Bank Credit

[Injin]

*big friendly smile*

I pretty much accept that you have enough proof to satisfy yourself.

Thing is, I can't see that proof, just your assertion of it.

Why not just go into the local branch and ask, like I did?

They think it's normal, well they would.

[Timm]

money will only change hands when the IOUs need to be settled. Bank credit cant settle a debt, but cash, or narrow money, can.

narrow money could be a record of cash stored in a banks current account.

when you borrow money, usually your account at the bank is debited with the loan amount. you could be given cash at that time as an alternative.

if you have the cash, clearly, the bank has given you the loan and has settled it from its current account. no question.

If you however pay a shop for goods writing a cheque, using a debit card or some other IOU, then its only when the bank is presented with the cheque, the debit or the IOU request, that cash or narrow money will change hands....to settle the new commitment you made.

course, if the shop has an account at your bank, then no cash is needed by the bank, all that happens is your account is credited and the shops debited. fortunate for the bank.

I hear what you are saying, understand it and can even accept it in principle.

In fact, I can add the observation that if your bank has an obligation to settle your spending, but your supplier deposits in my bank, while I also borrow to spend, and my supplier deposits in your bank, then overnight: the debts could be settled without actual transfer of money.

But I still have no evidence that this (or what you say) is what happens.

[Timm]

Why not just go into the local branch and ask, like I did?

They think it's normal, well they would.

I can't.

I have no debt.

[Injin]

I can't.

I have no debt.

You don't have to, just raise it as a hypothetical.

"Hey, I was wondering.."

[Flatdog]

Happy days...this thread is a bit more like it...kinda trancends many of the other topics under discussion on the front page

[babesagainstmachines]

I did not ask whether the banking system creates money. Promising money is not the same as creating money, and it is the former that this thread is interested in.

Define money then.

Have some Injin dollars for your trouble while you work it out I$10000000000.

Don't spend it all at once, we wouldn't want to spark inflation.

[the_austrian]

In my view, banks don't create money because the State guarantee of bank deposits is not reliable. That doesn't mean I wouldn't place a fairly high price on your cheque because there are plenty of people who do value bank credit, apparently, and I would be able to get something good in exchange, for the time being. Watch out for when people start to wake up to the banking myth though, we have a few good internet documentaries now, soon someone will make one that is completely accessible to the public and everyone will rush to the banks the next morning, all over the world.

[impatient_mug]

In my view, banks don't create money because the State guarantee of bank deposits is not reliable. That doesn't mean I wouldn't place a fairly high price on your cheque because there are plenty of people who do value bank credit, apparently, and I would be able to get something good in exchange, for the time being. Watch out for when people start to wake up to the banking myth though, we have a few good internet documentaries now, soon someone will make one that is completely accessible to the public and everyone will rush to the banks the next morning, all over the world.

And do what? If everyone over night decided that banking was a myth then what would be the point in rushing to the bank to get bits of paper laced with security measures, with pictures of marginally famous people on them, but that hold no value as they were issued by a bank?

[the_austrian]

And do what? If everyone over night decided that banking was a myth then what would be the point in rushing to the bank to get bits of paper laced with security measures, with pictures of marginally famous people on them, but that hold no value as they were issued by a bank?

The distinction is between bank credit and fiat cash; admittedly, State failure will come soon after so eventually even notes and coins will be worthless (as happens to all paper currencies) but what I was talking about is the value of cash over the money in your bank account. At the moment they are at parity, in that people do not significantly prefer cash, but when the crisis hits, they will greatly prefer cash because they will know not all bank credit will be redeemable. Perhaps you are right in that a banking crisis and State failure are synonymous, I only argue that for a while the State might still be a problem.

[Charterhouse]

You want to buy a car. You go to HSBC and say, "Lend me �10,000". They say yes and tap tap on the keyboard and you've got �10,000 in your account. Cost to HSBC so far - Nil.

You go to a dealer and pick out a car, haggle the price down to �10,000 and say, "How should I pay?" Dealer says stick your debit card in the machine and we'll transfer the money to our account. You notice the dealer also banks at HSBC. You drive away in your new car. Financial situation at this point: Dealer has �10,000 in its HSBC account earning 1%. You are paying 8% on your �10,000 debt. Cost to HSBC so far - Nil.

Eventually dealer decides to spend the money to pay rent or staff wages or buy new stock. The �10,000 gets transfered to, say, Barclays. HSBC says to Barclays, "Sorry, we don't actually have �10,000 to give - we just invented it out of nothing." Barclays replies, "No probs old chap, we'll notionally lend the money back to you at the LIBOR rate of 4%." Financial situation is now: You are paying HSBC 8%. HSBC is paying Barclays 4%. Barclays are paying their depositor 1%. So HSBC is earning 4% and Barclays 3% on money that HSBC invented out of nothing.

This situation continues for a long time.

Then HSBC expects you to give them �10,000 to pay off the loan!

You are mentally retarded, just fyi.

[Injin]

You are mentally retarded, just fyi.

[Never Going To Buy !]

You are mentally retarded, just fyi.

Source please . . . . . ?

Or do I just assume you have qualified in mental health?

[Authoritarian]

You are mentally retarded, just fyi.

Unbeliever!

Anyone can create credit out of thin air. Just write a piece on a piece of paper "I promise to pay the bearer £x" and sell it to someone for the face value plus interest. It seems like you're creating money but what you're actually doing is creating risk. It plausable that the banks use this technique although to what degree I don't know.

[Alan B'Stard MP]

Not true. Inter-bank lending solves all problems. The BoE is not required. And the larger the bank the more chance the money will just move from account to account never leaving the bank. Also note that for every wedge leaving HSBC to go to Barclays another will be moving in the opposite direction. They largely cancel out, although the bigger banks have the advantage.

Interbank lending still uses accounts as the central bank and with central bank liabilites.

[Bloo Loo]

I hear what you are saying, understand it and can even accept it in principle.

In fact, I can add the observation that if your bank has an obligation to settle your spending, but your supplier deposits in my bank, while I also borrow to spend, and my supplier deposits in your bank, then overnight: the debts could be settled without actual transfer of money.

But I still have no evidence that this (or what you say) is what happens.

Banks use double entry book-keeping.

If you have used this yourself, you will have all the evidence you need.

the point being that all accounts must balance, whether with current account, or with outstanding credits and debits.

[sleepwello'nights]

we have a few good internet documentaries now, soon someone will make one that is completely accessible to the public

I've seen "Money as Debt", which other ones do you recommend?

Edited July 11, 2009 by sleepwello'nights

[the_austrian]

I've seen "Money as Debt", which other ones do you recommend?

That's about the best one, to my mind. Others include The Money Masters and Zeitgeist, The Movie which I think has a good section on banking in the beginning. There are numerous individuals on YouTube who propagate information on the banking system including, but not limited to: manoftruth, lorax2013, podrag, FeverIAm.

[Timm]

Banks use double entry book-keeping.

If you have used this yourself, you will have all the evidence you need.

the point being that all accounts must balance, whether with current account, or with outstanding credits and debits.

I haven't, so I might need some help here. The way I see it is:

Money comes in, bank records liability to the depositor against the money they now hold as an asset.

Borrower is lent money. His contract to repay is recorded as an asset, which now balances against the liability to the depositor.

What have I missed?

[Injin]

I haven't, so I might need some help here. The way I see it is:

Money comes in, bank records liability to the depositor against the money they now hold as an asset.

Borrower is lent money. His contract to repay is recorded as an asset, which now balances against the liability to the depositor.

What have I missed?

Bank has nothing.

Man wants to borrow, bank lodges his promises to repay as an asset, then pay out from there.

Fraud, plain and simple.

[Timm]

Bank has nothing.

Man wants to borrow, bank lodges his promises to repay as an asset, then pay out from there.

Fraud, plain and simple.

But still, all we have is assertion.

For a start, if they don't need money, why do they bother taking deposits they have to pay interest on?

[Injin]

But still, all we have is assertion.

For a start, if they don't need money, why do they bother taking deposits they have to pay interest on?

Because they don't have any money?

[Bloo Loo]

I haven't, so I might need some help here. The way I see it is:

Money comes in, bank records liability to the depositor against the money they now hold as an asset.

Borrower is lent money. His contract to repay is recorded as an asset, which now balances against the liability to the depositor.

What have I missed?

thats the idea.

money comes in,

client current account DR=x, deposits account CR=x, books balance. (CD+DR=0)

client borrows x....loan account opened and DR=loan. Loan sales account CR=loan. balance is in order. A new account is created.

client moves loan into his current account.....no money moves but a transaction is recorded DR current account, CR loan account. all is balanced.

client spends his current account balance with jo bloggs car dealers, who also have an account at the bank.

client current account CR the sum, Jbloggs account DR the sum. all is balance, no money changed hands.

come month end, bank raises invoice for interest against the loan account.

CR loan account, DR interest acrued account (for example) (Profit and loss account)

client pays interest with cash.

DR loan account, CR deposits account.

so now the bank has carried out all the above transactions, still has the cash in its coffers and the interest it has earned.

[Timm]

Because they don't have any money?

Why do they need it?

Look, I'm not saying bank credit does not exist, I just want some evidence it is used as a matter of course as a proxy for money. Something like Rothbard's Mystery of Banking, maybe pp97-98, but I was hoping for something a bit more authoritative. I have to say though, I'm beginning to wonder if you boys have anything, and that was not my expectation when I started this thread.

I have to go shopping now, so I'll see y'all later.

[huw]

For a start, if they don't need money, why do they bother taking deposits they have to pay interest on?

Assume the model is as it's said to be.

Bank makes 100 equal loans by entering digits (promises) into accounts. Its capital (cash) is enough to cover 10 of these loans, so it's leveraged 10:1. In return it gains corresponding promises from the borrowers to repay principle+interest according to a fixed schedule.

20 borrowers decide to draw their loans as cash on day 1; bank instantly runs out of money. Or 10 borrowers draw/spend their loans and then break their own promises to repay, wiping out the bank's capital. Bank is bust.

The bank takes deposits/bonds (of cash or promises) to spread the risk, and pays a fee (interest) to those theoretically* taking the risk on.

* In practice it's the taxpayer

[Bloo Loo]

Why do they need it?

Look, I'm not saying bank credit does not exist, I just want some evidence it is used as a matter of course as a proxy for money. Something like Rothbard's Mystery of Banking, maybe pp97-98, but I was hoping for something a bit more authoritative. I have to say though, I'm beginning to wonder if you boys have anything, and that was not my expectation when I started this thread.

I have to go shopping now, so I'll see y'all later.

money is money, credit is the promise of money.

you can offset a liability in exchange for a promise, but that is only if both parties agree. A party cannot refuse money.