How the banks create money

[Tippit]

Let's take it a little further than that.

I can see a hard gold standard working. What I can't see is how we would transition towards it - especially if we don't have the gold.

Higher gold prices. Gold is scarce, yes, but there is plenty of it to facilitate transactions, otherwise history wouldn't have selected it as money, up until recently.

You have argued that people should be free to use any currency they choose. Again I don't see that helping the cause of a hard gold standard. Historically, it seems, fiat currencies tend to displace commodity-based currencies. (The more usual way this "law" is expressed is, "whenever 'bad' money is introduced into a society, 'good' money gets withdrawn" ).

This is nonsensical, because the consequences of Gresham's law that you're describing are the direct antithesis of freedom in currency - fiat money. Fiat means "by decree". Decrees are meaningless unless backed by violence or the threat of violence, so the very existence of fiat money precludes freedom of currency. I would add that this leaves unresolved what exactly the state would officially accept for the payment of taxes. The coercive aspect of taxation as it relates to what is acceptible for payment is the "teeth" in the decree. It follows that whatever the state demands for the payment of taxes is a "fiat" currency. If the state demands that we first accept paper so that we may satisfy its demand for that paper later on in the remittance of taxes, our freedom to use whatever currencies we choose are impeded in proportion with the size of the state.

This is the dilemma of having freedom of choice in currency.

At least a full reserve fiat only system seems implementable. Ideally, a central agency would figure out how much money needs to be created each year to keep the economy functioning at optimum levels. In practice, politicians would never cede the power of the money press to an autonomous agency. The chancellor would probably want that power for himself.

Once again I vehemently disagree that its ideal for some central authority, be it a presumably accountable politician, or private central banker to issue monetary edicts from his ivory tower. The best monetary policy is no policy, it is using a form of money for which the supply cannot be manipulated.

We've seen politicians cede vast amounts of public power to unaccountable private entities in the past, just witness the modern central bank. The only thing the politician asks in return is the promise to monetize their endless budget deficits, something which central bankers do gladly in exchange for the institutional right to counterfeit money.

Politicians in charge of the money supply? Most people would shout "Noooooooooooo!!!" However, money needs to be created to keep debt levels down to a reasonable level (compared to GDP for example). The natural avarice shown by politicians would actually work in our favour. Ultimately it would be up to the voters to decide how much of their taxes they want to pay directly and how much through inflation.

Strictly as a lesser of evils, I would rather have the money supply managed by a politician than an unaccountable central banker, but this is far from ideal. With regard to limiting debt, I would prefer to have it done by statute, and set the limit at zero.

 

[tensordyne]

Gold Standard! Yuck!

Let's take it a little further than that.
I can see a hard gold standard working. What I can't see is how we would transition towards it - especially if we don't have the gold.

I can't. Reading S. Zarlenga's book definitely cured me of any thoughts that a gold-based, or commodity-convertible currency of any kind, really, could in the long run, work. The best forms of money are limited in issue, cheap to produce, next to impossible to copy, non-convertible, abundant enough to serve the needs of exchanging goods and services and legal tender which are good for payment of all debts, public and private. That is what history has shown, time, after time, after time.

You have argued that people should be free to use any currency they choose. Again I don't see that helping the cause of a hard gold standard. Historically, it seems, fiat currencies tend to displace commodity-based currencies. (The more usual way this "law" is expressed is, "whenever 'bad' money is introduced into a society, 'good' money gets withdrawn" ).

The Local Currencies that are springing up are a pretty interesting development. As Tippit believes that money is defined by the market and not by society at large even talking about free-money is something that is difficult. What is meant though is something to the effect of let people barter with whatever they want, and then if through bartering one common form of barter item gets chosen by most people, the Tippit would consider that the money.

Societies the world over have been there and done that. Then the Greeks found out that nomisma is the way to go to bring in true prosperity. The Romans figured it out too before they were wooed by metal. The British Colonies in America found it out. The Island of Jersey right now uses this form of money quite happily.

Simply put, gold as money sucks!

At least a full reserve fiat only system seems implementable. Ideally, a central agency would figure out how much money needs to be created each year to keep the economy functioning at optimum levels. In practice, politicians would never cede the power of the money press to an autonomous agency. The chancellor would probably want that power for himself.

They did in effect cede power this way already in the US (around the world as well?). But, then again, if something like Greenbacker money was instituted for some length of time I am sure it would though inertia and the prosperity it offers, become something of a fixture of the economy. Those pesky banksters though keep coming back trying to get their free lunches.

Politicians in charge of the money supply? Most people would shout "Noooooooooooo!!!" However, money needs to be created to keep debt levels down to a reasonable level (compared to GDP for example). The natural avarice shown by politicians would actually work in our favour. Ultimately it would be up to the voters to decide how much of their taxes they want to pay directly and how much through inflation.

There is some history to show this is true. In all but times of war Governments that issue their own debt-free currency issue limited amounts as proscribed by law. Zarlenga makes special note of that fact a couple of times in his book.

Money is like soup, not too hot or not too cold and everything is fine. Replace hot with issue and that is how it goes.

 

[psionl0]

I don't understand why my triple would have to represent the sum (R + D + L), that is only one possibility out of a huge infinity of possibilities for an invariant function that the triple R,D,L might have. If F is an invariant of R,D,L then whenever R,D,L changes to say R',D',L' then F(R,D,L) = F(R',D',L'), or some other representation of the same idea.

That is probably the trap you fell into. F is not invariant. F(R,D,L) = F(R',D',L') only if R = D - L and R' = D' =L'.

Anyhow,

(R, D, L) = (R, M + S, L) -> (R, (M - i) + (S + i), L) = (R, D, L).

nails if perfectly. You should now be in a position to see if my analysis of interest in fractional vs full reserve banking is sound or flawed. (I am looking forward to any criticism you might have about this).

Hmm, so not just banks use T accounting it would seem then. No wonder then that some accounting types have come on here and say normal businesses could act like banks and therefore banks do not make money.

It makes me laugh when people talk about "T accounting" as though it was some magic forumula. Transactions in an account can be displayed in a number of ways. One is with a "T account" which shows debit transactions on the left and credit transactions on the right. The other main method is the "triple money column" which has separate columns for debits, credits and a running balance. It's all about presentation and any decent accounting software should be able to display/filter your transactions in any format you want.

Those people who claim that the "T accounting" proves money is not created lack a fundamental understanding of accounting principles (hows that for tact?) A poultry farmer sells eggs that were "created". T accounting explains this perfectly.

What the heck does PN stand for? The parenthetical note is interesting too. Seems maybe you have taken some accounting classes?

"Promissory Note" of course! The receiver can take this to the bank and (as per your signature quote).

I have never taken any classes on this but when I was a director in charge of the company books, I had to teach myself bookkeeping. (A visit from the tax office sure sharpened my bookkeeping skills fast!)

Sounds good. It is good that that the interest question is out of the way, as well as your agreement with the other equations. It makes my response to your first equation post easier to do, I think. I should say the following: I reserve the right to change my mind about anything, at any time, if given new evidence.

I am glad you find my proposals interesting too, by the way.

I always relish an honest discussion even if the viewpoints differ. Randi skeptics come in a number of varieties but paradoxically, the ones in the economics section seem to be the least skeptical of all - even when you can prove that there is an elephant in the room. Misquotes, flawed interpretations and strawman arguments are the main tools of the trade they use to defend their conformist views.

 

[psionl0]

Higher gold prices. Gold is scarce, yes, but there is plenty of it to facilitate transactions, otherwise history wouldn't have selected it as money, up until recently.

That doesn't really address the issue. If the US accounts for X% of the world's money supply then logic dictates that it should also have at least X% of the world's gold before it makes the switchover. Otherwise, it would be the currency act of 1764 situation all over again.

This is nonsensical, because the consequences of Gresham's law that you're describing are the direct antithesis of freedom in currency - fiat money.

Ah! That is the name of the law I was looking for. to be fair, I think Gresham was referring more to the funny bits of paper the banks issued than what was decreed by the government.

King Henry's "tally stick" system satisfies your definition of fiat currency. It was successful for 700 years but did not stop gold being the primary currency. (The fact that tally sticks were only used to pay taxes probably helped in this regard).

The best monetary policy is no policy, it is using a form of money for which the supply cannot be manipulated.

Ordinarily I would agree but there are so many tricks around for manipulating money and extracting undeserved financial gains that I can't count them all. Clearly some form of intervention is necessary.

By calling for a hard gold standard, you are already dictating one policy - the outlawing of FRB.

With regard to limiting debt, I would prefer to have it done by statute, and set the limit at zero.

I presume you mean government debt - for which I agree 100%. Preventing individuals from trading with credit would be grossly invasive and counterproductive.

 

[psionl0]

I can see a hard gold standard working.

I can't.

Of course there are some caveats:
- No FRB
- No government borrowing
- Balanced imports and exports.
ie: Financial discipline!

Gold and other precious commodities have been used successfully for thousands of years. The fact that gold is referred to as a "noble" metal lends support to the Zarlenga theory that money originates from religion rather than trade (or that the true religion all along has been "avarice" )

It is only relatively recently (brief historical episodes aside) that fiat replaced the doomed metals based money. Evidently the antics of the banksters and their plants in government destroyed the financial discipline necessary for a gold standard to work.

When financial events reach their inevitable doomsday scenario, you can be sure that fiat money or government borrowing will get the blame while the banksters get let off the hook.

 

[tensordyne]

temp-report



Cool, working on the reply to your first equation post now. I have no problem with the post below except for one section.

That is probably the trap you fell into. F is not invariant. F(R,D,L) = F(R',D',L') only if R = D - L and R' = D' =L'.

Uhm, with all due respect, I think your mathematics is a little rusty.

First off, here is how mathworld defines invariant:

A quantity which remains unchanged under certain classes of transformations. Invariants are extremely useful for classifying mathematical objects because they usually reflect intrinsic properties of the object of study.

Now, I never stated what F is, I just said that there was no reason why it was necessary to assume F(R, D, L) = R + D + L.

Define F as F(R, D, L) = R + L - D. (Incidentally, F is also, of course, always 0)

Then F is an invariant of the banking world. All the ways that (R, D, L) can transform into other triples (R', D', L') will be such that

F(R, D, L) = F(R', D', L') = 0. This makes F an invariant of those transformations.

I think you might be thinking of conserved or something. Either way, when it comes to abstract mathematics, I can pretty well assure you I most of the time get it correct, at least on the more basic definitions.

Reading wikipedia for their higher-level math pages is pretty fun btw. If you do not know a term, just go back, and back, and back some more. After a while, after you are reading about Schlafli symbols and how they relate to adeles and god only knows what else, you forget though what you started out with. Oh yeah, Algebraic Topology, or was it Lie Algebras?

Anyhow,nails if perfectly. You should now be in a position to see if my analysis of interest in fractional vs full reserve banking is sound or flawed. (I am looking forward to any criticism you might have about this).

Yup, in the process of doing so now.

It makes me laugh when people talk about "T accounting" as though it was some magic forumula. Transactions in an account can be displayed in a number of ways. One is with a "T account" which shows debit transactions on the left and credit transactions on the right. The other main method is the "triple money column" which has separate columns for debits, credits and a running balance. It's all about presentation and any decent accounting software should be able to display/filter your transactions in any format you want.

Yeah, I think the thing some of the honest folks who think banks do the same thing they can do with a normal business can do, do not understand how both deposits and loans go up in the T accounting of banks. All the other operations a bank does are what a normal business could do, except that one.

Those people who claim that the "T accounting" proves money is not created lack a fundamental understanding of accounting principles (hows that for tact?) A poultry farmer sells eggs that were "created". T accounting explains this perfectly.

ROFL.

"Promissory Note" of course! The receiver can take this to the bank and (as per your signature quote).

I have never taken any classes on this but when I was a director in charge of the company books, I had to teach myself bookkeeping. (A visit from the tax office sure sharpened my bookkeeping skills fast!)

Could not find a free copy of the pdf online of that banking book! Good to know about the bookkeeping. I think between the two of us debating on various points we might be able to figure out some things. I know I figured out some things.

I always relish an honest discussion even if the viewpoints differ. Randi skeptics come in a number of varieties but paradoxically, the ones in the economics section seem to be the least skeptical of all - even when you can prove that there is an elephant in the room. Misquotes, flawed interpretations and strawman arguments are the main tools of the trade they use to defend their conformist views.

Are you using Randi skeptic in the derogatory way? That is a term I wanted to have in the lexicon here, just like woo is. Randi-skeptic is basically a pseudo-sceptic in the sense of someone who claims to be a sceptic, but is really one who uses fallacious arguments, with the additional requirement for Randi-skeptics that they are trying to defend some seemingly status-quo position.

It is true, the thing with Sceptic-PK was really bizarre. I mean, my signature literally said that Sceptic-PK's position about banks not making money was wrong, and yet nothing seemed to phase Sceptic-PK... Maybe it is because it is all so abstract. You hear someone you trust tell you some story about how things work and from there on out, nothing anyone says will dissuade you from thinking that story is wrong, no matter how well argued is the case. The new information will just feel wrong.

Oh, I am not going to debate Tippit anymore. I will let you take over that little chore if you want. It is just that so far the same sorts of things are being repeated by Tippit. That gets pretty boring pretty fast to me.

More Later

 

[Sceptic-PK]

It is true, the thing with Sceptic-PK was really bizarre. I mean, my signature literally said that Sceptic-PK's position about banks not making money was wrong, and yet nothing seemed to phase Sceptic-PK... Maybe it is because it is all so abstract. You hear someone you trust tell you some story about how things work and from there on out, nothing anyone says will dissuade you from thinking that story is wrong, no matter how well argued is the case. The new information will just feel wrong.

It’s not my fault you don’t understand what that quote is actually saying. Nobody, certainly not me, ever denied that banks expand (“create”) the M1 money supply by making loans. What you seem to STILL be refusing is where those loans come from, and those loans come from the money a bank has on deposit from its customers. That entire debate revolved around my factual claim that banks lend excess reserves. Even though MMM states this quite clearly you seem desperate to refuse it. Whatever floats your boat, but don’t reference ME in this fashion when it’s actually YOU that chooses to ignore what MMM actually states.

 

[psionl0]

. . . . . . banks expand (“create”) the M1 money supply by making loans. . . . . . . . . . . .and those loans come from the money a bank has on deposit from its customers. . . . . . . . . . .

Welcome back Sceptic-PK.

We have moved on from the question of the role that reserves play in the banks' lending process. At the end of the day, (from the public perspective) there is more money around in one form or another.

Why don't you leave it at that?

 

[Sceptic-PK]

Why don't you leave it at that?

tensordyne makes ironic statements referencing me. At no stage (that I've seen, correct me if you will) has tensordyne admitted that banks lend customer deposits OR that he made a dog's breakfast with his signature's actual meaning. If he stops referencing me, and admits to those 2 errors, I am more than happy to leave it at that.

 

[psionl0]

OTOH a lot of the recent discussion has been put into mathematical form. It is not apparent from the equations that banks are lending customer deposits (so the equations must be in error).

If you can correct these equations, you would stop us both dead in our tracks.

 

[Sceptic-PK]

Haha yeah, I'm gonna waste even more time taking a maths refresher for stuff I haven't done since I was in college...for what? So we can move onto the next point of anti-banking hysteria? If simple facts thus far have been unable to sway opinion, there is nothing my rusty equations would ever be able to do. Plus, some people round here can't even work out what $10,000 reserves - $9,000 reserves is.

 

[psionl0]

Just as I suspected. You are not up to the task.

 

[tensordyne]

Pink Unicorns.



Sceptic-PK, WELCOME BACK! Let's go through this line by line.

It’s not my fault you don’t understand what that quote is actually saying.

OK, go over my quote line by line and let me know what each line is really saying. Oh yeah, that is right, I asked you for that before and you declined. I guess what I do not understand is why I should agree with anything you are saying when you are not willing to give arguments for it. Bad me.

Nobody, certainly not me, ever denied that banks expand (“create”) the M1 money supply by making loans.

Here is what you said in post #1082:

While people call this money creation, no new real money has been created, people have merely been given access to the same money over and over. No different than any of us could do if we wanted and had deep pockets!

Here is my signature from 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.

The quote above says new money is created. If money comes out of excess reserves for loans, then it would also mean it comes from deposits, since taking from reserves takes from deposits. The above clearly says banks do not pay out loans from deposits. Your scheme does not have new money being created.

Believe this or not Sceptic-PK, banks use the same kind of mathematics that me and you do. You have money expanding but with no money being created. The erstwhile reasoning behind this is that the money is not actually there, just a promise to pay. This is a misunderstanding based on how FRB works.

A bank starts out with reserves R, deposits and capital D, and loans and investments L. These are just total numbers. The rule is that Assets = Liabilities always (that should be a new math symbol, the 'always equals', then again, maybe that is what 'defined as' sign serves as already... or maybe not. There is a subtle difference between defined as and always equals it seems to me.).

In terms of equations this means that R = D - L because Assets = R + L and Liabilities is equal to D. I have been using a triple to represent this recently. Take a bank that already has a given triple (R, D, L). If a new loan q is made, the triple changes like so

(R, D, L) -> (R, D + q, L + q)

I can show you where in MMM it says this if you are curious Sceptic-PK. What often happens after a loan though is that the money thus create (q) is transferred to another bank. Say the other bank has triple (r, d, l). After the transfer this bank will have

(r + q, d + q, l).

The bank that originated the loan will have (R - q, D, L + q). In 9:1 reserve ratio banking the ratio of reserves to deposits must be greater then 0.1. That q eats into the excessive reserves because excessive reserves is reserves - required-reserves. That is the whole of your confusion Sceptic-PK. You do not understand how both making a loan and transferring the money created from that loan means a bank has its excessive reserves eaten into.

By the way, I can back up each and every one of the assertions above by referencing some part of MMM. What do you have to back up your statements Sceptic-PK?

Oh, that is right, your argument is our downright refusal to understand your story. Pink unicorns rule the world Sceptic-PK! What you seem to STILL be refusing is where those pink unicorns come from, and those pink unicorns come from the magma the earth has in deposit from its crust! It is so obvious, don't you SEE Sceptic-PK!?!?! Pink Unicorns! Pink Unicorns!

What you seem to STILL be refusing is where those loans come from, and those loans come from the money a bank has on deposit from its customers.

Speak of the devil!

That entire debate revolved around my factual claim that banks lend excess reserves.

Your un-factual claim. My signature quote states very clearly loans come from people signing promissory notes ( PN -- psionl0 ). My quote is from MMM, your story is from... yourself. Sorry, I think I will go with a publication of the Federal Reserve.

Even though MMM states this quite clearly you seem desperate to refuse it. Whatever floats your boat, but don’t reference ME in this fashion when it’s actually YOU that chooses to ignore what MMM actually states.

I LIKE SCREAMING AT PEOPLE I DISAGREE WITH. MAKES IT SEEM LIKE TO MYSELF I AM CORRECT... First off, I will reference you if I like. Please feel free to do the same to me. It's called free-speech. So, tell us what MMM says then. Ooooh, that is right, we just have to trust in your infallibility.

Really though, I am beyond you now Sceptic-PK. I started with lomiller some, then moved on to you. I pretty much demolished your arguments, to the point that you did not respond to my last post, as you said you would. Then I moved on to Tippit. I would say I demolished Tippit's arguments, but then, Tippit belongs to a Cult, and so logical arguments do not necessarily work all the time. Hard-core deprogramming is what is required. I did what I could though.

Now I am debating mostly with psionl0. psionl0 showed me an error in my understanding of excessive and required reserves, as well as how interest works. Now I think we are debating the finer points of how banks create money.

o How does the mathematics of FRB and Central Banking lead to unstable economic conditions (if that is what it does)?

o High-powered money, how is it related to the triple (or Assets = Liabilities)?

o Bank stress tests. What are they and how do they work.

What I like about debating psionl0 is that I have the feeling that if I were to find a logical argument that showed what psionl0 believes in to be wrong, that psionl0 would likely make a change of stance about it. I do not get that feeling with most everyone else I have debated thus far on this forum.

All the best to you Sceptic-PK.

 

[psionl0]

Uhm, with all due respect, I think your mathematics is a little rusty.

Sure, I am a lot less of an egghead than I was when I first graduated. I will defer to your expertise when it comes to the more abstract mathematics of this analysis.

Are you using Randi skeptic in the derogatory way?

Absolutely not! If you look through the political or religious forums, you will find plenty of Randi-skeptics using their critical thinking skills and coming up with well reasoned arguments that challenge the official line or popular opinion.

They just happen to be conspicuous by their absence in the economics forum. Most people here seem to be wearing elephant-filtering glasses.

Oh, I am not going to debate Tippit anymore. I will let you take over that little chore if you want.

He does raise your hackles doesn't he? I find it a good policy not to shoot people down in flames just because of their views. It is the arguments they provide in support of their views or the way they handle genuine questions about their views that define them.

 

[Sceptic-PK]

Just as I suspected. You are not up to the task.

Your faux offer was fairly transparent. I could become up to the task, if I was willing to put a bit of refresher study in, there is nothing remotely complex or unfamiliar in any of the quaint maths we see here. If you want to feel superior for remembering what you did in 9th grade then go ahead, hahaha. I would be hugely surprised if either your or tensordyne's conclusions were any better with numbers than with MMM's words!

 

[tensordyne]

Just as I suspected. You are not up to the task.

You are too nice psionl0. Your reserve is impressive on this topic. Hopefully my response to this diversion is entertaining at least.

 

[psionl0]

I could become up to the task, if . . . . (excuse) . . . . (excuse) . . . . .

Put up or . . . . .

 

[Sceptic-PK]

OK, go over my quote line by line and let me know what each line is really saying. Oh yeah, that is right, I asked you for that before and you declined. I guess what I do not understand is why I should agree with anything you are saying when you are not willing to give arguments for it. Bad me.

Incorrect. I provided an answer some time ago. No, I can't be bothered finding it. I pointed out the bleeding obvious- that what MMM states in your stupid sig is that when I deposit $10 in a bank and they loan $9 to you, when I go check my balance it still says I have $10. The bank may have loaned my money but they haven't reduced my deposit balance. Simple.

Here is what you said in post #1082:

And it remains as true now as it was then. There is no new money. There is the same money that has been loaned around. And around. And around. Kind've like this stupid f'n discussion.

The quote above says new money is created. If money comes out of excess reserves for loans, then it would also mean it comes from deposits, since taking from reserves takes from deposits. The above clearly says banks do not pay out loans from deposits. Your scheme does not have new money being created.

As above. You don't understand what the quote is saying. And you're ignoring every other explanation in MMM. Including the extremely easy subtraction and addition examples. Once again: Banks do nothing you can't do yourself.

Of course "my scheme" expands deposits (or "creates money if you really must use that term). There is the $10 I have in my bank account, and the $9 you have in your hand. Wow, now there's $19! Except of course there's not, my bank has $1 and you have $9.

It's getting the point where I'm not sure I can continue to explain the same f'n concept over and over.

Believe this or not Sceptic-PK, banks use the same kind of mathematics that me and you do.

Yeah, I've been saying this for pages. There is nothing special about banks, they can not do anything you can't.

You have money expanding but with no money being created. The erstwhile reasoning behind this is that the money is not actually there, just a promise to pay. This is a misunderstanding based on how FRB works.

Nonsense.

A bank starts out with reserves R, deposits and capital D, and loans and investments L. These are just total numbers. The rule is that Assets = Liabilities always

Lol, are you seriously trotting out psi's explanations to you about a concept only you seemed not to understand as you lead into something I've been trying to spell out to you for months?

You do not understand how both making a loan and transferring the money created from that loan means a bank has its excessive reserves eaten into.

This is just getting comical. This entire time I've been pointing out the impact on reserves when a loan has been transferred. The creation of a loan has no impact on reserves. MMM states this categorically. I mean ****, I almost feel like I'm being trolled.

 

[Sceptic-PK]

Put up or . . . . .

Seriously? You honestly want me to spend time catching up on high school so I can argue with some middle-aged buffoon who still doesn't understand that banks lend customer deposits? Why would I ever do that? Enjoy your evening pounding the keyboard in righteous indignation, lulz.

 

[psionl0]

Blah blah blah I can't do it.

At least, that's all I am reading.