How the banks create money

[Sceptic-PK]

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.

I asked you to clarify what you were trying to say, because nothing you quoted seemed to be related to the questions I asked or assertions you made. So, I am still waiting for answers to my questions.

 

[webb5]

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?

As for achieving certain goals it's painfully obvious that the present system does not work, past history and now proves this. On the other hand Social Credit does. In Australia for example common wealth resources and such was used as a fine example how money could be correctly created. An Australian bank owned by the people did this. It was called the Commonwealth Bank of Australia

The banks did not always control Australia. The Commonwealth Bank of Australia the “Peoples Bank “as it was once called, supplied Australia with enough money to fund the first world war at a rate less than one percent. It also financed the Indian Pacific Railway system at a slightly higher rate; both loans were paid within months of completion. The bank continued to offer it services after the war. The bank opened in1913 and played an invaluable part to the country’s economy. But in doing so it posed a major threat to the private banks. Enormous pressure was placed on government members and by 1924 the Bruce Page Government surrendered the peoples bank. The Commonwealth Bank was no longer the people’s bank it used to be, it was no longer allowed to compete effectively against the private banks.

Remarkably, if the People’s bank remained in its former glory, the Great Depression would have had very little effect on Australia and this country would have remained debt-free today.

 

[BobTheCoward]

As for achieving certain goals it's painfully obvious that the present system does not work, past history and now proves this. On the other hand Social Credit does.

What? Nothing is obvious. What are you talking about? What are these certain goals? What are you citing that it doesn't work? What past history?

 

[psionl0]

Webb5 did post more than 1 sentence you know.

 

[Sceptic-PK]

As for achieving certain goals it's painfully obvious that the present system does not work, past history and now proves this. On the other hand Social Credit does. In Australia for example common wealth resources and such was used as a fine example how money could be correctly created. An Australian bank owned by the people did this. It was called the Commonwealth Bank of Australia

The banks did not always control Australia. The Commonwealth Bank of Australia the “Peoples Bank “as it was once called, supplied Australia with enough money to fund the first world war at a rate less than one percent. It also financed the Indian Pacific Railway system at a slightly higher rate; both loans were paid within months of completion. The bank continued to offer it services after the war. The bank opened in1913 and played an invaluable part to the country’s economy. But in doing so it posed a major threat to the private banks. Enormous pressure was placed on government members and by 1924 the Bruce Page Government surrendered the peoples bank. The Commonwealth Bank was no longer the people’s bank it used to be, it was no longer allowed to compete effectively against the private banks.

Remarkably, if the People’s bank remained in its former glory, the Great Depression would have had very little effect on Australia and this country would have remained debt-free today.

This is, of course, almost completely wrong. Webb can't even get the simple facts straight, the CBA was created in 1911 and opened in 1912. The private banks did not exert any pressure on the government or CBA, and the CBA remained government owned and controlled until the 1990s when it was privatised by the Labor government.

Not only did it not lose its "peoples bank" status, but it started to become Australia's central bank in the 20s. It's role in the Depression was related to its reluctance to expand the supply of credit, which had absolutely nothing to do with pressure from private banking interests, and everything to do with the prevailing economic attitudes/experience at the time.

Australia was debt free during the early years of the 2000s, until the recent global economic crisis gutted tax receipts and the Rudd government's fiscal stimulus added to expenditure. Of course, neither of these facts are at all relevant to the privitisation of the CBA. The deregulation of the financial markets, banking constrictions and the selling off of CBA, flooded Australia with investment capital and contributed to Australia's excellent economic performance over the last 15 years. It also contributed to the over-heating and subsequent recession of the Australian economy during the previous decade, but nothing in life is free!

 

[webb5]

What? Nothing is obvious. What are you talking about? What are these certain goals? What are you citing that it doesn't work? What past history?

read my post again. I am talking about all the past recessions and the depression of the past. The reason, the drop in the money supply. An economics person like you should know. We need a stable money supply to maintain a robust economy. Social Cedit maintains a stable money supply that that circulates throughout the economy, without any recession or depression.

The present banking system creates money fraudently through the fractional reserve banking, it also charges us interest for it. Interest reduces our money supply. It also artificially increases the costs of every thing. What should worry you is the lack of reserves in the banks globaly.

 

[Sceptic-PK]

read my post again. I am talking about all the past recessions and the depression of the past. The reason, the drop in the money supply. An economics person like you should know. We need a stable money supply to maintain a robust economy. Social Cedit maintains a stable money supply that that circulates throughout the economy, without any recession or depression.

Social Credit will release us from this bondage of everlasting debt. Using social credit, a country may create debt-free money on the basis of its real physical wealth such as oil, minerals and land, and on its ability to create new physical wealth in areas such as farming, building, and industry.

http://www.bleedingindebt.com/

Webb, of course, does not seem to understand why commodity-like currencies are a bad idea. His assertion that a system with contractionary-bias is magically immune to recession or depression is quite laughable.

What happens when the 'real physical wealth' jumps around in price? What happens to your stream 'social credit' then? Or are we fixing the price of an arbitrary asset, with a gold exchange standard's ugly cousin? What happens when all these social-credit-backed assets have been loaned out, because we have an un-moving supply of credit or currency? No more loans for you next generation, haha! I have read 3 pages on that useless site and it still doesn't explain how it is all supposed to work. Sophistry of the highest order.

It is puzzling how Webb understands that recessions can be related to drops in the money supply, yet refuses to grasp that central banks can increase the money supply when it chooses.

The present banking system creates money fraudently through the fractional reserve banking, it also charges us interest for it. Interest reduces our money supply. It also artificially increases the costs of every thing. What should worry you is the lack of reserves in the banks globaly.

So, let's get something straight. The FRB system not only 'artificially increases' the price of everything, through inflationary lending multipliers, whilst simulteanously 'reducing the money supply' by charging interest? So it's doing both things at the same time?

Also, for someone that complains about fraud an awful lot you don't know how to spell its variants.

 

[webb5]

This is, of course, almost completely wrong. Webb can't even get the simple facts straight, the CBA was created in 1911 and opened in 1912. The private banks did not exert any pressure on the government or CBA, and the CBA remained government owned and controlled until the 1990s when it was privatised by the Labor government. Which bank site are you getting these lies from.

Not only did it not lose its "peoples bank" status, but it started to become Australia's central bank in the 20s. It's role in the Depression was related to its reluctance to expand the supply of credit, which had absolutely nothing to do with pressure from private banking interests, and everything to do with the prevailing economic attitudes/experience at the time. In 1924 the bankers took control of the activities of the Commonwealth Bank and preventing it from saving Australians from the ravages of the 1930s Depression.

Australia was debt free during the early years of the 2000s,What a load of rubbish, where did you get this crap from! until the recent global economic crisis gutted tax receipts and the Rudd government's fiscal stimulus added to expenditure. Of course, neither of these facts are at all relevant to the privitisation of the CBA. The deregulation of the financial markets, banking constrictions and the selling off of CBA, flooded Australia with investment capital and contributed to Australia's excellent economic performance over the last 15 years. It also contributed to the over-heating and subsequent recession of the Australian economy during the previous decade, but nothing in life is free!

The great sell off of Australia's farms and industries to foreign ownership you are relating to as flooded investment was never good for Australia. The taxes and profits that used to stay in Australia is now lost and is going overseas. Our excellent performance is more to do with our expanding trade with China. China being our major trading partner has protected us well from the global recession. This link will help you get the facts right http://www.huffingtonpost.com/ellen-brown/escaping-the-sovereign-de_b_669564.html

 

[webb5]

http://www.bleedingindebt.com/

Webb, of course, does not seem to understand why commodity-like currencies are a bad idea. His assertion that a system with contractionary-bias is magically immune to recession or depression is quite laughable.

What happens when the 'real physical wealth' jumps around in price? What happens to your stream 'social credit' then? Or are we fixing the price of an arbitrary asset, with a gold exchange standard's ugly cousin? What happens when all these social-credit-backed assets have been loaned out, because we have an un-moving supply of credit or currency? No more loans for you next generation, haha! I have read 3 pages on that useless site and it still doesn't explain how it is all supposed to work. Sophistry of the highest order.

That explains it then doen't it. You have failed to understand how Social Credit works. Your written words prove this. Try checking the whole site first before you make any more dum comments. Your ignorence here is very impressive!

It is puzzling how Webb understands that recessions can be related to drops in the money supply, yet refuses to grasp that central banks can increase the money supply when it chooses.



So, let's get something straight. The FRB system not only 'artificially increases' the price of everything, through inflationary lending multipliers, whilst simulteanously 'reducing the money supply' by charging interest? So it's doing both things at the same time? Do you find anything wrong with this?

Also, for someone that complains about fraud an awful lot you don't know how to spell its variants.

Really! I didn't now spelling was part of this forum.

 

[Sceptic-PK]

Which bank site are you getting these lies from

Reading books, rather than dubious internet sites. The CBA acted as Australia's central bank for much of the century, before being sold in the 1990s. This is a matter of public record. At some stage during this process, I believe it was the 60s or 70s, the Reserve Bank of Australia was created in order to act as the country's central bank, and this role shifted away from the CBA. The CBA remained owned by the government until privatised by Hawke or Keating. The Reserve Bank achieved full independence within the government during Howard's years.

In 1924 the bankers took control of the activities of the Commonwealth Bank and preventing it from saving Australians from the ravages of the 1930s Depression.

Wrong again. The CBA, acting as Australia's central bank, made a decision not to increase credit due to the circumstances/experience at the time. I think this decision was probably in error, but it had absolutely nothing to do with nefarious "bankers" taking control of the bank. During the Great Depression, the CBA was a government agency just as the Reserve Bank is a government agency now. At no stage was it taken over by "bankers", anymore than it already had bankers/economists as part of its government-appointed board. You don't understand central banking.

What a load of rubbish, where did you get this crap from!

Anyone who has any knowledge whatsoever understands the reasonably extreme austerity measures taken by the Howard government in order to pay Australia's debt off. Costello made the announcement in 2006:

As best as we can tell, tomorrow, the Commonwealth of Australia will eliminate its net debt.

That makes tomorrow:- April 21, 2006:- Debt Free Day.

It is the day we pay off the mortgage. From tomorrow our Government will no longer be a net borrower. In fact from tomorrow we will start to save to save for some of the big challenges of the future.

As you can imagine in a large and complex operation with many Government Departments and many contracts, the Government is being invoiced and making payments on a constant basis. The Government is borrowing from some and lending to others all the time. But when you take into account all of the Commonwealth borrowing and all of its lending, in net terms, from tomorrow the Commonwealth will owe nothing.

This is a far cry from the $96 billion the Commonwealth owed, in net terms, in 1996.

http://www.treasurer.gov.au/DisplayDocs.aspx?pageID=&doc=speeches/2006/008.htm&min=phc

Again, it seems you don't have a cursory knowledge of even recent Australian history.

The great sell off of Australia's farms and industries to foreign ownership you are relating to as flooded investment was never good for Australia. The taxes and profits that used to stay in Australia is now lost and is going overseas. Our excellent performance is more to do with our expanding trade with China. China being our major trading partner has protected us well from the global recession. This link will help you get the facts right

You don't know what you are talking about. Take a class in Australian history and learn what the Hawke/Keating/Howard governments did to modernise the Australian economy, which started with with financial services and deregulation of the sector. The book, "Unfinished Business: Paul Keating's interrupted revolution" by David Love is a good place to start. Yes, China plays its part currently but I am talking about the last 30 odd years of financial reform. Pick up a book.

Do you find anything wrong with this?

Yes, it doesn't make any sense.

That explains it then doen't it. You have failed to understand how Social Credit works. Your written words prove this. Try checking the whole site first before you make any more dum comments. Your ignorence here is very impressive!

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it. I suggest you stop believing everything you read on the internet, especially in a subject it is quite obvious you are woefully confused by.

 

[psionl0]

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it. I suggest you stop believing everything you read on the internet, especially in a subject it is quite obvious you are woefully confused by.

Hmmm, Who do I believe? Ellen Brown's article on Escaping the Sovereign Debt Trap: The Remarkable Model of the Commonwealth Bank of Australia or Sceptic-PK's instant dismissal of that article as "full of errors and nonsense"?

Boy, that's a toughie (NOT).

 

[Sceptic-PK]

Hmmm, Who do I believe? Ellen Brown's article on Escaping the Sovereign Debt Trap: The Remarkable Model of the Commonwealth Bank of Australia or Sceptic-PK's instant dismissal of that article as "full of errors and nonsense"?

Boy, that's a toughie (NOT).

At no stage have I denied that a government may choose to create a so-called “people’s bank” if it wants to. I am denying the fallacious history lesson provided by Webb and his erroneous assertion that the CBA stopped being the “people’s bank” and was taken over by nefarious private “bankers” in the 1920s. Also note that having a bank act as a commercial lender AND a central bank could cause similar levels of systemic risk as we saw in the recent economic meltdown. Also note that if the government wants private banks to lend at low levels of interest, it just reduces the cash rate as part of its monetary policy decisions. Additionally, providing relatively cheap credit for long periods of time can cause severe economic problems, such as inflation, bubbles and recessions, so Webb’s argument that a government-run bank could issue tons of easy credit ad nauseum is demonstrably false.

FYI your article in the Huffington substantiates all of my claims made thus far on the history of Australia’s banking system:

King O'Malley insisted that the Commonwealth Bank had to control the issue of its own notes, but he lost on that point – until 1920, when the Bank did take over the issuance of the national currency, just as the U.S. Federal Reserve was authorized to do in 1913…The Commonwealth Bank received almost all of the powers of a central bank in emergency legislation passed during World War II, and at the end of the war it used this power to begin a dramatic expansion of the economy. In just five years, it opened hundreds of branches throughout Australia. In 1958 and 1959, the government split the bank, giving the central bank function to the Reserve Bank of Australia, with the Commonwealth Banking Corporation retaining its commercial banking functions. Both banks, however, remained publicly-owned…It [the CBA] functioned as a wholly owned state bank until the 1990s, when it was privatized.

Thanks for playing.

 

[psionl0]

That whole site was full of errors and nonsense. I don't see any reason to waste any more time on it.

FYI your article in the Huffington substantiates all of my claims made thus far on the history of Australia’s banking system:

Thanks for playing.

I won't comment on these two contradictory statements.

The original www.bleedingindebt.com/ showed that we don't need to have banks create money out of debt to thrive. In relation to Australia it said:

Money did not build Australia; it was the resourcefulness and skills of hard working people that built Australia. The use of Money, which was in short supply, only served the people as a means to exchange and as a means to establish value.

*The Australians of the first 100 years, to say the least, were resourceful. The economy to them was the physical environment around them, and what it could be made to produce. Real or imagined shortages of money had little to do with the challenge. The shortage of money was solved for a while by the use of rum and promissory notes (also known as ”Calabash“ money), which became accepted as currency (social credit in action!)

A similar story applies in the American colonies which used "colonial script" until it was outlawed by the Currency Act of 1764.

As I have pointed out many times, the government can create all the money we need interest free. Yet for some reason, it is believed that governments have to BORROW the money instead. Furthermore, more than 90% of the money we have has to be borrowed into existence from the banks which then charge interest on it. WHY?

 

[Sceptic-PK]

As I have pointed out many times, the government can create all the money we need interest free.

Government can already create all the money it needs and charge itself whatever it likes. The reason this isn't common practice is because it is inherently inflationary. You guys keep talking about the supposed evils of an expanding money supply, yet post comments like this? I am truly confused.

You're under the misconception that governments pay interest on currency created, when interest and profits collected by a central bank are returned (minus expenses) to their relevant Treasury departments. I think the most recent Fed return was 97% of its profits? I'd have to check that... Yes, governments pay interest to those that buy government debt, but this is due to an elected government spending more than it generates in tax receipts, and has little to do with the actual banking sector charging governments for its own currency.

Repeat after me: The pointy end of central banks are run by independent government agencies. They are designed to be independent from elected government so they can make effective monetary policy decisions with regards to what is best for the country's economy, rather than what's best for whomever is holding sway in the halls of power.

No, they don't always get things right. But they are not a nefarious institution responsible for a nation's lack of fiscal discipline and ensuing IOUs.

Yet for some reason, it is believed that governments have to BORROW the money instead.

See above.

They borrow money because just making new money to lend out for near nothing forever and a day is a terrible idea and I can't think of any credible economic theory that advocates it.

Furthermore, more than 90% of the money we have has to be borrowed into existence from the banks which then charge interest on it. WHY?

You're conflating the issues now. The reason there is a high amount of supposed "borrowed" money in the money supply is because we just love borrowing money. We don't rely upon commercial banks to create new money, we rely upon them to give us money now when we don't have as much as we want. If you don't like how much interest they are charging you for your money, don't borrow it. Save your money 'til you have as much as you want/need.

Governments rely upon commercial banks to disseminate currency at an efficient rate at market prices. Part of that market price is determined by the country's central bank (ie the cash rate). The reason it has a market price and isn't normally lent out for free should be obvious to anyone. Yes, a government-run bank could act as a commercial lender I suppose, just as the CBA did for much of its life, but the prevailing wisdom has been to let these activities be run by the private sector. Buying money has a cost, just like everything else.

I think you mean well but have been confused by bad information, and I probably haven't done as good a job as many in here could have in explaining small parts of the monetary system, but it is late and I am tired and I am not an expert by any stretch of the imagination.

http://en.wikipedia.org/wiki/Central_bank is as good a place to start as any in order to clear a few things up.

 

[psionl0]

I think you mean well but have been confused by bad information. You believe that Fractional Reserve Banking is a SACRED COW that must never be interfered with.

I have explained many times how a Full Reserve system could work and still ensure that money increases as needed and allow those people who want it all now to keep borrowing money.

Unfortunately, the banks have put a spell on you and convinced that you that the sky will fall down if you interfere with their ability to control the money supply.

 

[BobTheCoward]

read my post again. I am talking about all the past recessions and the depression of the past. The reason, the drop in the money supply. An economics person like you should know. We need a stable money supply to maintain a robust economy. Social Cedit maintains a stable money supply that that circulates throughout the economy, without any recession or depression.

The present banking system creates money fraudently through the fractional reserve banking, it also charges us interest for it. Interest reduces our money supply. It also artificially increases the costs of every thing. What should worry you is the lack of reserves in the banks globaly.

I'm sorry. My post was much simpler than read into it. I literally meant, what are the assumptions we are making about what are desired and undesired outcomes. You say it is obvious that it failed, but never hint at what are the metrics we are to judge it by or how we have arrived at those being the right metrics.

 

[marplots]

I think you mean well but have been confused by bad information. You believe that Fractional Reserve Banking is a SACRED COW that must never be interfered with.

I have explained many times how a Full Reserve system could work and still ensure that money increases as needed and allow those people who want it all now to keep borrowing money.

Unfortunately, the banks have put a spell on you and convinced that you that the sky will fall down if you interfere with their ability to control the money supply.

I do not want to be under ensorcellment. And I am sorry for asking a question you probably already answered. But if banks are not allowed some fractional reserve, what is their business model and how do they make money?

My guess is that they would have to accumulate a great deal of their own money -- free and clear from depositors -- and exclusively lend that out and only lend that out. All deposits must be kept at the ready to release when requested and could not be lent out.

Is this what you envision when you say no fractional reserve?

 

[psionl0]

I should point out that banks charge account keeping fees on transaction accounts. An average seems to be about $5 per month which is far more than they would get by lending the money out in your account (unless you consistently had more than about $10,000 sitting in your account). Credit card charges can even be higher (not including interest). Banks also have a habit of sneaking in stiff penalty fees for such things as bounced checks, overdrawn accounts and using other banks' atms. So banks are not about to fold if they can't lend out your deposits.

It should also be noted that "fixed term" deposits do not count as fractional reserve banking because the depositor and the borrower don't have access to the same money at the same time.

I posted more about how this would work in the A peculiar view of money thread starting at post #65

 

[Sceptic-PK]

I think you mean well but have been confused by bad information. You believe that Fractional Reserve Banking is a SACRED COW that must never be interfered with.

I have explained many times how a Full Reserve system could work and still ensure that money increases as needed and allow those people who want it all now to keep borrowing money.

Unfortunately, the banks have put a spell on you and convinced that you that the sky will fall down if you interfere with their ability to control the money supply.

Thank you for confirming any attempted discussion with you is a waste of time. You don’t understand banking, you don’t respond to questions and your ideas are stupid. I am out of here.

 

[marplots]

I posted more about how this would work in the A peculiar view of money thread starting at post #65

Thank you for the quick and informative answer.