Money As Debt, Fractional Reserve Banking Etc

[Bloo Loo]

why, if its just money they created. it wouldn't cost them anything and they wouldn't have anyone to pay back.

yes that would be nice, but I think our ever so fearce FSA regulator might do something- or not

[Extradry Martini]

ExtraDry, that post is so full of misconceptions I don't know where to start

You seem to be saying that all the money originates at the central bank. You didn't say it explicitly, but it stands to reason based on what you did say. Because either the bank gets its money from the central bank, or it gets it from another bank (who got it from the central bank), or it gets it from a depositor (who got it from another bank who got it from the central bank). All the money must have originated with the central bank.

Well, in that case you are demonstrably wrong. The Bank of England will happily tell you how much "central bank created" money exists in the economy, and you will find that it is a tiny fraction of the total amount of money that exists in Sterling bank accounts across the country.

That banks operate on fractional reserves is obvious from the fact that the banks' total Sterling liabilities to depositors exceed the amount of physical money in existence. And if you meet the entrance criteria for an undergraduate degree in economics at LSE, there you will find no shortage of extremely well-educated economists who will teach you all about how the banking system really works - including the mechanism of credit expansion via fractional reserve banking.

It's not a conspiracy. You're supposed to know all about it and understand it as part of being a responsible citizen of the Western world!

Oh dear - you are confusing narrow money with broad money as well. Read my post again or get a book on it - I'm so, so tired of explaining this to people.... It's as if they do not want to understand....

Bloo Loo: In answer to your question, private banks used to act like central banks in printing money (under licence for a while and prior to that in competition with each other), but they don't any more..

Guys, sorry, but I really do know what I'm talking about here - and I am utterly bored of doing this the whole time. I won't be posting in this thread again.... It's not rocket science - private banks simply cannot print money. End of story.

Edited October 3, 2007 by Extradry Martini

[benj]

Oh dear - you are confusing narrow money with broad money as well.

...

Guys, sorry, but I really do know what I'm talking about here - and I am utterly bored of doing this the whole time. I won't be posting in this thread again.... It's not rocket science - private banks simply cannot print money. End of story.

I don't think anyone here ever said they could.

I am not confusing broad and narrow money. If you're saying "private banks cannot create narrow money" then you're right. If you are saying "private banks cannot create broad money" then you're wrong. If you're saying "private banks can create broad money but broad money is not money" then you're confused.

[Ah-so]

Guys, sorry, but I really do know what I'm talking about here - and I am utterly bored of doing this the whole time. I won't be posting in this thread again.... It's not rocket science - private banks simply cannot print money. End of story.

You say that, but you will be drawn in again by the next nutter to start a thread on this.

[Extradry Martini]

You say that, but you will be drawn in again by the next nutter to start a thread on this.

Hahahaha ...Actually, I'm already drawn in again....

Benj:

We agree then, no? I think most people do understand that the phrase "print money" means narrow money. WHy on earth did you bother responding to my earlier post? All you've done is wasted a load of time on a subject I find so tedious to talk about - and Im sure you do too!

Right that's it - definitely not talking about this again.

[othello]

Reading the link provided earlier in this thread by Injin I discovered that Fractional Reserve Banking was replaced in 1988, as a result of the Basle Accord, by the Capital Adequacy System. So lets not debate Fractional Reserve Banking any more.

[benj]

Reading the link provided earlier in this thread by Injin I discovered that Fractional Reserve Banking was replaced in 1988, as a result of the Basle Accord, by the Capital Adequacy System. So lets not debate Fractional Reserve Banking any more.

But the Capital Adequacy System is just Fractional Reserve Banking on steroids!

[benj]

Hahahaha ...Actually, I'm already drawn in again....

LOL, this is what happens to me every time too.

We agree then, no? I think most people do understand that the phrase "print money" means narrow money. WHy on earth did you bother responding to my earlier post?

Mainly because some of the things you said seemed rather confusing and/or confused. Sorry if it came across as confrontational!

Just by way of a "last word" on the subject, I have dusted down my copy of Begg et al. and I quote here some excerpts from Chapter 23 ("Money and modern banking"):

Money is any generally accepted means of payment for delivery of goods or settlement of debt. It is the medium of exchange.

Society enforces the use of token money by making it legal tender. The law says it must be accepted as a means of payment.

In modern economies, token money is supplemented by IOU money. An IOU money is a medium of exchange based on the debt of a private firm or individual.

A bank deposit is IOU money because it is a debt of the bank. When you have a bank deposit the bank owes you money. You can write a cheque and the bank is obliged to pay whenever the cheque is presented. Bank deposits are a medium of exchange because they are generally accepted as payment.

A commercial bank borrows money from the public, crediting them with a deposit. The deposit is a liability of the bank. It is money owed to depositors. In turn the bank lends money to firms, households, or governments wishing to borrow. Banks are not the only financial intermediaries. Insurance companies, pension funds, and building societies also take in money in order to relend it. The crucial feature of banks is that some of their liabilities are used as a means of payment, and are therefore part of the money stock.

...UK banks hold reserves that are only 2% of the sight deposits that could be withdrawn at any time. If only 2% of people holding sight deposits denominated in pounds withdrew their money, banks would not have enough cash to meet these withdrawals.

Today, we define money as those generally accepted means of payments that are usable for unrestricted payments. We can use them at any time to pay any amount to anyone. They are measured as notes and coin in circulation with the general public plus deposits with the banking system.

...modern banks create money by granting overdraft facilities, issuing sight deposits in excess of the cash reserves in their bank vaults. Without depositing any cash, some people are told they now have money in their bank accounts. These bank accounts are money because people can write cheques against them and use them as a means of payment. Modern fractional reserve banking is an intrinsic part of the process of money creation.

Because the cash reserves of commercial banks are only a small fraction of total bank deposits, bank-created deposit money forms by far the most important component of the money supply in modern economies.

From now on, anyone who wishes to assert that "banks cannot create money" should take up their argument with one of the authors: not Rudi Dornbusch, unfortunately, since he's been dead for five years... but David Begg, Principal of the Imperial College Business School and Research Fellow of the Centre for Economic Policy Research, perhaps? Or Stanley Fischer, the former VP of the World Bank, First Deputy Managing Directory of the IMF, and now Governor of the Bank of Israel?

If these gentlemen say that commercial banks can and do create money, I'm not going to argue with them. Particularly when they publish textbooks giving detailed and easy-to-follow explanations of how it all works.

[othello]

But the Capital Adequacy System is just Fractional Reserve Banking on steroids!

Here we go again. We have been fed mis-iformation and had a discussiob about something that no longer exists (apparently).

[othello]

LOL, this is what happens to me every time too.

Mainly because some of the things you said seemed rather confusing and/or confused. Sorry if it came across as confrontational!

Just by way of a "last word" on the subject, I have dusted down my copy of Begg et al. and I quote here some excerpts from Chapter 23 ("Money and modern banking"):

From now on, anyone who wishes to assert that "banks cannot create money" should take up their argument with one of the authors: not Rudi Dornbusch, unfortunately, since he's been dead for five years... but David Begg, Principal of the Imperial College Business School and Research Fellow of the Centre for Economic Policy Research, perhaps? Or Stanley Fischer, the former VP of the World Bank, First Deputy Managing Directory of the IMF, and now Governor of the Bank of Israel?

If these gentlemen say that commercial banks can and do create money, I'm not going to argue with them. Particularly when they publish textbooks giving detailed and easy-to-follow explanations of how it all works.

I don't agree. The bank is NOT creating money. It is lending. The money is has to be found and paid back when the borrower starts to pay it back. The money is 'created' by the individual or organisation earning it and paying it back into the system. The bank is taking the risk that it may not be paid back (unless it is a secured loan as most are).

PS. These people tend to say things about Banking when they are trying to sell a book about the banking system. Wouldn't sell may copies if the said "Banking works pretty well by lending money", would they?

Edited October 4, 2007 by othello

[Injin]

Here we go again. We have been fed mis-iformation and had a discussiob about something that no longer exists (apparently).

Capital adequacy is just fractional reserve banking split into demographic sections within a bank.

They have to keep more cash around for those on the dole, workers paid weekly with low incomes who want cash right now than people like NR's pensioners who will put £100k in their and then forget about it for half a decade. They work out how much they need to keep for each section by looking at past behaviour and keep a different amount in stock per group. This lowers the overall amount of capital required to pay day to day expenses. It also puts the bank at constant, serious risk of collapse. if past behaviour fails to equal present behaviour.

It's all fine* (just like FR lending itself in fact) until the "wrong" demographic group walks in looking for their money.

The big weakness of the capital adequacy system is that it's using long term funds to cover short term losses - so basically all banks/BS are following NR's business model with their own customer base!

*As in it works, it's still fraud, immoral and dangerous.

Edited October 4, 2007 by Injin

[ockham]

If these gentlemen say that commercial banks can and do create money, I'm not going to argue with them.

But remember the three criteria of being 'money': 1. Medium of exchange 2. Store of value 3. Unit of account.

Sure, banks create a medium of exchange by writing IOU's. Mortgage banking, in essence, is a swap of IOU's. The borrower gives an IOU to the bank, meaning, he promises to pay some money, measured by some unit (pounds, dollars, fish, seashells) to the bank over a period of time. The bank gives the customer their IOU, meaning the promise to pay the customer OR anyone else who presents the IOU, some money, now.

The difference (a) the time period. The customer IOU is usually over a long time period. The bank IOU is for presentation whenever you want. ( Only the bank will accept the borrowers IOU. But, because of the perceived creditworkthiness of the bank by society at large, the borrower can present the bank IOU anywhere, and it is accepted.

Injin (not you) keeps insisting that there is some fraud involved in this. Don't see that. It only works because of the perceived creditworthiness of the bank, by everyone, and the perceived creditworthiness of the customer only to the bank. The bank is representing itself as creditworthy, and if it is, it is being honest. (If by contrast the bank claims to be creditworthy because it has lots of high quality assets, when actually it doesn't, that is dishonest and fraudulent. But doesn't mean that banking is inherently fraudulent).

[ockham]

Capital adequacy is just fractional reserve banking split into demographic sections within a bank.

They have to keep more cash around for those on the dole, workers paid weekly with low incomes who want cash right now than people like NR's pensioners who will put £100k in their and then forget about it for half a decade.

[...]

The big weakness of the capital adequacy system is that it's using long term funds to cover short term losses - so basically all banks/BS are following NR's business model with their own customer base!

You seem to be confusing capital adequacy with liquidity requirements. Capital adequacy is the requirement that a certain percentage of the bank's LIABILITIES are to people who are prepared to accept a loss (i.e. the equity holders). These people are the first to soak up any difference between the book value of the assets, and their real value.

The liquidity requirement is that a certain portion of ASSETS be held in liquid instruments. Cash, government bonds, gold, that sort of thing.

[Injin]

But remember the three criteria of being 'money': 1. Medium of exchange 2. Store of value 3. Unit of account.

Sure, banks create a medium of exchange by writing IOU's. Mortgage banking, in essence, is a swap of IOU's. The borrower gives an IOU to the bank, meaning, he promises to pay some money, measured by some unit (pounds, dollars, fish, seashells) to the bank over a period of time. The bank gives the customer their IOU, meaning the promise to pay the customer OR anyone else who presents the IOU, some money, now.

The difference (a) the time period. The customer IOU is usually over a long time period. The bank IOU is for presentation whenever you want. ( Only the bank will accept the borrowers IOU. But, because of the perceived creditworkthiness of the bank by society at large, the borrower can present the bank IOU anywhere, and it is accepted.

Injin (not you) keeps insisting that there is some fraud involved in this. Don't see that. It only works because of the perceived creditworthiness of the bank, by everyone, and the perceived creditworthiness of the customer only to the bank. The bank is representing itself as creditworthy, and if it is, it is being honest. (If by contrast the bank claims to be creditworthy because it has lots of high quality assets, when actually it doesn't, that is dishonest and fraudulent. But doesn't mean that banking is inherently fraudulent).

Why do you think that the banks IOU is money but their customers IOU's aren't?

Tha bank already accepts them as assets and even sells them on the open market! Bansk sell signed customers pledges to each other, these hold value over time and they have a fixed amount on them. They are money.

One more time - ANYONE CAN MAKE MONEY. The trick to banking is to pretend that the average man or woman in the street cannot make money/promissory notes, but then use the forms they sign as money in the open market. Because no commidity is backing the currency, it's all just promises to nothing.

Only the bank of england can make legal tender. Anyone can make money.

[ockham]

Why do you think that the banks IOU is money but their customers IOU's aren't?

I've already explained that. Read my post again.

[Injin]

I've already explained that. Read my post again.

Oh yeah. You seem to think that because only one person accepts a document as money, it's not really money.

Why?

[ockham]

Oh yeah. You seem to think that because only one person accepts a document as money, it's not really money.

Why?

Money is what everyone accepts as money. Very few people will accept the customer's IOU as money. So it's not money. You made another point about the assets of the bank (i.e. loans to the customer) being sold on. Correct, that can happen. But the buyer trusts that the bank has done a full 'credit check' on the customer IOU. Think of the assets as being the customer IOI plus an implicit bank guarantee.

[Injin]

Money is what everyone accepts as money. Very few people will accept the customer's IOU as money. So it's not money. You made another point about the assets of the bank (i.e. loans to the customer) being sold on. Correct, that can happen. But the buyer trusts that the bank has done a full 'credit check' on the customer IOU. Think of the assets as being the customer IOI plus an implicit bank guarantee.

No it isn't.

Money is anything that somebody will accept as a medium of exchange.

You cannot legislate what people will accept as valuable, it's up to them. If me and Dave uses oranges as a medium of exchange to swap a car for a fridge, who are you to tell me and dave that oranges aren't money?

t's an internal matter between me and dave. If my bank accepts my signature as valuable and treats it as an asset, then that's up to the bank. For them then to say that they haven't recieved anything from me is proved false by their own action s in treating my signature as an asset.

That they can sell that form to other people - other loan companies, banks, debt collectors and so on, all just proves that it is money.

Not only that, but what backs currency?

[babesagainstmachines]

This is all very interesting.

Here's a thought (that no one will probably respond to )

Instead of taxation and the legions of tax collectors the governments employs, together with their constant battle against tax evasion and the like,

what would happen if the government just spent every penny it needs into existence and became the sole issuer of money. Inflation would then be the only tax that exists, and the only tax that is neccessary. Would the world be a better place? Or have I lost my marbles?

[Injin]

This is all very interesting.

Here's a thought (that no one will probably respond to )

Instead of taxation and the legions of tax collectors the governments employs, together with their constant battle against tax evasion and the like,

what would happen if the government just spent every penny it needs into existence and became the sole issuer of money. Inflation would then be the only tax that exists, and the only tax that is neccessary. Would the world be a better place? Or have I lost my marbles?

No. Firstly, because it wouldn't last and the government is only really interested in control and destruction. The trouble we are seeing now is because of two things - one is massively overegged house prices, the other is the government buying bullets and bombs via the printing press. An inflation tax frees the government from any control

Secondly, fiat currency is just paper. If you don't demand it at truncheon/gun point then peopel will quickly stop using it and move back to real wealth - gold/silver etc.

[ParticleMan]

move back to real wealth - gold/silver etc.

At last! That's what your selling.

I'll have nine, thanks.

(Arguing with a FRB-conspiracy-theorist-loon is like wrestling with a pig - after a while, you realise the pig enjoys it).

[ockham]

No it isn't.

That they can sell that form to other people - other loan companies, banks, debt collectors and so on, all just proves that it is money.

I've already replied to that argument.

[Magpie]

Oh yeah sure. I respect my neighbours and they in turn respect me. We have dispute resolution agencies and so on to sort things out, as well as our own common sense. The other poster was trying to lay claim as this everyday respect peopel generally have for each other as somehow being a product of banking, which is just lunacy.

Balderdash. The other poster was countering your argument that 'society doesn't exist', using the specific example of property rights, and how they only work because of the social fabric.

I see you now recognise that such a thing as social fabric does exist, so I hope you'll withdraw your earlier statement that society doesn't exist.

The system of banking and money is largely based on social fabric, on shared convention and custom, not on coercion. It's certainly reasonable to query the way that it operates in detail, but to simply dismiss the whole thing as a fraud is to misunderstand how it works. I accept an IOU or a banknote, because I trust that I will be able to exchange it in future, because I understand how the society I live in works.

[Injin]

At last! That's what your selling.

I'll have nine, thanks.

(Arguing with a FRB-conspiracy-theorist-loon is like wrestling with a pig - after a while, you realise the pig enjoys it).

Oh I am not advocating as something that must happen. I just think that if people were free to choose, that's what they would do. I might be wrong, but it's a general pattern in history.

What I am selling is that people should be free to choose, that coercion is bad, that lying even by ommission is wrong and invalidates contracts etc.

[Injin]

I've already replied to that argument.

Ok. You seem to be missing a bit.

Money is any medium of exchange between two or more people - yes or no?

You can't mandate what that is - yes or no?

Once someone has accepted something as valuable they can't change their mind - yes or no?