidated ...

I waltz into Bank A, which just opened and has no money at all, and deposit $10,000.

Now, Bank A cannot put the $10,000 in its reserve account at the Fed and go out and lend $90,000 (assuming a 10% reserve requirement). Note after the loan the bank would have accounts for $10,000 and $90,000 for a total of $100,000 so its reserve requirement is met. But, still, it can't make that loan because it does not have that money on its book to loan. (Note: this is the crux of the matter, so if I'm wrong here, I'm wrong).

Instead, it must deposit $1000 in its reserve account, and it can lend $9000.00. This is ALWAYS the way FRB is explained (MMM withstanding).

 

[psionl0]

"What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts".
If you are saying that banks don't credit customers' accounts but lend out cash instead then you have to prove it.

Just because you were clever enough to figure out how the money multiplication works doesn't mean there is nothing for you to learn. MMM describes the whole banking/money system including the role of central banks in an easy to understand manner. You would be better off reading it instead of dismissing it on the basis of a single (true) statement.

 

[Saggy]

"What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts".

That is not the incorrect statement. This is the incorrect statement ....

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.

I've explained why this is not true twice now. Please re-read.

 

[psionl0]

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.

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.

But, it's easier to understand when you realize that only money THAT HAS BEEN DEPOSITED can be loaned. That's the essential thing to understand, then it all falls into place.

That is not the incorrect statement. This is the incorrect statement ....

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.

I've explained why this is not true twice now. Please re-read.

I have and it looks like you have shifted the goal posts.

On the off chance that you were referring to your last quote all along, I will just repeat that if the bank is lending cash from what it holds in reserves then money is created. If it is lending money deposited by somebody (ie the depositor has no access to that money while it is on loan) then money has merely been transferred.

MMM should have worded that sentence more clearly.

 

[lomiller]

If you are saying that the distinction does not change the final result (how much money ends up being created) then that is a reasonable definition of "material". It still doesn't make MMM wrong.

Yes, it's not MMM that is wrong rather your interpretation of what it says is wrong.

 

[psionl0]

Yes, it's not MMM that is wrong rather your interpretation of what it says is wrong.

That would depend on how you interpret my interpretation of what it says.

 

[lomiller]

Instead, it must deposit $1000 in its reserve account, and it can lend $9000.00. This is ALWAYS the way FRB is explained (MMM withstanding).

And it underlays how FRB works, but with modern banking a lot of this is decoupled or involves multiple simultaneous transactions. The result at any given point in time is still identical to what you get from this description but the actual process to get there is modified somewhat.

For example in the classic FRB example the person takes cash and later deposits it at some bank, maybe not the one that lent it. Once deposited 90% is available for lending.

In modern banking the loan is given out and the cash deposited instantly and therefor 90% of that newly created deposit is instantly available for lending. Functionally what this means is the bank's cash available for lending decreases because their reserve requirement went up and they record a new asset and liability from the loan and deposit. Since depots are counted as M2 money the M2 money supply increases by the amount of the loan.

Of course those three things happen simultaneously and are not separable they all occur together or not at all. Modern Money Mechanics is simply pointing out the last part that the bank credits the account thereby increasing the money supply, but this doesn't occur in isolation.

 

[lomiller]

That would depend on how you interpret my interpretation of what it says.

you have written enough that we know enough of your interpretation that multiple people have told you that you are wrong.

 

[psionl0]

you have written enough that we know enough of your interpretation that multiple people have told you that you are wrong.

That depends on how you interpret these "multiple people".

You have a unique way of interpreting stuff you read. On more than one occasion you have interpreted a post of mine to mean the exact opposite to what was written even though it was written in plain English.

You again demonstrate your unique reading skills when you say "Since depots are counted as M2 money the M2 money supply increases by the amount of the loan."
Page 2 of MMM states that "This transactions concept of money is the one designated as M1 in the Federal Reserve's money stock statistics".

 

[Saggy]

I will just repeat that if the bank is lending cash from what it holds in reserves then money is created. If it is lending money deposited by somebody (ie the depositor has no access to that money while it is on loan) then money has merely been transferred.

MMM should have worded that sentence more clearly.

The MMM statement is perfectly clear and wrong.

Now you are distinguishing a bank 'lending cash from what it holds in reserves' and 'lending money deposited by somebody'. LOL ! All the money in a bank is deposited by somebody. A bank cannot lend its reserves, the reserves are by definition held in reserve. I suppose a bank could decrease its reserves and lend the money freed up, but that doesn't make any sense, as it would imply the bank had too much money in reserves already. There is no incentive for a bank to put too much money in reserves.

Try to focus on this question - can a bank lend money that has not been deposited? The answer is NO ! And remember, the reserves money is money that was deposited.

 

[psionl0]

Try to focus on this question - can a bank lend money that has not been deposited?

I don't understand what you are disagreeing about. Anybody who understands year 1 mathematics can figure this out:
- When a bank lends money it credits the borrower's account.
- The bank doesn't drag anything out of its vault during this process.
- The bank doesn't remove this credit from anybody else's account.
- The bank and the borrower are dealing with money that didn't exist before the loan.
- This is money creation that didn't involve the bank's reserves in any way.

The banks reserves are necessary for the bank's day to day cash transactions and some other requirements. Bank reserves set a limit to the amount of money a bank can create and even then the bank is unlikely to lend out the limit at once.