Fractional Reserve

[Number79]

If people knew that £1,000 hadn't actually changed hands why do they repay loans?

because they believe that the money was lent to them in the form of electronic digits from the banks account and has to be repaid.

people don't need to see cash anymore, they trust in electronic money and believe that loans like this work just the same as when you pay for food with a plastic card.

[Injin]

Do you still have the credit agreement you signed?

Nope.

[Timm]

(...)

the so called 'fraud' is purported upon depositors. Not borrowers.

(...)

That's just it - the shopkeeper is the one who has been scammed. You can't make that right by paying the bank back, and he's going to wonder what the ****** you are on about if you try and "repay" him.

Yes.

And the shopkeeper has put the scam in the bank.

[Injin]

because they believe that the money was lent to them in the form of electronic digits from the banks account and has to be repaid.

people don't need to see cash anymore, they trust in electronic money and believe that loans like this work just the same as when you pay for food with a plastic card.

So why don't they just offer an email of £1,000 like I did?

[Alan B'Stard MP]

Have they ever thought about it?

Go and ask that - ever thought about where interest comes from gfor the banks?

I expect lots of glazed eyes. Hmmm I could have some fun with that.....

Huge amount of money tied up in term deposits from J6P. I doubt most people believe it's the tooth fairy putting 50ps under the pillow.

[VeryMeanReversion]

Private banks produce no means of exchange. they create invoices...bankers call these invoice money, but without means of exchange, they cant be honoured.

A banker can loan me money. he creates a loan. he MUST give me means of exchange to settle, or allocate some of what he has to my account if I am with the same bank.

If he has insufficient means of exchange, he will need to borrow it.

Only the Government creates the means of exchange through their central banks...Means of exchange are backed by the taxpayer.

My understanding is this:

If I take a mortgage, the bank creates the money and records the loan as an asset.

To meet regulations the amount of money the bank is allowed to create is limited, based on its assets like cash or share capital.

So I think the bank can create something which is generally accepted as money. It's not coins or cash but as good as for just about everybody. A house sellers bank will accept the house buyers banks electronic transfer or cheque as money.

Where did I go wrong?

VMR.

[Alan B'Stard MP]

So why don't they just offer an email of £1,000 like I did?

Because money doesn't go down copper wires. Only requests to journal different accounts.

[Injin]

Yes.

And the shopkeeper has put the scam in the bank.

Comical, isn't it?

They have to accept it, or it's all over. Shopkeeper goes and gets his goods back, borrower doesn't owe anything.

Could it be that you can't actually morally borrow something from someone and then give it away?

I think so.....

[JustYield]

Where did I go wrong?

VMR.

Double entry book keeping. Boring, but it works.

[Alan B'Stard MP]

My understanding is this:

If I take a mortgage, the bank creates the money and records the loan as an asset.

To meet regulations the amount of money the bank is allowed to create is limited, based on its assets like cash or share capital.

So I think the bank can create something which is generally accepted as money. It's not coins or cash but as good as for just about everybody. A house sellers bank will accept the house buyers banks electronic transfer or cheque as money.

Where did I go wrong?

VMR.

We bank with the commercial banks.

The banks in turn bank with the central bank.

The accounts at the central bank are the 'real money'. They cant transfer money to the central bank - only between accounts held there.

Funds from mortgages are paid - if between two different institutions - via CHAPS. CHAPS is a real time gross settlement system - and are paid from by transfer between accounts at the central bank. These accounts are cash. Commercial bank accounts are just records of monies owed.

[Number79]

Where do they think interest comes from then?

from the banks profits made by playing the markets with depositors cash and from interest charged on loans.

[Injin]

Because money doesn't go down copper wires. Only requests to journal different accounts.

But I only owe them £1,000 in cash if the wire actually had £1,000 in cash at the end of it in the first instance.

Otherwise it's just numbers, the same as mine.

"Accounts" don't signify, it's about what I got and therefore what I give back.

[Alan B'Stard MP]

from the banks profits made by playing the markets with depositors cash and from interest charged on loans.

So - If i read your post correctly - youre wrong to think J6P thinks all the money is held in a central vault.

[_w_]

commercial banks can't print cash.

there may be the odd exception for scottish notes - not sure.

You could in the past but you're right. Go for the USB key then, same difference.

[Alan B'Stard MP]

But I only owe them £1,000 in cash if the wire actually had £1,000 in cash at the end of it in the first instance.

Otherwise it's just numbers, the same as mine.

"Accounts" don't signify, it's about what I got and therefore what I give back.

No - it wasn't what you got. There are not numbskulls running around computers you know.

[Injin]

No - it wasn't what you got. There are not numbskulls running around computers you know.

What did I get, then?

Many a genius has believed in things that didn't exist, so that's no help here.

[Number79]

So - If i read your post correctly - youre wrong to think J6P thinks all the money is held in a central vault.

hmm...it clearly appears so but I don't think that j6p has joined up many of the dots and still believes in the vault while understanding that banks play the markets. Maybe some still believe that their interest is made up from that charged on loans and mortgages.

[Timm]

Comical, isn't it?

They have to accept it, or it's all over. Shopkeeper goes and gets his goods back, borrower doesn't owe anything.

But this way, they still have a claim on the interest.

Could it be that you can't actually morally borrow something from someone and then give it away?

I think so.....

Yes, to do so would be to permanantly deprive.

But you havn't borrowed anything have you?

Unless you can borrow a transferable promise?

[Alan B'Stard MP]

What did I get, then?

Many a genius has believed in things that didn't exist, so that's no help here.

Computers and everything in them exist.

[Injin]

hmm...it clearly appears so but I don't think that j6p has joined up many of the dots and still believes in the vault while understanding that banks play the markets. Maybe some still believe that their interest is made up from that charged on loans and mortgages.

I think Alan is trying to defend FRB by saying people can't possibly believe in things that contradict each other or don't make any sense.

[VeryMeanReversion]

We bank with the commercial banks.

The banks in turn bank with the central bank.

The accounts at the central bank are the 'real money'. They cant transfer money to the central bank - only between accounts held there.

Funds from mortgages are paid - if between two different institutions - via CHAPS. CHAPS is a real time gross settlement system - and are paid from by transfer between accounts at the central bank. These accounts are cash. Commercial bank accounts are just records of monies owed.

From My linkhttp://en.wikipedia.org/wiki/Money_creation

Money creation through the fractional reserve system

Main article: Fractional-reserve banking

Further information: Money supply

To avoid confusion, keep in mind that a "central bank" is not in any way a federal institution - it is a private bank, not unlike other private banks, except for the fact that it has the right to control the initial issuance of debt-backed monies to a central government. Almost all nations have central banks, and almost all of the world's money supply is controlled not by governments, but by private bankers. Fractional-reserve banking creates money whenever a new loan is created. In short, there are two types of money in a fractional-reserve banking system, the two types being legally equivalent [3][4]:

1. central bank money (all money created by the central bank regardless of its form (banknotes, coins, electronic money through loans to private banks))

2. commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money[5]

When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.

So you are correct if you think of money as only central bank money but I think of money as 2. (which a few years ago was 97% of the money supply in my understanding).

VMR.

[Injin]

Computers and everything in them exist.

And I once saw a man who was only 3 feet high.

What did I get, then?

[Alan B'Stard MP]

I think Alan is trying to defend FRB by saying people can't possibly believe in things that contradict each other or don't make any sense.

You signed a credit agreement. Not a money agreement.

[Injin]

You signed a credit agreement. Not a money agreement.

And not a credit contract, but a credit agreement.

My understanding of matters (when I signed) and what actually occured didn't match.

[Alan B'Stard MP]

From My linkhttp://en.wikipedia.org/wiki/Money_creation

Money creation through the fractional reserve system

Main article: Fractional-reserve banking

Further information: Money supply

To avoid confusion, keep in mind that a "central bank" is not in any way a federal institution - it is a private bank, not unlike other private banks, except for the fact that it has the right to control the initial issuance of debt-backed monies to a central government. Almost all nations have central banks, and almost all of the world's money supply is controlled not by governments, but by private bankers. Fractional-reserve banking creates money whenever a new loan is created. In short, there are two types of money in a fractional-reserve banking system, the two types being legally equivalent [3][4]:

1. central bank money (all money created by the central bank regardless of its form (banknotes, coins, electronic money through loans to private banks))

2. commercial bank money (money created in the banking system through borrowing and lending) - sometimes referred to as checkbook money[5]

When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.

So you are correct if you think of money as only central bank money but I think of money as 2. (which a few years ago was 97% of the money supply in my understanding).

VMR.

Yes this all correct - although makes no mention of settlement. The clearing banks bank with the central bank - the lesser banks with the clearing banks. They still have to have access to funds to be able to extend credit and make good on settlement.

You seem to be under the impression they extend loans in the manner of a toilet roll chucked at anfield. Ever wonder why there are big banks and small banks if it was just a matter of extending credit to every tom dick and harry? It's about cash flow. Inflow of money needs to be assured before outflow can be allocated.

I'd much rather a banking system service the economic need for money in issuing liabilities - than the state - because when it fails it is self-correcting. Not true if the state issues all the money liabilities.

Unfortunately politicians get in the way.

Edited November 4, 2009 by Alan B'Stard MP