Hi Everyone!
Until now I thought that the central bank is loaning the banks money at the discount interest, and they to the borrowers. So central bank -> banks -> borrowers. in other words, the central banks are those who really create the money, and the government (at least where the central bank is in the hands of it) is taking low interest from the banks. that is why, interest rate by the central bank is so important.
i've seen the movie "Money as Debt"
Normal 0 false false false EN-US X-NONE HE
http://video.google.com/videoplay?docid=-2550156453790090544&hl=en
What this is saying, is that banks can multiply the base money (in the past, gold, now resrve money), by 100 times. They claim that banks create 95% of the money, the government only 5%. which means, COMMERCIAL BANKS create new money and not the government. and the the one who create inflation.
It doesn't make any sense to me, since:- why the interest rate is so important, if the banks can creating new money by themselves? they do not need to borrow money from the central bank anyway, so it wouldn't have any serious effect. let's say it 5%. who cares? they can lend in 2%, it doesn't matter, they create it.
- In my place, in Israel, we have in the last 20 years about 4% inflation (my estimation based on the changes in prices). if the banks could create 100 times the money, + the government prints is own money as taxation, how it could possibly be 4%? doesn't make sense.
- Why I hear Austrian Economics warning that the Government deficit will result in inflation. It's anyway, mostly, been created by private borrowers... not the government prints money. if the government will print like 2 trillion dollar to pay the Chinese, still private borrowers can borrow more all over America, and by that creating more new "money" (currency), in the supply
do you get my point here?
There is no doubt that new money (currency\) ic created when a new loan is being made. the question is, does it come from the central bank, that charge interest from the banks (it fot the power), or if it comes directly from the banks themeselves.
Yes it's the commercial banks that create most of the money that comes into existence through credit expansion. The Fed regulates how much money banks are allowed to create. Since under normal circumstances a bank will always create as much money as it can, the Fed is effectively the real money creator.
Hi DBratton,
thank you for the response.In other words, what you are saying is that the banks CAN'T create as much money as they want, as the movie suggests.
The second thing is, are the banks create their money out of a thin air, or the money they create they actually lending from the central bank at the
discount rate (which today is actually nothing in U.S). as I explained, it doesn't make any sense based on the economic history (inflation level, dependance ofn interest rate of the central bank) that they create it. it make more sense they lend it. but this movie claims otherwise.
Rimon
the fractional reserve banking system, receiving a liquidity injection from the central bank will pyramid the money into new 'out of thin-air' money.
If 1000$ is injected and after the money multiplier the new credit money has expanded to 10000$, then 9000$ is the thin air 'part'.
but in another manner of speaking, none of the dollars are back by any commodity, so they are all 'air' to start with.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Yeah...
I think they got it wrong in the movie. it not just the power in the handsof the banks, but it is shared with the central bank.
The second mistake, I believe they made, is claiming that the banks can keep multipliying the money they create 100 times, not just 9 times.It doesn't make any sense. Tell me if I right. If I deposit $1000 at a bank, it can't multiply it. It CAN convert those to $100 central bank note.
On;y central banks notes are enabling the banks to create new money, in the ratio of 1:10. but nothing more, as the movie claim (minute 15:00).
Did I get it right?
rimon:If I deposit $1000 at a bank, it can't multiply it. It CAN convert those to $100 central bank note.
No, they don't technically multiply it (i.e., create new bank notes) but what they do is loan your money to someone else, all-the-while pretending that it's still yours. They use your 1000 to loan out something like $900, and so on.
============================
David Z
"The issue is always the same, the government or the market. There is no third solution."
So what would happen without the Fed or a similar central-banking system? The banks would be in competition, and a bank that creates money beyond the demand for holding money from its depositors would quickly be subject to a run, or its competitors can simply accept its notes at face, stockpile them, then go in demanding payment for the notes - thus shutting the bank down.
The Fed prevents this in a few ways. First, they've made it such that the underlying money simply is the same thing as the banknote itself, thus rendering moot the question of covering the bank notes. There is no backing, and essentially there is a paper standard. Second, by being essentially a cartel, removing the banks from a competitive situation. Why don't other banks break this cartel? First, because of legal tender laws - since legal tender laws force us to use banknotes as money, there is no real way to bankrupt them by the method described earlier. Second, because of the privilege given to Fed member banks, thus enabling them to quickly outcompete rivals.
Thank you JAlanKatz,that was an excellent answer. It really a conspiracy of the government, the banks, and the big lenders against the people. essetially, the most powerful forces in the society are involve in this scam, and combining with the fact that the avarege person can hardly grasp it, espacially with no teaching at school or university, that explains a lot.
Anyway, my question really was technical, about exactly how this ingenious system works. As you can re-read, it was on the specific relations and autorities the commercial banks and the central banks (basically government and , although I understood that in U.S. the federal reserve is also basically outside the governement, which is an ADDITIONAL scamming on the top of it.). I try to put it again:
1. O.k. the banks take the federal reserve note and multiply it by 10 times. But can banks keep multiply the money in the market even more? how much new money can the COMMERCIAL banks can create? (the central bank, as much as it pleases) as I explained, it doesn't make sense since it would grow inflation much more than 3%. look above.
2. And one more thing. If I understood right, the banks create new money in two ways: 1) Loan deferal reserve notes, that stays in the federal reserve,and create 10X against it. but they are (that one way how inflation is controlled)
2) The second way. They can take your deposits, and lend 90% on them. by that, creating new money since that 90% didn't exist before. But they need a deposits base in order to lend 90% of them. if someone withdraw their deposits, now they need to reduce their loans. So that is actually the second way the inflation is controled.
Is that correct?
rimon:1. O.k. the banks take the federal reserve note and multiply it by 10 times. But can banks keep multiply the money in the market even more? how much new money can the COMMERCIAL banks can create? (the central bank, as much as it pleases) as I explained, it doesn't make sense since it would grow inflation much more than 3%. look above.
Ok, maybe I'm missing something. The Fed has two roles - one to be the issuer of Fed reserve notes, and one to serve as a cartel organization for the 20 member banks. The Fed reserve notes stand for nothing in particular, and to vary their number, the Fed buys or sells bonds to and from the member banks. Suppose the Fed buys bonds from Chase in the amount of $1000, and Chase previously had the minimum reserve on hand - say it's 10% just for easy numbers. Now Chase can make additional loans in the $1000 cash that has now been added to their reserves. How much can they loan out? $900. But whoever borrows that money will now deposit it in an account somewhere. For simplicity, say they deposit it at Chase (why am I entitled to this simplifying assumption? Because the banks are members in a cartel.) Now Chase has another $900 on hand, and they loan out $810, which is deposited in Chase, which then loans out ... This is how we get the 10 times multiplier. That is, the 10 times includes all that the commercial banks create. (By the way, exactly the same thing happens if the original $1000 is in the form of a deposit from my mattress rather than in the form of the Fed creating reserves, except that now the structure is less stable. The same thing does not happen if it is a deposit from earnings, since then it had to be matched by a withdrawal from the employer's account.) Now do you see also why the Fed contributes only a small amount to the money creation, mathematically speaking? For every $1000 they create, the banks can then create $10,000 - but it's not independent.
rimon:2. And one more thing. If I understood right, the banks create new money in two ways: 1) Loan deferal reserve notes, that stays in the federal reserve,and create 10X against it. but they are (that one way how inflation is controlled)
Yes, the reserves are deposited in the bank's Fed account (the Fed serves as a bank for banks.) And yes, the Fed could vary the reserve requirement, and by raising it could control inflation. Why would it? This is, by the way, one reason to give it a government-sounding name. It then sounds plausible to people that the Fed can regulate the member banks. In fact, though, the Fed is composed of the member banks - for it to be expected to regulate is silly.
rimon:2) The second way. They can take your deposits, and lend 90% on them. by that, creating new money since that 90% didn't exist before. But they need a deposits base in order to lend 90% of them. if someone withdraw their deposits, now they need to reduce their loans. So that is actually the second way the inflation is controled.
Actually, as you noted, the banking system as a whole can loan 1000% on them (at 10% reserves, which is far higher than the system is at currently.) But yes, they need a deposit base, and if someone withdraws their money, they in theory need to reduce their loans. Why in theory? Because that money is going somewhere, and most likely, whoever borrows it will deposit it. If it's at the same bank, then at the end of the day, everything is still good. If it's at a different bank, at the end of the day one bank will have too many reserves, and one too few. Then the one with more reserves will lend overnight to the one with less at the overnight rate (set by the Fed) and the loans remain. In a non-cartelized system, on the other hand, they'd have to run around trying to call in loans - and thus learn not to overextend themselves that way. The only way that withdrawing money can actually reduce the reserves in the system overall is to put it in your mattress - or to buy gold. Notice that the Patriot Act required gold dealers to report their sales of gold - now why would they not want people buying gold...? You might ask - what if I withdraw money and spend it in foreign markets? Notice that the actors in those markets have traditionally bought a lot of bonds - from the member banks, thus putting it right back in. Notice also that countries which threaten that system by selling oil in Euros have a tendency to be invaded.
Thank very much for your thorough answer. I think I got it now, finally plus, a few comments.
1. I probably misunderstood. They banks create only 10X new money.Tell me if I got it right this time - they really lend in a ratio of 10:9 ($900 on $1000 deposits or loan from the central bank), but EFFECTIVELY, since it is in a loop system, it is actually 1:10.and one thing to make sure - I thought the federal reserve has his special notes that it loans to the banks, and I now understand that the reserve is just simple money. they can take simple deposits and put in a reserve.
2. About Reserve Ratio - the reserve ratio his actually: base money: new money created by the banks. If I understand it right, the reserve ration is 10:9, which is effectively 1:10, right? I mean, the banks need to have a deposits of $100,000 in order to lend $90,000 (10:9), but effectively, because it is in a close loop, they can lend $10 on $1 reserve, so it is 1:10.
by the way, you said: "at 10% reserves, which is far higher than the system is at currently." What is the reserve ratio today?
3. About Inflationary Effect. The reason that the inflation in only 3% although the money supply has effectively grown by 10 times, is because most of the new created money, is outstanding credit, and not in the circulation. right?By the way, I just learned that there are two types of "moneys" - monetary base (money in circulation), and revolving credit. I guess that the above example is revolving credit, and results in lower inflation.If the government prints 10X the money supply, it affects the monetary base, and results in inflation of 90 percents, actually 91 percent (yes?).
4. About the fed borrowing money to the banks.the money the commercail banks are getting from the Fed (in the discount rate), is loaned to them,right? I mean, they pay interest on it.Now, where does this interest go to? back to the banks? and only to make the illusion of "regulation" and federal control?
5. If I understood it correctly, if everyone withdraw their money, the banks cartel will go bankrupt since they could not, by the system, lend and more money and soon be out of business. But I guess that then the Fed would probably lend them new money, and prevent it from happening. (OR Obama will probably bail them out, saying they "too big to fail", since they financed his campaign)
You said also "The only way that withdrawing money can actually reduce the reserves in the system overall is to put it in your mattress - or to buy gold.".I don't think it is the same. the gold miner will get the money and return it to the system.It hurts the system in a different way, that people by gold, which is by pushing up the price of gold , and by that reduce the market value of the cartel notes, aka U.S. dollars.
6. Last thing, really..! - about the relation between the central bank and government. the fedral reserve lending money not only to the commercial banks, but also to the government, by that allow it to spend more than it could (I actually understood that the income tax is used to pay that debt).I just wonder if the money the federal reserve lends, is in the official deficit, or, where it goes. and if you know how much money the government owes to the federal reserve.
P.S. you know, I think that here in Israel it's a bit different. the central bank is in the hands of the governement, so I believe. and the government is controlling the cartel banks. So it may be a fraud of the government against the people, in this case. But it is better, I think. at least it spent as tax, and not going directly for private hands.
rimon:Tell me if I got it right this time - they really lend in a ratio of 10:9 ($900 on $1000 deposits or loan from the central bank), but EFFECTIVELY, since it is in a loop system, it is actually 1:10.and one thing to make sure - I thought the federal reserve has his special notes that it loans to the banks, and I now understand that the reserve is just simple money. they can take simple deposits and put in a reserve.
Assuming a 10% reserve requirement, the math works this way:
Deposit $100 (smaller numbers for simplicity this time)
Lend 90 - system has 190
Deposit 90
Lend 81 - system has 271
and so on
So here's the formula:
Sigma (.9^n)x; n=0, inf
Which works out to 10x
rimon:and one thing to make sure - I thought the federal reserve has his special notes that it loans to the banks, and I now understand that the reserve is just simple money. they can take simple deposits and put in a reserve.
Reserves just means the money that the bank has on hand. The way they hold that money is to deposit it in their own account at the Fed, which is a bank for bankers. When the banks need loans (because they find at the end of the day that they don't have enough reserves) they borrow from each other. If they all need loans, they'll borrow from the Fed - which will lend based on the money deposited in it by the people who are borrowing the money!
rimon:2. About Reserve Ratio - the reserve ratio his actually: base money: new money created by the banks. If I understand it right, the reserve ration is 10:9, which is effectively 1:10, right? I mean, the banks need to have a deposits of $100,000 in order to lend $90,000 (10:9), but effectively, because it is in a close loop, they can lend $10 on $1 reserve, so it is 1:10.
The reserve ratio is what portion of deposits you are allowed to loan out. If you view it as you suggest, then yes, a 10% reserve requirement amounts to a base money:new money ratio of 10:9, meaning that you have to have 1 on hand for every 10 you loan out. I think the base money/new money terminology is a bit confusing, though, since one aspect of our system is that there is no distinction between base money and new money - it's all the same kind of thing. This is a huge difference between commodity-based free banking with fractional reserve and a fiat system with fractional reserve that's sometimes glossed over. If I wanted to maintain a reserve of 10% in a commodity-based system, I'd be writing 100 notes for 10 ounces of gold - they'd be of different form. I would not lend out 100 ounces of gold for 10 ounces of gold - that would be physically impossible. But in our system, we deposit USD, and they loan out USD.
rimon:by the way, you said: "at 10% reserves, which is far higher than the system is at currently." What is the reserve ratio today?
Last I checked (admittedly, some time ago) it was around 5%. However, I wouldn't expect it to move much since the Fed stopped using it as a major instrument of monetary policy some time ago, and focused on other methods of controlling the money supply.
rimon:3. About Inflationary Effect. The reason that the inflation in only 3% although the money supply has effectively grown by 10 times, is because most of the new created money, is outstanding credit, and not in the circulation. right?By the way, I just learned that there are two types of "moneys" - monetary base (money in circulation), and revolving credit. I guess that the above example is revolving credit, and results in lower inflation.If the government prints 10X the money supply, it affects the monetary base, and results in inflation of 90 percents, actually 91 percent (yes?).
I don't put much stock in the government figures, or in this kind of distinction. On that 3% figure, though, remember that the 10 times growth is constant. The fact that the system inflates money that way is not constantly felt. Whenever money is deposited, the money supply grows by 10 times what is deposited. That's not going to figure into today's inflation figure, though, it's already happened.
rimon:4. About the fed borrowing money to the banks.the money the commercail banks are getting from the Fed (in the discount rate), is loaned to them,right? I mean, they pay interest on it.Now, where does this interest go to? back to the banks? and only to make the illusion of "regulation" and federal control?
What ends up happening is this - today, Chase is $100 short at close, and it borrows from Citi at the discount rate. Tomorrow, Citi is $100 short at close, and it borrows from Chase. The interest largely comes out in the wash.
rimon:5. If I understood it correctly, if everyone withdraw their money, the banks cartel will go bankrupt since they could not, by the system, lend and more money and soon be out of business. But I guess that then the Fed would probably lend them new money, and prevent it from happening.(OR Obama will probably bail them out, saying they "too big to fail", since they financed his campaign)
Ok, everyone withdraws their money. Now what? Let's chase it through. Point one - not everyone got their money. How come? Because deposits were $100 for every $1000 that appears on the books. So the bank pays 1/10 of what it's supposed to, and gives out IOUs for the rest. Point two - the banks still have loans outstanding, and now have 0 deposits, making for a reserve ratio of 0, which is below the requirement. Each bank, not aware that this is a coordinated event, wants to borrow from another bank. Can't be done. So all the banks want to borrow from the Fed. The Fed can only make loans on the basis of its deposits - but since all banks have 0 in reserves, the Fed has no deposits. So what can be done? Well, assuming everyone hasn't also cashed in their bonds, including foreign bondholders, the Fed can inject a large amount of reserves into the system by buying bonds that are held by the banks and printing the money to buy them. So assume that, at the same time that everyone withdrew their money, they also cashed in their bonds. Now the banks, if they don't file for bankruptcy, have to call in their loans to pay their depositers. Of course, only $100 left the banks in cash, and they're trying to call in $1000 in loans, so they'll get back...1/10 of the loans they call in. Now they have to foreclose on the loans, and now the banks own...pretty much everything in the country. But they then have to liquidate everything in order to pay their depositors, who then use the money to buy back what they lost when their loans were foreclosed... In the end, we have a much more rational allocation of resources - things go to depositors and are lost by people who bought things they couldn't afford. It all works out pretty well. In reality, though, instead the Fed bails out the banks and prevents this from happening.
rimon:You said also "The only way that withdrawing money can actually reduce the reserves in the system overall is to put it in your mattress - or to buy gold.".I don't think it is the same. the gold miner will get the money and return it to the system.It hurts the system in a different way, that people by gold, which is by pushing up the price of gold , and by that reduce the market value of the cartel notes, aka U.S. dollars.
Yes, good point. Thanks for pointing that out.
rimon:6. Last thing, really..! - about the relation between the central bank and government. the fedral reserve lending money not only to the commercial banks, but also to the government, by that allow it to spend more than it could (I actually understood that the income tax is used to pay that debt).I just wonder if the money the federal reserve lends, is in the official deficit, or, where it goes. and if you know how much money the government owes to the federal reserve.
I don't know how much the government officially owes to the federal reserve, but I don't think the Fed loans directly to the government. Instead, the Treasury issues bonds, which are then bought by banks, individuals, companies, and so on. When a non-bank buys a bond, they frequently have a bank hold the bond. The Fed then buys the bonds from the banks, both the bonds that the bank owns and those that it holds. How much they spend buying bonds at any particular time is under the direction of the board of governors, and is called "open-market operations." By buying or selling bonds, they influence the reserves in the system (with every dollar they spend on bonds generating 10 dollars of loans) and hence move the interest rate to their target. So the money that the Fed "lends" to the government is simply the amount that it spends on bonds, and is counted together with all the outstanding bonds, not reported separately (as far as I know.) If the Fed were audited, we'd know exactly what it's holding in bonds. Now, in theory, the Fed is independent and thus makes the decision as to how much debt to monetize isolated from politics. In reality, as Arthur Burns put it, the Fed does what the President wants, or else it might lose its independence.
rimon:P.S. you know, I think that here in Israel it's a bit different. the central bank is in the hands of the governement, so I believe. and the government is controlling the cartel banks. So it may be a fraud of the government against the people, in this case. But it is better, I think. at least it spent as tax, and not going directly for private hands.
I don't see the advantage. What does the government do with the money - certainly spend it into private hands, no?
JAlanKatz: The banks would be in competition, and a bank that creates money beyond the demand for holding money from its depositors would quickly be subject to a run, or its competitors can simply accept its notes at face, stockpile them, then go in demanding payment for the notes - thus shutting the bank down.
The banks would be in competition, and a bank that creates money beyond the demand for holding money from its depositors would quickly be subject to a run, or its competitors can simply accept its notes at face, stockpile them, then go in demanding payment for the notes - thus shutting the bank down.
Here we go again with the Crank Equilibrium theories.
1. If I am holding money, I am investing in money! Lending it out defeats this purpose.
2. Fractional Reserve Banking is inherently inflationary (defining inflation as an increase in the money supply). There will be more money channeled to investments then real savings. The interest rate will be artificially lowered. There will be a boom and then a Bust. If Banks want to profit in the absent of a Central Bank and an FDIC type welfare programs, then don't expect banks to be creating much money.
DD5:Here we go again with the Crank Equilibrium theories.
After spending a lot of time around Austrians who somehow want to prevent banks from lending at fractional reserves, I am no longer at a loss to explain how others can trust the free market in all things except defense. After all, if Austrians can trust the market to do all things except money...
DD5:1. If I am holding money, I am investing in money! Lending it out defeats this purpose.
I have no idea what this is supposed to mean in this context. How is this a response to my pointing out that, in competition (as opposed to a cartel), competition limits the ability to print more notes?
DD5:2. Fractional Reserve Banking is inherently inflationary (defining inflation as an increase in the money supply). There will be more money channeled to investments then real savings. The interest rate will be artificially lowered. There will be a boom and then a Bust. If Banks want to profit in the absent of a Central Bank and an FDIC type welfare programs, then don't expect banks to be creating much money.
Well, sure, if you define things that way. But it's not particularly useful to prove things by definition. Defining flying as removing oneself from the ground, I fly whenver I walk - but I cannot use this as a proof that I can walk to Japan. Why not? Because the statement "it is possible to fly to Japan" relies on a different aspect of flying. So, yes, defining inflation as an increase in the money supply, fractional reserve banking is inflationary. But the demonstration that inflation increases investments over real savings relies on inflation meaning an increase in the money supply in excess of demand to hold money. In a competitive banking system, a bank can only increase money supply in response to an increased demand for savings - hence the created money goes into savings, maintaining the equilibrium. On the last sentence, it's funny, I've always been convinced that a free market enhances creativity, profitability, and entrepreneurship with calculation. Most Austrians agree, most of the time.
JAlanKatz: Well, sure, if you define things that way. But it's not particularly useful to prove things by definition. Defining flying as removing oneself from the ground, I fly whenver I walk - but I cannot use this as a proof that I can walk to Japan. Why not? Because the statement "it is possible to fly to Japan" relies on a different aspect of flying. So, yes, defining inflation as an increase in the money supply, fractional reserve banking is inflationary.
Well, sure, if you define things that way. But it's not particularly useful to prove things by definition. Defining flying as removing oneself from the ground, I fly whenver I walk - but I cannot use this as a proof that I can walk to Japan. Why not? Because the statement "it is possible to fly to Japan" relies on a different aspect of flying. So, yes, defining inflation as an increase in the money supply, fractional reserve banking is inflationary.
What are you talking aobut?? I defined inflation just so we don't start arguing about terminology.
JAlanKatz: But the demonstration that inflation increases investments over real savings relies on inflation meaning an increase in the money supply in excess of demand to hold money.
But the demonstration that inflation increases investments over real savings relies on inflation meaning an increase in the money supply in excess of demand to hold money.
No matter how many times you're going to use this claim about "excess of demand to hold" , it's not going to get more convincing. You are proving nothing but your own confusion about the issue.
If I save $100 by not consuming that $100, I am investing $100 in whatever. No middle man called a Bank is going to magically multiply it and channel more then that $100 without misallocating resources. I cannot believe we have to argue about this fact. Even If I am holding that $100 (Not investing it in capital goods for example), you can still only loan out that $100 until I decide I want it back. But Fractional Reserve Banking creates multiple copies of that $100.
JAlanKatz: a bank can only increase money supply in response to an increased demand for savings - hence the created money goes into savings, maintaining the equilibrium.
a bank can only increase money supply in response to an increased demand for savings - hence the created money goes into savings, maintaining the equilibrium.
Congratulations! The above is pure Keynesian economics.
JAlanKatz: On the last sentence, it's funny, I've always been convinced that a free market enhances creativity, profitability, and entrepreneurship with calculation. Most Austrians agree, most of the time.
On the last sentence, it's funny, I've always been convinced that a free market enhances creativity, profitability, and entrepreneurship with calculation. Most Austrians agree, most of the time.
Yes, and Fractional Reserve Banking would not stand the market test because it is unproductive.
You are beating on a strawman: as if FRB could be productive in a free market but many Austrians (being inconsistent) are against it.
Ludwig von Mises Institute | 518 West Magnolia Avenue | Auburn, Alabama 36832-4528
Phone: 334.321.2100 · Fax: 334.321.2119
contact@Mises.org | webmaster | AOL-IM MainMises
Mises.org sitemap