How the banks create money

[AvalonXQ]

Calculus is something I happen to know something about. Anyhow, I think we agree on what fractional reserve banking is. The main difference is that I am not as in favour of it as you are.

When you contract with a bank to hold your money, their fractional reserve policy should be whatever the two of you are comfortable with. I don't see the need of the government to get involved, except as a sort of "consumer protection" (essentially the government acting as a sort of collective bargaining agent for consumers).
In a free market environment, some banks will be able to earn more money with a riskier fractional reserve, while others will have more business from those who prefer a safer ratio. Individuals like yourself who may not want a fractional reserve at all can pay significant fees for a bank to hold your money without being able to lend it out again. Each of these models can survive according to consumer preference and business fitness.

 

[drkitten]

When you contract with a bank to hold your money, their fractional reserve policy should be whatever the two of you are comfortable with. I don't see the need of the government to get involved, except as a sort of "consumer protection" (essentially the government acting as a sort of collective bargaining agent for consumers).

Well, that's more or less what we have now; the government establishes minimum standards, but banks are free to exceed those standards and keep larger cash reserves. (Actually, that's been a problem since about 2008-9, and part of why stimulus plans like Cash for Clunkers were necessary; too many people, including banks, were sitting on cash instead of investing it.)

The problem, of course, is that no one with any money wants to put it in the banks with a "safer" ratio, or the market would have supplied such banks already.

Individuals like yourself who may not want a fractional reserve at all can pay significant fees for a bank to hold your money without being able to lend it out again.

Not if no bank is willing to do that. It's an unsurvivable business model. People simply can't pay enough in fees to offset the lack of income from re-lending capital. If I deposit $1000 in my local bank and it turns into $10,000 in loans, the bank gets something like $500/year lending it out, and pays out only about $100 in interest on the deposits. So that's $400 a year in net income that I'd have to be willing to pay the bank to forgo reinvesting deposits.

So,... pay the bank $400/year in fees to hold $1000 in deposits? What kind of an idiot would be willing to do that?

 

[Sceptic-PK]

So,... pay the bank $400/year in fees to hold $1000 in deposits? What kind of an idiot would be willing to do that?

Gold investors?

 

[webb5]

You talk an overwhelming amount of nonsense. Pick up an economics textbook and stop wasting our time with your childish, poorly-written scribble.

Obviously I am wasting my time with you. You think there is nothing wrong with the banking system. You believe it's a privelege to pay interest on money created from nothing and the fact that there are not enough money reserves in the banking system doesn't mater either. You also think the global recession or possible depression is not the fault of the banks.

You are a fool, you have been brainwashed for so long by the media. You cannot see the truth when you see it. You have blinkers on when any one comes up with a different version of what you have been told to believe. Its also very easy to follow majority thought, even when it is wrong. Im sure you believe just about any thing the media throws at you. Its time you opened your eyes to the real world.

 

[Sceptic-PK]

So I take it that's a 'no' to picking up a textbook and trying to understand the complexities of economics?

 

[webb5]

When you contract with a bank to hold your money, their fractional reserve policy should be whatever the two of you are comfortable with. This doen not happen
I don't see the need of the government to get involved, except as a sort of "consumer protection" (essentially the government acting as a sort of collective bargaining agent for consumers). For you to say this, you obviously think it's ok for the banks to create money from nothing and sell it to us as debt.
In a free market environment, some banks will be able to earn more money with a riskier fractional reserve, while others will have more business from those who prefer a safer ratio. Individuals like yourself who may not want a fractional reserve at all can pay significant fees for a bank to hold your money without being able to lend it out again. Each of these models can survive according to consumer preference and business fitness.

The gruby commercial banks you are talking about, will not be able to compete against a People's Bank (A national bank reresenting the wealth of the nation) Money will not be created from fraudellent means but created on behalf of the wealth of the nation. You need to understand that fractionional reserve banking process is fraudellent

 

[Sceptic-PK]

To quote one Arnold J Rimmer- brimming over with wrongability.

 

[webb5]

So I take it that's a 'no' to picking up a textbook and trying to understand the complexities of economics?

The complexities of debt you mean. Dont't worry the stimulas packages will fix everything. The banks will look after you. They have Your interest at heart. Go back to sleep!

 

[BobTheCoward]

My first post...YAY! Right now, I am a senior in economics at a business school. Before that, I was an ELT on a fast-attack submarine (now, no one can accuse me of keeping secrets).

I had this exact conversation with a good friend of mine. He told me that he opposed fractional reserve banking. Like many who responded to Webb, I was shocked. Then I realized his concerns were ethical. At that point, there is nothing to discuss. I think in the evidence and theory of efficiency in an economy. I can't answer questions on ethics.

It doesn't take more than a few sentences into Webb's post to see the word fraud. As it is apparent FRB is not viewed as fraud in any legal sense, Webb's complaint is a moral one. It must be part of the "business and finance" part of the forum because that certainly isn't economics.

So, I concede to you, Webb, that social credit is more moral than fractional reserve banking. Do you wish to debate which system is most efficient at achieving certain goals (I reserve the right to pick the side after seeing the goals)? Or, does the issue of ethics achieve your goals in the debate?

 

[AvalonXQ]

I don't see how FRB is immoral as long as you're transparent about it. I'm reminded of the bank run scene in It's a Wonderful Life.

 

[drkitten]

I don't see how FRB is immoral as long as you're transparent about it. I'm reminded of the bank run scene in It's a Wonderful Life.

It's based on a fundamental misconception about the nature of "earning" money; the anti-FRB folks object to the idea that some banker somewhere is enriching himself off "my" money.

I admit to a certain hefty distrust of the middleman myself; when I worked as a contract temporary employee (in college), for example, the contracting company made more per hour than I did. I didn't really think that it was fair that they would bill me out at $20/hour and pay me $8, or whatever the number was. But, of course, the reason that I was working as a temporary employee in the first place was because I couldn't find a job myself. Both the job site and I were "paying" Manpower for the convenience of being able to find something more quickly and easily than we could without a central clearinghouse.

Similarly, if I need money for a new house, I can borrow it more easily from a bank than I can from a rich relative I don't have, or by asking several thousand friends for a few hundred each. The bank already has a few hundred from several thousand people that it can pool and lend, but it wants its cut. So it uses the money people deposit to make money, passing some back to the depositors as interest, but keeping the bulk for itself. But I'm generally happy with that arrangement -- as a depositor, I get some money instead of none, and as a borrower, I have a new house that I wouldn't otherwise have.

 

[lomiller]

Gold investors?

I lol’ed

There was a gold/silver/gems infomercial on the radio a while back. The first part of their pitch was on how gold always held it’s value, this was followed by a description of their 4:1 leveraging plan where you “control” $40K worth of gold for only $10K. They didn’t mention that if the price of gold drops by 25% you get a margin call and they take all the gold leaving you with nothing.

 

[marplots]

My first post...YAY! Right now, I am a senior in economics at a business school. Before that, I was an ELT on a fast-attack submarine (now, no one can accuse me of keeping secrets).

I had this exact conversation with a good friend of mine. He told me that he opposed fractional reserve banking. Like many who responded to Webb, I was shocked. Then I realized his concerns were ethical. At that point, there is nothing to discuss. I think in the evidence and theory of efficiency in an economy. I can't answer questions on ethics.

It doesn't take more than a few sentences into Webb's post to see the word fraud. As it is apparent FRB is not viewed as fraud in any legal sense, Webb's complaint is a moral one. It must be part of the "business and finance" part of the forum because that certainly isn't economics.

So, I concede to you, Webb, that social credit is more moral than fractional reserve banking. Do you wish to debate which system is most efficient at achieving certain goals (I reserve the right to pick the side after seeing the goals)? Or, does the issue of ethics achieve your goals in the debate?

Good first post!

I seem to remember the idea of charging interest is poo-pooed by various religions -- perhaps because it is seen as immoral? I'm also shaky about it, but thought that Islamic systems which didn't allow the charging of interest had several clever ways to technically get around the rules -- such as a 'home loan' being recast as 'rent to own' and student loans handled a different way -- necessary and practical solutions.

 

[Kestrel]

I lol’ed

There was a gold/silver/gems infomercial on the radio a while back. The first part of their pitch was on how gold always held it’s value, this was followed by a description of their 4:1 leveraging plan where you “control” $40K worth of gold for only $10K. They didn’t mention that if the price of gold drops by 25% you get a margin call and they take all the gold leaving you with nothing.

How do we know this infomercial isn't just part of a Ponzi scheme?

 

[psionl0]

Do you wish to debate which system is most efficient at achieving certain goals (I reserve the right to pick the side after seeing the goals)? Or, does the issue of ethics achieve your goals in the debate?

This is not just a moral issue. You have to remember that we are not talking about a closed economy where bank profits are spent back into the community. Vast amounts of money are going overseas as interest payments. The only way this can be achieved is either by allowing the banks to create more money (as debt) meaning inflation or allowing people/businesses to go bankrupt. We really need to ask if it is necessary to give the banks a monopoly on money creation for which everybody (either directly or indirectly) has to pay for its use.

Thomas Edison probably put it better than I can:

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also...It is absurd to say that our country can issue 30 million dollars in bonds and not 30 million dollars in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.

 

[Sceptic-PK]

We really need to ask if it is necessary to give the banks a monopoly on money creation for which everybody (either directly or indirectly) has to pay for its use.

1. How can you call it a "monopoly" when there is a central bank that can issue currency, that is run by the government?
2. How is "everybody" paying for the use of money if they themselves haven't borrowed it?

 

[psionl0]

1. How can you call it a "monopoly" when there is a central bank that can issue currency, that is run by the government?
2. How is "everybody" paying for the use of money if they themselves haven't borrowed it?

1. Surely you have studied Modern Money Mechanics. Just in case you are labouring under the misapprehension that this is a totally internal issue, have a look at the pie chart from U.S. National Debt Clock FAQ:
[HOTLINK]http://www.brillig.com/debt_clock/owed.gif[/HOTLINK]

2. Everybody pays in the same way they pay for the actions of shoplifters and insurance scammers - through higher prices (or reduced wages).

Note that I don't think that there is anything immoral about lending money and charging interest for it. However, non-bank financial institutions (eg pay day lenders, pawn brokers) actually have to have the money to lend out while banks can simply type numbers into a computer. It is also a fact that this practice has an adverse effect on the whole community.

Surely there is nothing wrong with examining alternatives to the banking system.

 

[Sceptic-PK]

1. Surely you have studied Modern Money Mechanics. Just in case you are labouring under the misapprehension that this is a totally internal issue, have a look at the pie chart from U.S. National Debt Clock FAQ:
[HOTLINK]http://www.brillig.com/debt_clock/owed.gif[/HOTLINK]

I have no idea what you're trying to say here. In no way did you support your assertion that the banks have a monopoly on money creation.

2. Everybody pays in the same way they pay for the actions of shoplifters and insurance scammers - through higher prices (or reduced wages).

What does this have to do with fractional reserve lending or the creation of money via commercial banks? Are you asserting that there is a perfect system that is immune to price fluctuation?

Note that I don't think that there is anything immoral about lending money and charging interest for it. However, non-bank financial institutions (eg pay day lenders, pawn brokers) actually have to have the money to lend out while banks can simply type numbers into a computer.

So?

It is also a fact that this practice has an adverse effect on the whole community.

It is hardly "fact" at all. There is nothing wrong with a small amount of inflation, it creates risk and spurs investment and spending, both of which capitalism depends upon. What does it matter if we're paying 10x the price for goods we were 100 years ago, if we're earning 20x the salary?

Surely there is nothing wrong with examining alternatives to the banking system.

When a valid alternative is suggested that doesn't sound incredibly silly, and isn't supported by fallacious reasoning and empty assertions, I'm all ears. The OP for instance is complete nonsense, as is his continued reference to "fraud".

 

[psionl0]

I'm beginning to think that the only thing you are not skeptical about is the "official line". You evidently denied everything I put in my last post without reading any of it.

Perhaps, as a "senior in economics at a business school", BobTheCoward might be able to point out the flaws in such concepts as L.E.T.S., Digital Coin, Bitcoin, and FULL RESERVE BANKING without resorting to meaningless phrases like "CT-woo".

 

[BobTheCoward]

Perhaps, as a "senior in economics at a business school", and FULL RESERVE BANKING without resorting to meaningless phrases like "CT-woo".

Gladly.

First. Flaw is not the right word. From dictionary.com....

1. a feature that mars the perfection of something; defect; fault: beauty without flaw; the flaws in our plan.
2. a defect impairing legal soundness or validity.
3. a crack, break, breach, or rent.

A system for organizing capital is not something that can be perfect. Also, any system short of magical pixie dust will probably be sound or valid. What the systems do have are general tradeoffs.

So, I will list some negative consequences of your proposals. I am not measuring the size of the negative aspects nor comparing them to the positives. That should be a big enough disclaimer.

Let us do full reserve banking. I mostly will assume a commodity currency. That is just more fun.

1) Assume a global world, there are some theories that foreign countries with central banks can economic rape a country with no monetary control.

2) Assume that is not an issue. As the economy grows, without inflation, prices will need to deflate. Humans do not deflate prices well and they tend to be sticky. Wages (a price like any other) tend to be sticky and more likely to lead to firings and depress economic growth. Also, it may cause economic growth to stall as people wait for prices to fall lower (perception that their wages will stick longer than the prices).

If not a commodity currency, there may be ways for the mint to put money in the economy. The methods have various issues with efficiency, welfare losses, transparency, etc. Another option is assuming that people may learn to renegotiate their wages every day. There are efficiency issues with that. Not to mention, it may involve people thinking beyond their monkey DNA, something not very common.

3) A bank would have to fund its operations. Fees would have to be assessed on depositors. People could use mattresses and we are back to ancient banking practices. The equilibrium price for banking services in this hypothetical world is giving me a hard-on. This thread has discussed that putting money in a bank leads to inflation reducing your wealth. In this scenario, putting money in a bank leads to fees reducing your wealth.

4) We still need a way to provide investment capital (or no investment capital allowed at all, another method for organizing our economy). So many options. The most obvious is the I-cant-believe-its-not-a-bank. Same setup we have now, just not called a bank.