How the banks create money

[webb5]

Webb5 is of course, completely wrong. The CBA was evolving into our central bank and did nothing out of the ordinary that couldn't be done by the RBA today. They were gearing up for war. And it resulted in inflation. I have already explained this to him. Everything the CBA did then the RBA could do now. They don't do it often for obvious reasons that have also already been explained to him.

If we had a war tommorrow (God forbid) where do you think the money would come from? Yep this money would come from private banks as debt. The Reserve Bank of Australia like every other central bank will not produce this money debt free. You can not compare!

Excess money in circullation will result in inflation regardless if it is created as debt or credit. What is your point?

 

[psionl0]

Sorry this is not true. This money did not come from deposits.“. . .

The Commonwealth Bank was set up as a savings and trading bank so naturally it had customer deposits (reserves). In any case the banks don't lend out depositors' money - they create money from borrowers' promissory notes and credit it into the customers' accounts. This is the definition of fractional reserve banking and this is what the commonwealth bank was doing for the government in the early years.

Since they were lending out to the government, the bank didn't have to bother too much with the reserve ratio. It could be argued that because the commonwealth bank was a government owned entity, the government was effectively creating money and lending it to itself. It would have made sense to do this while Australia was on the gold standard because the government would have had to "repay" this money in order to preserve the value of the pound.

Now that the gold standard is a distant memory, there is no need for the government to make such a convoluted arrangement -it can simply create the money itself. The only reason for perpetuating this arrangement is so that banks can continue to practise fractional reserve banking.

 

[psionl0]

If we had a war tommorrow (God forbid) where do you think the money would come from? Yep this money would come from private banks as debt.

This might be true nowadays but WWII is an exception in Australia. The Curtin government did not "print" money nor borrow from private bankers. They financed Australia's war effort through taxation and careful management of human and other resources.

Unfortunately, those were exceptional times. Australians were united by the war and were willing to make the sacrifices that were necessary to help the war effort. It is difficult to see the Curtin style measures working in today's increasingly divided world.

 

[Sceptic-PK]

If we had a war tommorrow (God forbid) where do you think the money would come from? Yep this money would come from private banks as debt. The Reserve Bank of Australia like every other central bank will not produce this money debt free. You can not compare!

Excess money in circullation will result in inflation regardless if it is created as debt or credit. What is your point?

No, the money wouldn't come from private banks as debt, ROFL. Anyone can be a bond holder.

And the reason why central banks don't just print money for the government and lend it at zero % is because that undermines confidence in the currency.

 

[webb5]

The Commonwealth Bank was set up as a savings and trading bank so naturally it had customer deposits (reserves). In any case the banks don't lend out depositors' money - they create money from borrowers' promissory notes and credit it into the customers' accounts. This is the definition of fractional reserve banking and this is what the commonwealth bank was doing for the government in the early years.

Not true read my last post again

Since they were lending out to the government, the bank didn't have to bother too much with the reserve ratio. It could be argued that because the commonwealth bank was a government owned entity, the government was effectively creating money and lending it to itself. It would have made sense to do this while Australia was on the gold standard because the government would have had to "repay" this money in order to preserve the value of the pound.

They did not worry about any reserve ratio because they did not use fractional reserve banking. The money created by the commonwealth bank was created on the basis of real wealth not debt.

Now that the gold standard is a distant memory, there is no need for the government to make such a convoluted arrangement -it can simply create the money itself. The only reason for perpetuating this arrangement is so that banks can continue to practise fractional reserve banking.

???

 

[webb5]

This might be true nowadays but WWII is an exception in Australia. The Curtin government did not "print" money nor borrow from private bankers. They financed Australia's war effort through taxation and careful management of human and other resources.

Partly true, the financing requirements of the Second World War were met largely through domestic borrowing. Gross Australian Government debt increased from around 40 per cent of GDP in 1939 to around 120 per cent of GDP in 1945.


Unfortunately, those were exceptional times. Australians were united by the war and were willing to make the sacrifices that were necessary to help the war effort. It is difficult to see the Curtin style measures working in today's increasingly divided world.

True

 

[webb5]

No, the money wouldn't come from private banks as debt, ROFL. Anyone can be a bond holder.

And the reason why central banks don't just print money for the government and lend it at zero % is because that undermines confidence in the currency.

The reality is that it would be funded by debt.

Money created from social credit does not create inflation if correct amounts are created. When Social credit is used correctly a country's currency is very stable.

Money created from private banks always creates inflation because it is created as debt with interest.

 

[psionl0]

. . . . . .
‘This bank is being started without capital, as none is required at the present time, but it is backed by the entire wealth and credit of the whole of Australia.’
. . . . . .
In the link below Jeremy Lee explains the creation of the commonwealth bank and how it could create money on the wealth of Australia. The video is not great but worth watching

http://www.youtube.com/watch?v=0lRm2Wwejaw

Originally Posted by psionl0
The Commonwealth Bank was set up as a savings and trading bank so naturally it had customer deposits (reserves). In any case the banks don't lend out depositors' money - they create money from borrowers' promissory notes and credit it into the customers' accounts. This is the definition of fractional reserve banking and this is what the commonwealth bank was doing for the government in the early years.

Not true read my last post again

I don't get it. The commonwealth bank created money and lent it to the government at low interest. As far as I can see this is what all banks do (apart from the low interest rate). After all, the title of this thread is "How the banks create money".

So what is it that magically transforms this practice from fractional reserve banking to "social credit"?
Is it because the bank was wholly government owned?
Is it because the interest rate was low?
Is it because no foreign borrowing was involved?
Is it because the bank was lending the money to the government?
Is there some technicality that I am not seeing?

Don't get me wrong. What the commonwealth bank did was far better than turning to international bankers. (Anybody who would do that when we can create our own money is either a moron or corrupt). However, don't confuse the issue by changing the name of the practice just because the outcome was good.

They did not worry about any reserve ratio because they did not use fractional reserve banking. The money created by the commonwealth bank was created on the basis of real wealth not debt.

You are playing with words here. Just because the money was lent to the government based on the its ability to repay the loan doesn't mean the no debt was involved.

 

[drkitten]

Money created from social credit does not create inflation if correct amounts are created. When Social credit is used correctly a country's currency is very stable.

Dude, money created from any source will not create inflation if correct amounts are created. If the increase in money supply from all sources balances the increases in production in the economy, prices will remain stable.

But since there's no way for any system to guarantee that correct amounts will be created, that's like saying "investments in the stock market will always make money if you invest in the right instruments." Or "digging for buried treasure will always be successful if you dig in the right spots."

Money created from private banks always creates inflation because it is created as debt with interest.

Wrong. All that means is that you need to make sure that you create enough additional wealth to cover the costs of principle and interest as well. If by borrowing $50,000, I can create $200,000 worth of wealth, I could pay 300% in interest and still not create inflation.

 

[Tippit]

The reality is that it would be funded by debt.

Money created from social credit does not create inflation if correct amounts are created. When Social credit is used correctly a country's currency is very stable.

Money creation in any form results in inflation, by the only definition that matters, inflation of the money supply. Mainstream economists like to use "general" price inflation instead because productivity gains serve to deflate the general price level, and thus obscure what is most important, the fact that the inflation represented a transfer of wealth. Curiously, we as a society have laws against theft, but apparently if the theft consists of incrementally small amounts of purchasing power stolen from virtually everyone (with an emphasis on the poor, who tend to have the most exposure to cash), it's "ok". Of course, social credit is concerned with redistributing this purchasing power in some equitable fashion, but it still represents theft from the saver.

Money created from private banks always creates inflation because it is created as debt with interest.

Money created by private banks under a fractional reserve system is inflationary, but it is limited by the reserve requirement ratio, the monetary base, and the collective policy of banks in general. When private bank loans are repaid, the principal is extinguished, which is deflationary. The interest is paid with money obtained in exchange for your labor, and that money is recirculated as the bank pays its employees and shareholders, which is neither inflationary nor deflationary.

The fundamental problem of course is that non-bankers don't have the legal right to fund our loans with money that we haven't first earned in exchange for our labor, unlike bankers. Of course, a portion of bank revenue pays depositors their pittance, but the balance in bank profits still represent parisitism in it's essence.

 

[webb5]

Dude, money created from any source will not create inflation if correct amounts are created. If the increase in money supply from all sources balances the increases in production in the economy, prices will remain stable.

But since there's no way for any system to guarantee that correct amounts will be created, that's like saying "investments in the stock market will always make money if you invest in the right instruments." Or "digging for buried treasure will always be successful if you dig in the right spots."




Wrong. All that means is that you need to make sure that you create enough additional wealth to cover the costs of principle and interest as well. If by borrowing $50,000, I can create $200,000 worth of wealth, I could pay 300% in interest and still not create inflation.

You still don't get it do you. Interest adds incredibly to the cost of living, affecting the poorest the most. It would be wrong to believe that we are not affected by the build up of compound interest. Over a long period as a taxpayer, we are paying interest on money the government borrowed half a century ago or more. Interest affects almost everything you buy. Interest costs to raw materials suppliers, manufacturers, carriers and retailers are built into the retail price of almost every product.

Of course interest is inflationary. Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. As I said before dude, debt with interest increases inflation

 

[webb5]

I don't get it. The commonwealth bank created money and lent it to the government at low interest. As far as I can see this is what all banks do (apart from the low interest rate). After all, the title of this thread is "How the banks create money".

So what is it that magically transforms this practice from fractional reserve banking to "social credit"?
Is it because the bank was wholly government owned?
Is it because the interest rate was low?
Is it because no foreign borrowing was involved?
Is it because the bank was lending the money to the government?
Is there some technicality that I am not seeing?

Don't get me wrong. What the commonwealth bank did was far better than turning to international bankers. (Anybody who would do that when we can create our own money is either a moron or corrupt). However, don't confuse the issue by changing the name of the practice just because the outcome was good.


You are playing with words here. Just because the money was lent to the government based on the its ability to repay the loan doesn't mean the no debt was involved.

Yes all of the above
The Commonwealth Bank was set up as originally as a People’s Bank. All money that is created from this bank is backed by the entire wealth and credit of Australia. Technically there is no debt because any money created is simply a token of this wealth. No money reserve is necessary as this money can be generated at any time from this real wealth not debt. This was the case until the banks took control of it.

Private banks are a complete opposite to People Banks. Even though our governments around the world allow them to operate the way they do it is a very fraudulent practice. Fractional Reserve banking allows banks the ability to create money out of nothing to enslave us with debt. see link http://www.bleedingindebt.com/how-the-banks-create-money.html

 

[webb5]

Money creation in any form results in inflation, by the only definition that matters, inflation of the money supply. Mainstream economists like to use "general" price inflation instead because productivity gains serve to deflate the general price level, and thus obscure what is most important, the fact that the inflation represented a transfer of wealth. Curiously, we as a society have laws against theft, but apparently if the theft consists of incrementally small amounts of purchasing power stolen from virtually everyone (with an emphasis on the poor, who tend to have the most exposure to cash), it's "ok". Of course, social credit is concerned with redistributing this purchasing power in some equitable fashion, but it still represents theft from the saver.

Not really, There are times when the money supply needs to be increased such as in popullation increases. This will not affect the saver because the buying power of the currency in question is maintained using social credit

Money created by private banks under a fractional reserve system is inflationary, but it is limited by the reserve requirement ratio, the monetary base, and the collective policy of banks in general. When private bank loans are repaid, the principal is extinguished, which is deflationary.

This would be true if this was the only loan but in reality ther are many new loans For every loan repaid.

The interest is paid with money obtained in exchange for your labor, and that money is recirculated as the bank pays its employees and shareholders, which is neither inflationary nor deflationary.

The majority of all banking costs are covered from bank fees. Some interest and compound interest is removed. Since the interest part is not created we will have a deflationary action here which is quickly neutralised by more bank loans. The money supply must forever increase in order for debt and interest repayments be made. If this is not done the economy will shut down as the money suppy required to run an economy will reduce leading to recession or depression. We are in a cycle of debt which gets greater and greater. Any money kept in savings is quickly devalued by the constent need to increase the money supply.

The fundamental problem of course is that non-bankers don't have the legal right to fund our loans with money that we haven't first earned in exchange for our labor, unlike bankers. Of course, a portion of bank revenue pays depositors their pittance, but the balance in bank profits still represent parisitism in it's essence.

Only because the money the banks create from nothing 'a transfer of wealth' is not added in the equation

 

[Sceptic-PK]

see link http://www.bleedingindebt.com/how-the-banks-create-money.html

I wondered why that site was so horribly written (not to mention full of nonsense) until I realised you actually wrote it.

 

[Tippit]

You still don't get it do you. Interest adds incredibly to the cost of living, affecting the poorest the most. It would be wrong to believe that we are not affected by the build up of compound interest. Over a long period as a taxpayer, we are paying interest on money the government borrowed half a century ago or more. Interest affects almost everything you buy. Interest costs to raw materials suppliers, manufacturers, carriers and retailers are built into the retail price of almost every product.

The problem you're describing has to do with unlimited government borrowing more than it does the banking system. It intersects with the banking system when the central bank monetizes that portion of government debt that didn't get auctioned. Politicians want to spend $X, private lenders want to lend $Y, the central bank steps in and creates enough money out of the ether to buy bonds when Y is less than X (which is a virtual certainty, especially lately in the US). This of course, is merely the regressive inflation tax at work.

In the US, the Federal Reserve is supposed to remit its profits (from interest on govt. debt) back to the US Treasury, this after taking it's approximately $200B in operating expenses first. I say "supposed" to because that's how the system is presumed to work, but open market activity is one aspect of the Fed that is not subject to audit, or outside inspection. I have seen evidence in the Federal budget that this occurs, however. To the extent that we can assume that most of the interest on US debt held by the Fed is indeed remitted back to Treasury, it is more or less the same as if Treasury simply created the money itself (minus the handling fee, of course). Interest paid to private debt holders of course, is a huge burden on US taxpayers, and it is one of the reasons why our current situation is not sustainable.

Of course interest is inflationary. Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole. As I said before dude, debt with interest increases inflation

Interest is not inherently inflationary. Even interest paid on private bank loans comes from pre-existing money. The problem is that the banker created the loan principal at a computer keystroke entry in exchange for your promissory note, whereas the interest you pay the banker to service the loan was obtained in exchange for your labor. This is not a quid pro quo. Of course, as a bank depositor you are paid a portion of the bank's revenue, but this doesn't change the fact that, outside of a few actually useful services that the bank provides, it is a parasitical relationship.

 

[webb5]

I wondered why that site was so horribly written (not to mention full of nonsense) until I realised you actually wrote it.

I don’t expect bank lovers or banks in general to like this site. I have no problem with your comment as you have proved to be consistently wrong with you comments.

 

[Sceptic-PK]

In the US, the Federal Reserve is supposed to remit its profits (from interest on govt. debt) back to the US Treasury, this after taking it's approximately $200B in operating expenses first.

Could you source that $200B in expenses claim for us please? Nowhere in any Fed report anywhere can I see $200B in operating expenses. This report:

http://www.federalreserve.gov/boarddocs/rptcongress/annual07/sec2/c3.htm#nl7

states that operating expenses were $3.2B-$3.5B in 2006-2007.

The net income (before payments to Treasury) for the Fed in 2007 was $38.7B of which $34.6B was returned to Treasury.

or outside inspection.

What is this then?

http://www.newyorkfed.org/markets/omo/omo2009.pdf

I have seen evidence in the Federal budget that this occurs, however. To the extent that we can assume that most of the interest on US debt held by the Fed is indeed remitted back to Treasury, it is more or less the same as if Treasury simply created the money itself (minus the handling fee, of course).

Excellent, we got something right. You get a gold star.

 

[Sceptic-PK]

I don’t expect bank lovers or banks in general to like this site. I have no problem with your comment as you have proved to be consistently wrong with you comments.

Haha, I hardly like banks. Indeed they annoy me more than most types of private enterprise. However that doesn't mean I will tolerate liars and frauds who need to peddle false and misleading information in order to make points. Your refusal to accept the fact that the CBA was government-owned until sold off in the 90s is but one example where you are unable to reconcile your childish fantasies with reality.

 

[Tippit]

Not really, There are times when the money supply needs to be increased such as in popullation increases. This will not affect the saver because the buying power of the currency in question is maintained using social credit

That has been stated many times before on this forum in different fashions, but the assumptions behind the logic are fallacious. Population increases ultimately increase production, and have a deflationary effect. I've explained before why I believe the anti-deflation hype espoused by contemporary economists exists, and that is to justify the lucrative inflation tax. There is no good reason why, given population increases, we cannot simply let the dollar adjust and rise in value. A social credit scheme that first robs the saver in order to redistribute productivity gains depends exactly on how it is redistributed, and it will be imperfect by definition. That said, it would probably be an improvement from the status quo, depending on what exactly you are advocating.

This would be true if this was the only loan but in reality ther are many new loans For every loan repaid.

No, this is limited by the reserve requirement ratio. The simple money multiplier is the reciprocal of the reserve requirement ratio. If we assume the RRR is 10%, then the SMM is 10, which means for every dollar in the monetary base, there are a maximum of ten dollars in the banking system. There are a few other factors which may result in a lower real multiplier, but the aggregate loans are restrained by this process.

The majority of all banking costs are covered from bank fees. Some interest and compound interest is removed. Since the interest part is not created we will have a deflationary action here which is quickly neutralised by more bank loans. The money supply must forever increase in order for debt and interest repayments be made. If this is not done the economy will shut down as the money suppy required to run an economy will reduce leading to recession or depression. We are in a cycle of debt which gets greater and greater. Any money kept in savings is quickly devalued by the constent need to increase the money supply.

What you're describing is a variant of the "debt virus" hypothesis, which has been debunked. The simple answer is that banks have employees and shareholders to pay, who then spend or invest that money back into the economy, it doesn't disappear into a deflationary "black hole".

The problem with public debt is that it is foisted on the public without consent, and that eventually it can become unservicable leading to the problems that you are seeing in Greece, Spain, and Ireland. Since politicians' appetite for spending persists regardless of their constituents ability to pay, they have and will continue to debase the currency in order to fund their largesse.

 

[webb5]

The problem you're describing has to do with unlimited government borrowing more than it does the banking system. It intersects with the banking system when the central bank monetizes that portion of government debt that didn't get auctioned. Politicians want to spend $X, private lenders want to lend $Y, the central bank steps in and creates enough money out of the ether to buy bonds when Y is less than X (which is a virtual certainty, especially lately in the US). This of course, is merely the regressive inflation tax at work.

Yes governments do waste money, but governments need money to run their country. Debt is a problem that demands more debt to service debts.The cost of these debts is covered in higher taxes and thus higher inflation.

In the US, the Federal Reserve is supposed to remit its profits (from interest on govt. debt) back to the US Treasury, this after taking it's approximately $200B in operating expenses first. I say "supposed" to because that's how the system is presumed to work, but open market activity is one aspect of the Fed that is not subject to audit, or outside inspection. I have seen evidence in the Federal budget that this occurs, however. To the extent that we can assume that most of the interest on US debt held by the Fed is indeed remitted back to Treasury, it is more or less the same as if Treasury simply created the money itself (minus the handling fee, of course). Interest paid to private debt holders which is 90% of government borrowing of course, is a huge burden on US taxpayers, and it is one of the reasons why our current situation is not sustainable.The Fed owns less than 10% of the government's total debt.



Interest is not inherently inflationary. Even interest paid on private bank loans comes from pre-existing money. The problem is that the banker created the loan principal at a computer keystroke entry in exchange for your promissory note, whereas the interest you pay the banker to service the loan was obtained in exchange for your labor. This is not a quid pro quo. Of course, as a bank depositor you are paid a portion of the bank's revenue, but this doesn't change the fact that, outside of a few actually useful services that the bank provides, it is a parasitical relationship.

Interest is almost always inflationery because it increases the cost of products and services as already mentioned, you cannot get away from this. The banks are more than a simple parasite, they are a deadly parasite which will consume us all if allowed.