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How the banks create money

Why were Greenbacks the "best" US money? They were used by Lincoln to finance the bloodiest and most destructive war in US history (in US terms), the Civil War. Without the Greenback, soldiers in all likelihood would not have been paid, and war would have been averted. This is a distinguishing mark of fiat currencies - they rely on force through legal tender laws in order that people accept them, and they are typically used to finance the use of force against others by militaries. Greenbacks were probably the worst example of US fiat currency, and Lincoln one of the worst presidents, although certainly not worse than some contemporary ones.

The US would have gone into war with the Confederacy with or without Greenbacks. The difference is that the other option at the time was to get a loan from European aligned bankers who wanted something like 36% interest. The Civil War was won by the US and the US did not go into debt because of it.

The distinguishing mark you speak of is the distinguishing mark of privately controlled fiat money, not publicly controlled fiat money.

Songs were written about the Greenback and how great it was in allowing for prosperity. A populist Political Party called the Greenback Party was created as well. Read some of Zarlenga's work if you want to know the real score.

The bad thing, is that the government can manufacture them virtually costlessly, and use them to extract wealth from people who have actually produced something - the inflation tax. It's impossible for most taxpayers to comprehend the degree to which this occurs, and it functions not only as a regressive tax, but an arbitrary one, two horrible characteristics. The defining characteristic of money should be its ability to store value independent of the avarice of politicians and bankers.

It is not a bad thing that paper money can be manufactured at almost no cost, that is why paper money was invented in the first place.

The IRS was created to pay back the debt of the US to the Fed. All things being equal, if the US just spent the money into existence there would be no need for the IRS tax, which I agree, is a manifestly unjust tax.

You elect your politicians, but you have no control over who is a banker. Plus, believe it or not, publicly controlled money systems (not quasi-governmental but really private controlled ones, like we have now) have a good historical track record.

Short answer, read Zarlenga's stuff.
 
Well, the context that has been discussed about so far has been in relation to Fractional Reserve Banking.

Mastercard and Visa as far as I know do Fractional Reserve Banking Loans every time someone swipes a card.

Banks are not allowed to do home loans? Commercial Banks (that do Fractional Reserve Banking) make some of their biggest money on home loans, that was the whole thing behind the Housing Loan Bubble (that involved Control Fraud, look up Prof. Black).

Private lenders do not do fractional reserve banking, nor do Pawn Shops.

In general, as I have said before, the use of the term loan in regards to Fractional Reserve Banking does not denote what people would conventionally think of as a loan.
As I understand the matter in the US, commercial banks are not allowed to do consumer home loans. They can do commercial property loan, but for a max of 7 years, then the note must be renewed. As I noted, savings and loans are allowed to do home loans.

You may be referring to commercial banks handling morgage securities and that type of stuff, which is not the same as directly handling home loans.

It often seems that banks do home loans, because people walk into a bank and fill out the papers and get one. But it isn't held by the bank, they act like a retail storefront for the loan which immediately passes off to another party.
 
As I understand the matter in the US, commercial banks are not allowed to do consumer home loans. They can do commercial property loan, but for a max of 7 years, then the note must be renewed. As I noted, savings and loans are allowed to do home loans.

You may be referring to commercial banks handling morgage securities and that type of stuff, which is not the same as directly handling home loans.

It often seems that banks do home loans, because people walk into a bank and fill out the papers and get one. But it isn't held by the bank, they act like a retail storefront for the loan which immediately passes off to another party.
Whether commercial banks are allowed to do home loans like other banks or not is irrelevant. The money that is borrowed to buy a home is created by a bank.
 
Whether commercial banks are allowed to do home loans like other banks or not is irrelevant. The money that is borrowed to buy a home is created by a bank.
Really?

So Fannie Mae and Freddy Mac's money (90% of new home loans) is created by banks?

I'm not saying that ledger entries may not exist on paper that make that appear to be so. But is that really what is going on?
 
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The IRS was created to pay back the debt of the US to the Fed.
Did you get that from Zarlenga?

That would imply that the fed is a privately owned corporation who's profits go overseas. Even if that were true, the fact remains that the fed only holds about 10% of government debt. The rest is either privately held or owed to government institutions who have had their cash raided by the government. So if the IRS is about servicing government debt then how much the government owes the fed is the least of its concerns.

All things being equal, if the US just spent the money into existence there would be no need for the IRS tax, which I agree, is a manifestly unjust tax.
Something like that could not be considered in isolation - especially where fractional reserve banking is involved. Even under a full reserve system, the government can not just "spend money into existence" without recovering most of it through taxation. There is no such thing as a free lunch. If the government simply churns out more and more money without collecting taxes then everybody will pay for the cost of government via Tippit's "inflation tax".
 
Really?

So Fannie Mae and Freddy Mac's money (90% of new home loans) is created by banks?

I'm not saying that ledger entries may not exist on paper that make that appear to be so. But is that really what is going on?
Don't take my word for it. Read tensordyne's signature.
 
Something like that could not be considered in isolation - especially where fractional reserve banking is involved. Even under a full reserve system, the government can not just "spend money into existence" without recovering most of it through taxation. There is no such thing as a free lunch. If the government simply churns out more and more money without collecting taxes then everybody will pay for the cost of government via Tippit's "inflation tax".

Wow. Really?

First of all, it's not "my" tax. It's not a fantasy that I invented. Using scare quotes doesn't make the consequences any less real, either. Second, everyone pays regardless of whether or not income tax is collected. If I counterfeit your money, and then rob you, I've robbed you twice. What about this is so hard to understand? It's such a simple concept...
 
Lighten up! I'm only giving you credit for the term inflation tax - not mocking the term. The circumstance described above is exactly how a tax would work so well done in pointing out how inflation can be a tax.
 
Lighten up! I'm only giving you credit for the term inflation tax - not mocking the term. The circumstance described above is exactly how a tax would work so well done in pointing out how inflation can be a tax.

I give up.
 
I give up.
Why? I agree with just about everything you have posted except for the notion that a hard gold standard will work. As long as governments are unwilling to live within their means, their actions in constantly borrowing money would be disastrous if the money supply was invariant.
 
Why? I agree with just about everything you have posted except for the notion that a hard gold standard will work. As long as governments are unwilling to live within their means, their actions in constantly borrowing money would be disastrous if the money supply was invariant.

Please tell me you're just trolling now. You said inflation "can be" a tax. There is no "can be". Inflation "is always" a tax, for precisely the same reason that me counterfeiting money in my basement "is always" theft. It's not conditional. It's not dependent. It's a certainty, not a likelihood. It's a guarantee, not a promise. It doesn't matter what the general price level is. It doesn't matter how the money is spent. Is, always, forever, in every corner of the universe, under all circumstances, a tax.

I don't consent to the government extending credit on my behalf, nor do I consent to it taxing me arbitrarily by debasing the currency I'm forced to transact in. Without sound money, government can never, nor will ever live within its means. Either my english isn't clear enough, or you will never understand. I'm leaning towards the latter.
 
Don't take my word for it. Read tensordyne's signature.

Good, I am learning something in the current round of exchanges. Something about commercial banks not creating the loans and the Fed only owning 10%. Something I say that is wrong is most likely due to me and not Zarlenga because he is far too good at his research to make a simple mistake of that order.

Thanks for ref'ing my sig psion, it is true, banks create money from nothing as book-keeping entry, my signature is a smoking gun in that sense.
 
Please tell me you're just trolling now. You said inflation "can be" a tax. There is no "can be". Inflation "is always" a tax, for precisely the same reason that me counterfeiting money in my basement "is always" theft. It's not conditional. It's not dependent. It's a certainty, not a likelihood. It's a guarantee, not a promise. It doesn't matter what the general price level is. It doesn't matter how the money is spent. Is, always, forever, in every corner of the universe, under all circumstances, a tax.
You're a hard man to please. I agree with your assertion that if the government creates money then it is taxing the population via inflation. What more do you want?

Inflation doesn't always make the government a winner because it could drive up costs more than it does revenue (but as long as governments can borrow to cover the extra costs, who cares?) Of course many a tax has generated less than hoped for revenue (and sometimes the cost of collecting a new tax exceeds the revenue collected). So maybe this is not a criteria for deciding if inflation is a tax.

I don't consent to the government extending credit on my behalf, nor do I consent to it taxing me arbitrarily by debasing the currency I'm forced to transact in. Without sound money, government can never, nor will ever live within its means. Either my english isn't clear enough, or you will never understand. I'm leaning towards the latter.
I agree 100%.

No matter what reform we do to the monetary system, we will never have sound money until we take away the government's credit card.
 
You're a hard man to please. I agree with your assertion that if the government creates money then it is taxing the population via inflation. What more do you want?

Your responses belie your position. I'm pretty adept at parsing english.

Inflation doesn't always make the government a winner because it could drive up costs more than it does revenue (but as long as governments can borrow to cover the extra costs, who cares?)

Yes, it does. If I counterfeit money, I debase my pre-existing money along with everyone else's, yet somehow, I don't care, because my profits far exceed my losses. This should be obvious.

Of course many a tax has generated less than hoped for revenue (and sometimes the cost of collecting a new tax exceeds the revenue collected). So maybe this is not a criteria for deciding if inflation is a tax.

Inflation is always a tax. See above. I don't need any criteria, I know it apriori, while you obviously have your doubts since you're still deciding. Can you give any examples of the cost of imposing a tax exceeding the revenue? I sure can't think of any. I'm not sure how that's relevant, other than the fact that seigniorage is probably the cheapest form of taxation.

No matter what reform we do to the monetary system, we will never have sound money until we take away the government's credit card.

We can have any combination of fiat money, fractional banking, or sovereign debt issuance. That says nothing about their desirability, or beneficiality to society-at-large.
 
Inflation is always a tax.
I get it! (But you are about to think I don't ;)). This means that the main beneficiaries of the inflation tax are the banks because for every $1 the government creates, the banks get to create $9.

We can have any combination of fiat money, fractional banking, or sovereign debt issuance. That says nothing about their desirability, or beneficiality to society-at-large.
Now I don't get it. Do you see a problem with governments borrowing money or not?
 
I get it! (But you are about to think I don't ;)). This means that the main beneficiaries of the inflation tax are the banks because for every $1 the government creates, the banks get to create $9.

You get it for now, until you use it in scare quotes, talk about mythical circumstances when it might not be a tax, or refer to it as if it were my own wacky idea.

Yes, private banks create the lions share of inflation due to the money multiplier.

Now I don't get it. Do you see a problem with governments borrowing money or not?

You claimed that we couldn't have sound money unless we "take away the government's credit card". The use of sound money is completely independent of whether or not we allow the government to borrow, but it does put a constraint on the amount it can conceivably borrow. I've made it clear what my stance is on government borrowing.
 
You claimed that we couldn't have sound money unless we "take away the government's credit card". The use of sound money is completely independent of whether or not we allow the government to borrow, but it does put a constraint on the amount it can conceivably borrow. I've made it clear what my stance is on government borrowing.
Actually this is the first time I have read your stance of government borrowing (probably haven't been around long enough) and frankly, I am shocked. If you believe that we can have sound money without taking away the government credit card then we have an irreconcilable difference of opinion.

Nearly every government around the world has a serious debt problem. Even the Chinese government owes about 20% of its GDP. It seems to be a global problem. Politicians all over want big government but know the taxpayers won't wear the cost. So they thwart the taxpayers' wishes by borrowing the money instead (who cares about the future?) As the P.I.G.S. have shown, a lack of ability to inflate a country out of its money woes does absolutely nothing to slow down the rate of borrowing. They would rather sell the country up the river than do away with a single bureaucrat.

Gold might be sound money but we would never know because the creditors would have it all unless politicians are banned from borrowing. A full reserve fiat system at least allows politicians to do what they are doing without encumbering a nation with debt. Anything else and we might as well put up a for sale sign at the IMF.
 
Actually this is the first time I have read your stance of government borrowing (probably haven't been around long enough) and frankly, I am shocked. If you believe that we can have sound money without taking away the government credit card then we have an irreconcilable difference of opinion.

I said I would ban government borrowing a few posts up. Sound money has a very specific definition. You can have sound money and government borrowing at the same time, just like you can have full reserve fiat money, or fractional reserve sound money, with or without government borrowing. Saying what is technically possible is not saying what I advocate.
 
I said I would ban government borrowing a few posts up. ....
From a purely capitalist point of view, I would not absolutely ban government borrowing.

For example, if they wanted to borrow against the asset, Yellowstone, someone might make a deal with them. If they defaulted, then the asset goes to the lender.

A number of examples such as that are possible at least in the abstract. And such money shouldn't go into the Fed and cause a multiplier effect downstream.

But what the US Government wants to do is what we call "unsecured loans", coupled with the money multiplier, and seemingly, way below market interest rates.
 
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For example, if they wanted to borrow against the asset, Yellowstone, someone might make a deal with them. If they defaulted, then the asset goes to the lender.
That sounds like a first class reason for banning government borrowing.

Sooner or later, the government will have to hold a fire sale of national assets such as these to bring its debt down or it will have to put up these assets as security in order to keep borrowing money.
 

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