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Money As Debt, Fractional Reserve Banking Etc


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As I said. The fundsmoney/cash. Which he can withdraw as cash, transfer to another bank in consideration for the house purchase etc etc.

You seem stuck on the idea that "people" think when they deposit money in a bank it is kept in their own little shoebox with their name on it.

What job do you do?

The bank does not received the customers property, merely the legal right to take possession of it in the case of a default in the contract int he MOrtgage- the contract itself is that the bank will loan some dosh in return for payments and interest- thats the contract, there is usually a fee for doing this and thats the consideration

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What's special about him is that he has knowledge, skills and experience that the cabin-builder and the fisherman do not have. Which is what ockham said (I think). But he doesn't have to be some superhuman being.

Banking is an economy of scale. Imagine every person in the community potentially wants to be able to transact with every other person in the community. That's a quadratic problem. If there are N people, then there are N*(N-1)/2 pairs of people who need to establish whether they trust each other enough to do business. Trust is hard to earn (evidently). So it's much more efficient if the banker steps in to broker everyone's deals. If the banker can earn all N people's trust, and conversely the banker can assess the trustworthiness of all N people, then the amount of trust-garnering work has been reduced to N*(N-1)/2 to N. For large N this is significant. For N=100, there were 4950 pairs of people trying to get over their mutual suspicions. With the banker, there are only 100 such pairs.

The banker doesn't have to be any more trustworthy than anyone else - indeed in this example it's assumed that people have just as hard a time trusting the banker as they do trusting the dung-shoveller! This "centralised" solution just emerges because we as a society tend to do whatever we can to simplify our lives and eliminate unnecessary work.

Oh. I thought the answer was that the banker can hire goons to take people's stuff away if they cross him and builder and fisherman can't. Still, your way is nicer, so it must be true. I like the voluntary idea of banking also. It's a nice idea.

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So, the customer gives the bank money and subsequently withdraws it.

Where is the banks consideration?

It's not me that are hung up on the deposit money being kept in a little shoebox. It;s the banks who do that. They call it a "customer account" or somesuch.

The bank's consideration is the contractual interest charged on the loan secured against the asset.

RIght, I have concluded you are just trolling and have no interest in replying further. You clealry have no interest in listening or trying to understand to anyone's points on here. I am genuinely interested in what your qualifications/line of work is but note you do not wish to divulge.

I shall let someone else debate with you.

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The numbers below show how fiat money is created out of "nothing" yet banks can show such figures as you quote at the same time. Imagine 10K is deposited at one bank, this we will call the seed deposit, and we shall see how much money can be "grown" from it.

So 10K is deposited at bank 1, and bank 1 then lends 9K, which is deposited at another bank, which then lends 8100K and so on:

10000> 9000

9000 > 8100

8100 > 7290

7290 > 6561

6561 > 5904

5904 > 5314

5314 > 4782

4682 > 4304

4304 > 3874

3874 > 3486

So in just 10 transactions a possible 59K can be loaned out from an initial deposit of just 10K, yet each bank individually can show that its deposits outweigh its loans and liabilities. You have to look at the system as a whole and also remember that much of the money in the deposit column is actually debt.

yes but you are missing the point that money must be deposited before a new loan can be created. therefore the money cannot be withdrawn by everyone at the same time. basically in accountancy terms new money seems to have been created but in reality that £10000 is just being passed on from person to person with the banks holding back bit of that money each time.

This is just hand waving. It dosnt change the fact that from a loan of 10K a further 50K can enter and be spent in the economy. Or that if the banking system were rolled up into one system it could generate over 50K of loans from one deposit of 10K. That is why money = debt.

Edited by Cptkernow
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Oh. I thought the answer was that the banker can hire goons to take people's stuff away if they cross him and builder and fisherman can't.

:lol::lol:

The centralisation of Hired Goon services is just another way that society has found economies of scale...

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Money deposited with a bank becomes the banks property, the depositor is now only a creditor.

Thus, in England, the goldsmiths, and the deposit banks which developed subsequently, boldly printed counterfeit warehouse receipts, confident that the law would not deal harshly with them. Oddly enough, no one tested the matter in the courts during the late seventeenth or eighteenth centuries. The first fateful case was decided in 1811, in Carr v. Carr. The court had to decide whether the term “debts” mentioned in a will included a cash balance in a bank deposit account. Unfortunately, Master of the Rolls Sir William Grant ruled that it did. Grant maintained that since the money had been paid generally into the bank, and was not earmarked in a sealed bag, it had become a loan rather than a bailment. Five years later, in the key follow-up case of Devaynes v. Noble, one of the counsel argued, correctly, that “a banker is rather a bailee of his customer’s funds than his debtor, . . . because the money in . . . [his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up.” But the same Judge Grant again insisted—in contrast to what would be happening later in grain warehouse law—that “money paid into a banker’s becomes immediately a part of his general assets; and he is merely a debtor for the amount.”

This money is then deposited with the central bank and becomes a "Reserve Account". the bank can now lend up to the reserve ratio 5:1...10:1...whatever the rules allow at a given time.

When depositors demand their deposits back, this reduces their reserve account balance, and thus the amount they can legally lend.

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Give me an example please. One of the most successful examples of inelastic money was the "tally stick" which lasted for 700 years.

Aah, but that's a good example right there. I believe that the formation of the BoE had something to do with the (monetary) discount-to-face-value with which these were trading at the time.

For real inelasticity (and the outcomes of this), you need to look to a unit which prices a finite quantity directly. A tally-stick is finite only in one sole dimension - both halves are irrefutably the same contract. But an issuer can issue as many more as will grow from the ground, and as the market will price. So a given tally's monetary value fluctuates with risk (of non-payment), market depth, and time (the risk of default increases as the issuer approaches death).

What monetary units do this? In short - those that are (compulsarily) convertible at a fixed rate for finite commodities; if a unit of exchange were convertible (at an enforced, fixed rate) for time directly, this would be the most severe example. The feudal practice of allocating manor fields between Lord, Church, and peasant - and then demanding proportionate labour on each achieves this indirectly. It is not so much the token - as the compulsion to convert it into a finite commodity at some immutable rate (the peasant's time on the earth is finite; the demand to allocate some proportion of it to each field - regardless of any efficiency achieved - is compulsive; the result is waste, and unrest).

Both fiat and commodity based systems have devolved to this (but not all of either); if you look to any war or revolution, you will find at least one (social) stressor which is the breakdown between the "agreed" (generally - at gunpoint) notional conversion rate, and, the willingness to supply (at this rate).

My contention is the way the price of money is manipulated to cause asset bubbles, when levels of debt break with economic reality. That causes economic instability, as now. Using gifts from the treasury and the stealth tax of inflation to support private business has always led to civil unrest.

Systemic rot is bad, and - as clearly evidenced in the recent HoC Treasury Select Comittee testamony - this one is rotten to the core. It's time for a better approximation - no argument there. But the process of how we arrive at the next approximation is of vital importance (to me, at least).

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So, the customer gives the bank money and subsequently withdraws it.

Where is the banks consideration?

It's not me that are hung up on the deposit money being kept in a little shoebox. It;s the banks who do that. They call it a "customer account" or somesuch.

if you cant even comprehend what a bank is and what a bank does then exactly what is the point of your arguement?

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The bank's consideration is the contractual interest charged on the loan secured against the asset.

RIght, I have concluded you are just trolling and have no interest in replying further. You clealry have no interest in listening or trying to understand to anyone's points on here. I am genuinely interested in what your qualifications/line of work is but note you do not wish to divulge.

I shall let someone else debate with you.

What?

I asked what the bank gives to the customer. What is the bank offering to the taker of a loan? What is the banks consideration for the loan? As far as I can see it all comes from the borrower. At no point can the bank make a loss or does it risk anything of it's own.

Customer gives bank asset, bank returns asset. Banker demands amount of asset + interest to be "returned". How is this a loan? I am totally lost.

I assure you I am not trolling, I am seeking to understand where you are coming from.

if you cant even comprehend what a bank is and what a bank does then exactly what is the point of your arguement?

I don't have an argument. I'm trying to understand how banking works. Everyone seems content with the idea that if we call a bunch of people who routinely misrepresent what they do a special word like "bank" then what they do isn't misrepresentation. It's kinda weird, frankly.

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Like northern rock, you mean?

Billions of mortgages on the books all deposits gone even though they are a fraction of the loaned amount and still claiming to be solvent with a good business model?

Old biddies all reclaim their cash, NR still have mortgaegs live and call none of them in. You work it out. Jesus.

We all know that NR had an unsustainable business model that required them to borrow short term from the money markets to fund loans - and they have gone under as a result. They are the exception. Yet they still loaned less than 3 times what they had in deposits. Not 20-30 times as we have been led to believe! Let's stick to the facts.

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Each month the borrower repays interest (income to the bank) and capital (if it is a repayment mtge) reducing the banks asset and enabling it to further increase its lending.

A quibble: if the capital is paid back, there is no reduction in assets. One asset (a loan) is exchanged for another (cash). This will, as you say, be turned quickly into another loan, i.e. another asset.

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I have a degree and a postgraduate qualification in banking.

Hi Red Kharma,

Do you know of any books about the history of banking that would be readable by the average layperson (i.e. me)? I'm interested in the topic but can't seem to find anything suitable on Amazon.

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That's kinda the point being made on this thread, isn't it?

In the example I gave there is £100 of high-powered money, which becomes £1000 of broad money by means of £900 of overdrafts. What's not to understand? :)

The total in peoples' bank account is not £1000.

It is £100.

You are wrong.

No money has been created.

No money is created until debt is defaulted and a central bank steps in to bail a bank out.

Only central banks can create money.

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We all know that NR had an unsustainable business model that required them to borrow short term from the money markets to fund loans - and they have gone under as a result. They are the exception. Yet they still loaned less than 3 times what they had in deposits. Not 20-30 times as we have been led to believe! Let's stick to the facts.

If someone was trying to lead you to believe that banks lent out 20 to 30 times what they had on deposit, then they really were deluded. The key point is that all the money loaned out ends up back in the banking system as deposits.

It is a matter of fact beyond doubt that the banks do operate on fractional reserves, and that their lending practices do indeed create >30 times more of the economy's broad money stock than the central bank itself creates. This is a monetary question and had nothing to do with the ratio of savings depositors to outstanding loans at any one banking institution.

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The total in peoples' bank account is not £1000.

It is £100.

Here we go again.

There are £1000 total credit balances in the system, that people can use to pay each other with.

There are £900 total debit balances owing to the bank.

The original £100 of high-powered central bank money still exists.

The fact that some people are overdrawn to the tune of £900 does not in any way diminish the ability of the other people who own the £1000 to make payments using those funds.

If you have some alternative explanation for the simple fact that M4 broad money in the UK economy is >30 times bigger than M0 narrow money as created by the central bank, then go ahead and enlighten us. In fact, why not write to the Bank of England and ask them for an explanation, instead of wasting my time?

"Dear Mr. King, It has come to my attention recently that the total amount of money in bank and building society deposit accounts in the UK (so-called "M4") vastly exceeds the amount of central bank-created money (so-called "M0"). A long time ago, I decided that the Bank of England was the only institution in the UK that can create money. This disparity is therefore extremely worrying to me. Please could you explain why this difference exists, without using the words 'you are wrong' in your answer. Because I don't like to be wrong. Yours etc."

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Here we go again.

There are £1000 total credit balances in the system, that people can use to pay each other with.

There are £900 total debit balances owing to the bank.

The original £100 of high-powered central bank money still exists.

The fact that some people are overdrawn to the tune of £900 does not in any way diminish the ability of the other people who own the £1000 to make payments using those funds.

If you have some alternative explanation for the simple fact that M4 broad money in the UK economy is >30 times bigger than M0 narrow money as created by the central bank, then go ahead and enlighten us. In fact, why not write to the Bank of England and ask them for an explanation, instead of wasting my time?

"Dear Mr. King, It has come to my attention recently that the total amount of money in bank and building society deposit accounts in the UK (so-called "M4") vastly exceeds the amount of central bank-created money (so-called "M0"). A long time ago, I decided that the Bank of England was the only institution in the UK that can create money. This disparity is therefore extremely worrying to me. Please could you explain why this difference exists, without using the words 'you are wrong' in your answer. Because I don't like to be wrong. Yours etc."

:lol::lol::lol::lol:

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Here we go again.

There are £1000 total credit balances in the system, that people can use to pay each other with.

There are £900 total debit balances owing to the bank.

The original £100 of high-powered central bank money still exists.

The fact that some people are overdrawn to the tune of £900 does not in any way diminish the ability of the other people who own the £1000 to make payments using those funds.

If you have some alternative explanation for the simple fact that M4 broad money in the UK economy is >30 times bigger than M0 narrow money as created by the central bank, then go ahead and enlighten us. In fact, why not write to the Bank of England and ask them for an explanation, instead of wasting my time?

"Dear Mr. King, It has come to my attention recently that the total amount of money in bank and building society deposit accounts in the UK (so-called "M4") vastly exceeds the amount of central bank-created money (so-called "M0"). A long time ago, I decided that the Bank of England was the only institution in the UK that can create money. This disparity is therefore extremely worrying to me. Please could you explain why this difference exists, without using the words 'you are wrong' in your answer. Because I don't like to be wrong. Yours etc."

actually they cant all withdraw their cash at the same time. if they do, then money must be drawn from other peoples deposits i.e a different part of the banking system. thats why there is a fractional reserve.

if you take the banking system as whole its just money moving from one part to another. someone has to save before someone else can spend.

imagine if you lend your friend £1000 they then lend that £1000 to someone else. does this mean that £2000 can be spent in the system?

no, because although your friend owes you £1000, this is just on paper, you cant spend it unless he gets it back.

Edited by mfp123
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actually they cant all withdraw their cash at the same time. if they do, then money must be drawn from other peoples deposits i.e a different part of the banking system. thats why there is a fractional reserve.

if you take the banking system as whole its just money moving from one part to another. someone has to save before someone else can spend.

imagine if you lend your friend £1000 they then lend that £1000 to someone else. does this mean that £2000 can be spent in the system?

no, because although your friend owes you £1000, this is just on paper, you cant spend it unless he gets it back.

YEAH BUT WHERE DID THE FIRST £1000 come from? It is a PROMISE from the bank to give you--- what? Gold--no, food--- no WHAT is it they are promising I wonder

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YEAH BUT WHERE DID THE FIRST £1000 come from? It is a PROMISE from the bank to give you--- what? Gold--no, food--- no WHAT is it they are promising I wonder

Nothing.

They promise nothing.

"I promise to pay the bearer on demand absolutely ****** all."

A promise is a promise is a promise is a promise. All banking is STILL fraud.

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Here we go again.

There are £1000 total credit balances in the system, that people can use to pay each other with.

There are £900 total debit balances owing to the bank.

The original £100 of high-powered central bank money still exists.

The fact that some people are overdrawn to the tune of £900 does not in any way diminish the ability of the other people who own the £1000 to make payments using those funds.

If you have some alternative explanation for the simple fact that M4 broad money in the UK economy is >30 times bigger than M0 narrow money as created by the central bank, then go ahead and enlighten us. In fact, why not write to the Bank of England and ask them for an explanation, instead of wasting my time?

"Dear Mr. King, It has come to my attention recently that the total amount of money in bank and building society deposit accounts in the UK (so-called "M4") vastly exceeds the amount of central bank-created money (so-called "M0"). A long time ago, I decided that the Bank of England was the only institution in the UK that can create money. This disparity is therefore extremely worrying to me. Please could you explain why this difference exists, without using the words 'you are wrong' in your answer. Because I don't like to be wrong. Yours etc."

I am not remotely convinced by your post. M0 represents notes and coins in circulation. Most transactions these days are done electronically. You do not buy a house with notes and coins. M4 is a much larger figure than M0 because of this and not because the high street banks have 'created' money.

I do think you should stop posting as some kind of expert. I am no expert but understand enough to see that you and one or two others are merely confusing the issue to make a point. Sorry to say it but it is frustrating when people are being misled.

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I am not remotely convinced by your post. M0 represents notes and coins in circulation. Most transactions these days are done electronically. You do not buy a house with notes and coins. M4 is a much larger figure than M0 because of this and not because the high street banks have 'created' money.

I do think you should stop posting as some kind of expert. I am no expert but understand enough to see that you and one or two others are merely confusing the issue to make a point. Sorry to say it but it is frustrating when people are being misled.

"In most monetary transactions no cash changes hands." is a rough translation of your post.

And why are the banks photons different than Joe Bloggs photons?

It wouldn't be because Joe Bloggs think that where his photons go, real cash follows, would it?

Here have some money from the bank of Injin, it's exactly, factually, 100% empirically verififable as the same as bank money -

£10,000

Have fun!

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