Should and will the Fed be abolished?

[ShackledNation]

How would that work? Banks have to hold your entire deposit in reserve? How would anyone get a loan?

Time deposits. You would have to pay to have demand deposits, but you would get interest for the time deposits. This is when you agree to give the bank ownership of your money for a certain amount of time. (This is done today as well). The banks then pay back the money with interest. Basically, you loan your money to the bank, and then the bank loans that same money out rather than printing new receipts that represent no new wealth.

Currently, the reserve requirement on time deposits is 0%. Is the problem that current reserve requirements are too high?
Not sure what your point is about "new receipts". Banks don't print FRNs, so I guess you mean account statement, which would be the case for demand or time deposits

I don't think yo understand time deposits. You cannot withdraw time deposits on demand. The entire purpose of time deposits is to loan them and then return the funds to the bank customer. Of course the reserve requirement is 0%. Time deposits are loanable funds.

Since loans from time deposits increase the money supply just like loans from demand deposits do, I'm not sure how prices will stop rising under your plan.

My god no. Time deposits do not increase the money supply at all. They can't be withdrawn on demand. If I loan money to someone, I am not increasing the money supply. A time deposit is simply a loan to the bank. The bank then loans that loan to someone else, and pays back the depositor with part of the interest.

Banks didn't lose money because they lent demand deposits, they lost money because their borrowers failed to repay them. How is that changed under your plan? You would outlaw bad loans? Besides, the bank portion of TARP was paid back in full and then some. It actually made a profit.

Do you know what a bank run is? A bank run is when all the customers try to withdraw their funds from the bank at a same time. But since demand deposits can be loaned out, they do not have the funds. This is not possible with time deposits because you cannot withdraw time deposits on demand.

Shareholders do not contribute to loanable funds when they buy stock.

You aren't thinking this through. Banks may use the funds from shareholders to make more loans. When you buy stocks from the company, the company uses the funds to try and improve the company. That is the whole point of investment. Banks can make more money by making more loans, so it makes complete sense they would loan invested money.

Every time you take out or pay back a loan, the money supply changes. Nature of the beast. Thanks for the reply.

That is not true at all unless you have a fractional reserve banking system that allows for the creation of new money. If you have an economy with $100, and $30 is put in time deposits to be loaned, you still have $100 in the economy. All of what I am saying is simply basic economics regarding banking and the two types of deposit accounts. You fail to make the distinction between the two, which obviously has led to your confusion.

 

[ShackledNation]

If the Fed is privately owned, why does the government get much much more of the Fed's earnings than the shareholders?

And why is the chairman appointed by...the government?

 

[expat_panama]

If the Federal Reserve is privately owned then I'm a penguin.

Live and learn, Kevin.

The stockholders in the 12 regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System...

That may be what you say Ed but it's not what Congress, the Fed, and the law says.

The "Federal Reserve" is was created by an act of congress, and is run by a board of governors named by the president and the meets in a government building in Washington. The board runs the Open Market Committee and is in charge of the district banks. District bank day to day ops is managed per board instructions by directors, some of those are elected by private banks and the rest are named by the governors. More here and here.

 

[Toddsterpatriot]

Currently, the reserve requirement on time deposits is 0%. Is the problem that current reserve requirements are too high?
Not sure what your point is about "new receipts". Banks don't print FRNs, so I guess you mean account statement, which would be the case for demand or time deposits

I don't think you understand time deposits. You cannot withdraw time deposits on demand. The entire purpose of time deposits is to loan them and then return the funds to the bank customer. Of course the reserve requirement is 0%. Time deposits are loanable funds.

I can currently withdraw my time deposit by forfeiting a few months interest. Demand deposits are also loanable funds, not sure what your point is here.

My god no. Time deposits do not increase the money supply at all. They can't be withdrawn on demand. If I loan money to someone, I am not increasing the money supply. A time deposit is simply a loan to the bank. The bank then loans that loan to someone else, and pays back the depositor with part of the interest.

My god yes. Time deposits do increase the money supply.

M2 Money Stock (M2) - FRED - St. Louis Fed

The above link clearly shows small time deposits (less than $100,000) are part of M2.

Do you know what a bank run is? A bank run is when all the customers try to withdraw their funds from the bank at a same time. But since demand deposits can be loaned out, they do not have the funds. This is not possible with time deposits because you cannot withdraw time deposits on demand.

I do know what a bank run is. What happens when your "time deposit only" bank takes in $1,000,000 in time deposits, makes $1,000,000 in loans and only gets repaid $500,000? You have 0% in reserves and all your depositors want their money today, because the CDs matured? Is a run now possible?

Every time you take out or pay back a loan, the money supply changes. Nature of the beast. Thanks for the reply.

That is not true at all unless you have a fractional reserve banking system that allows for the creation of new money. If you have an economy with $100, and $30 is put in time deposits to be loaned, you still have $100 in the economy. All of what I am saying is simply basic economics regarding banking and the two types of deposit accounts. You fail to make the distinction between the two, which obviously has led to your confusion.

You are mistaken. If the $30 is loaned, the money supply is now $130.

 

[Kevin_Kennedy]

WEll its a drop dead cinche that a privately owned bank is NOT going to make policies that are in the BEST interests of the nation, isn't it?

Now I DO think that national BANK oversight that does SOME of the things that the FED does is necessary in a modern capitalistic system.

But that national banking oversight ought to be done by PUBLIC officials, and ALWAYS with the motivation to serve the best interests of the United States of America and her PEOPLE.

If the Federal Reserve is privately owned then I'm a penguin.

Live and learn, Kevin.

The stockholders in the 12 regional Federal Reserve Banks are the privately owned banks that fall under the Federal Reserve System. These include all national banks (chartered by the federal government) and those state-chartered banks that wish to join and meet certain requirements. About 38 percent of the nation’s more than 8,000 banks are members of the system, and thus own the Fed banks.

The concept of "ownership" needs some explaining here, however. The member banks must by law invest 3 percent of their capital as stock in the Reserve Banks, and they cannot sell or trade their stock or even use that stock as collateral to borrow money. They do receive dividends of 6 percent per year from the Reserve Banks and get to elect each Reserve Bank’s board of directors.

The Fed is a mixture of private and government ownership. How many privately owned institutions have their chairmen appointed by the President of the U.S., for example?

 

[expat_panama]

...unless you have a fractional reserve banking system that allows for the creation of new money. If you have an economy with $100, and $30 is put in time deposits to be loaned, you still have $100 in the economy...

Money is created by people with or without banks and is created by banks whenever they can pay interest on deposits.

Economies don't have money, people do. In an economy where people's holdings total $100, some guy who just bought a cow for $10 is going to swap a dollar's worth of milk to a neighbor for an 'pay on demand note' for a dollar's worth of piglet fresh out of sow that very morning. That IOU can be used to buy a dozen eggs from a different neighbor (easier to walk over to the neighbor with the note than the piglet). People's holdings are now $101.

The only way banks can pay interest on time or any other kind of deposits, is by loaning money while holding borrowers collateral which is used to guarantee that deposits will be available for withdrawal as promised. The deposits are money brought in by depositors, and loan is new money created by the bank. The money supply grew; before it had been just the depositors money, and now it's the money depositors have in the bank plus the money loaned out.

 

[ShackledNation]

Currently, the reserve requirement on time deposits is 0%. Is the problem that current reserve requirements are too high?
Not sure what your point is about "new receipts". Banks don't print FRNs, so I guess you mean account statement, which would be the case for demand or time deposits

I don't think you understand time deposits. You cannot withdraw time deposits on demand. The entire purpose of time deposits is to loan them and then return the funds to the bank customer. Of course the reserve requirement is 0%. Time deposits are loanable funds.

I can currently withdraw my time deposit by forfeiting a few months interest. Demand deposits are also loanable funds, not sure what your point is here.

I know what you are talking about there, but usually the withdrawal has to be scheduled well in advance. And you are forfeiting interest remember, so you are losing money. That is the agreement with the bank, but that is not always the case. Many plans do not have the option you are talking about. My point is that without fractional reserve banking demand deposits cannot not be loaned. Demand deposits will not make up loanable funds.

My god yes. Time deposits do increase the money supply.
The above link clearly shows small time deposits (less than $100,000) are part of M2.

Your data show time deposits are part of the money supply. It does not show that putting money in time deposits creates new money. When you put money into a time deposit, all you are doing is transfering the money from somewhere else. You aren't creating anything. That is like saying if you have 1 cracker and you give that 1 cracker to a friend, you all of a sudden have 2 crackers. Transfer is not creation!

I do know what a bank run is. What happens when your "time deposit only" bank takes in $1,000,000 in time deposits, makes $1,000,000 in loans and only gets repaid $500,000? You have 0% in reserves and all your depositors want their money today, because the CDs matured? Is a run now possible?

If a bank does that poorly, it will go out of business. That is the natural free market check on bad loans. But making a bad loan is not a bank run. With time deposits, a run cannot happen because all of the banks funds will not be withdrawable on demand at the same time. If bad loans were made, to stay solvent banks would have to pay people with other time deposit loans that have a later maturity date or with their own profits. Of course bank failure is still possible, but you are conflating bank failure with a run on the bank. Runs refer to demand deposits. Because demand deposits are not loaned out, they will always be in the bank. If 100% of bank customers withdrew their funds from demand deposits today, only 10% of those customers would get their money. If the same thing happened without fractional reserve banking, all the money would be there and all customers would have their funds.

That is not true at all unless you have a fractional reserve banking system that allows for the creation of new money. If you have an economy with $100, and $30 is put in time deposits to be loaned, you still have $100 in the economy. All of what I am saying is simply basic economics regarding banking and the two types of deposit accounts. You fail to make the distinction between the two, which obviously has led to your confusion.

You are mistaken. If the $30 is loaned, the money supply is now $130.

That is not true at all. If I have $100, and loan you $100, there is not $200 in the economy because i no longer have $100 dollars. You are grossly confusing what it means to transfer money and what it means to create money. If I buy something at the store for $10, I am not creating $10 of money. The same is true if I loan $10.

Explain to me how money is created through loans without the existence of fractional reserve banking.

 

[ShackledNation]

...unless you have a fractional reserve banking system that allows for the creation of new money. If you have an economy with $100, and $30 is put in time deposits to be loaned, you still have $100 in the economy...

Money is created by people with or without banks and is created by banks whenever they can pay interest on deposits.

No it is not.

Economies don't have money, people do. In an economy where people's holdings total $100, some guy who just bought a cow for $10 is going to swap a dollar's worth of milk to a neighbor for an 'pay on demand note' for a dollar's worth of piglet fresh out of sow that very morning. That IOU can be used to buy a dozen eggs from a different neighbor (easier to walk over to the neighbor with the note than the piglet). People's holdings are now $101.

How are the holdings now $101? When he pays the interest, he does not create money. He is deducting money from his savings. Interest does not equal the creation of new money.

The only way banks can pay interest on time or any other kind of deposits, is by loaning money while holding borrowers collateral which is used to guarantee that deposits will be available for withdrawal as promised. The deposits are money brought in by depositors, and loan is new money created by the bank. The money supply grew; before it had been just the depositors money, and now it's the money depositors have in the bank plus the money loaned out.

You seem to be describing fractional reserve banking, but to be honest your description makes little sense. Here is what happens when a simple non-fractional reserve banking loan is made.

Depositor puts $100 in time deposit account. Depositor no longer can use that money. Bank loans out that $100 dollars and charges 10% interest. The debtor invests the money and starts a company. He pays back the loan with interest, meaning he pays back $110. By this time, the time deposit has matured. The bank returns the $100 to the depositor, and also gives half the interest to its depositor, so the bank would have made $5 in profit. The depositor would have $105 instead of $100. Between the depositor and the bank, there is an additional $10 that neither had before. Did the money supply increase?

You would probably say yes, because the bank has more money as does the depositor. But the answer is no. Because that extra $10 did not come out of thin air. It came from the debtor. The debtor did not counterfeit his interest payment. He had to pay interest out of his savings. Say he used the money to start a business. His repayment of the loan + interest would come from his new profits. Nothing was created, only transferred.

Bank profit increased. Depositor profit increased. Debtor profit/savings financed those increases. It is a common fallacy to mistake interest payments with the creation of money. The creation of money occurs when banks create more receipts to money than depositors have in the bank on the ledger sheet. Instead of loaning out the deposits, the banks just create more money and loan that out. That is not possible unless fractional reserve banking exists, and any act of creating new receipts in such a way would be illegal.

 

[expat_panama]

...unless you have a fractional reserve banking system that allows for the creation of new money. If you have an economy with $100, and $30 is put in time deposits to be loaned, you still have $100 in the economy...

Money is created by people with or without banks... ... some guy who just bought a cow for $10 is going to swap a dollar's worth of milk to a neighbor for an 'pay on demand note' for a dollar's worth of piglet fresh out of sow that very morning. That IOU can be used to buy a dozen eggs from a different neighbor (easier to walk over to the neighbor with the note than the piglet). People's holdings are now $101.

How are the holdings now $101? When he pays the interest, he does not create money. He is deducting money from his savings...

That's an excellent question because it cuts to the core of the discussion.

Money is three things, it's a unit of account (how much is it worth? let's say three bucks) it's a medium of exchange (I can pay with cash, a check or plastic), or as a store of value (and you can take that to the bank). The instant my stinky pig farmer neighbor wrote me the "dollar's worth of piglet pay on demand" note, he created money in all three senses.

The problem here may be the confusion over the difference between wealth and money. The money was the note, but the wealth was created by the sow in the form of a piglet. Banks create money for loans but they don't create the wealth which is the collateral that backs the money's value.

 

[ShackledNation]

Money is three things, it's a unit of account (how much is it worth? let's say three bucks) it's a medium of exchange (I can pay with cash, a check or plastic), or as a store of value (and you can take that to the bank). The instant my stinky pig farmer neighbor wrote me the "dollar's worth of piglet pay on demand" note, he created money in all three senses.

I don't understand your example. Is that $1 supposed to be a loan? Also, it seems like in your economy a dollar is backed by pigs, but our economy has a dollar backed by nothing. If the economy is backed by piglet pay, piglet pay is the actual money. The paper receipts are used as representations of that money. If the dollar is backed by gold, gold is the real currency. Gold is the unit of account, the medium of exchange, and the store of value. The paper money backed by gold simply represent receipts to gold. The paper is only used because it is easier to carry around paper and use electronic money than to lug around gold bars. You are correct that the paper receipts are not wealth, but they are not the true money either. Gold is the true money with a fixed gold standard. Also keep in mind that the gold is not exactly wealth. It has many uses (luxury, electronics) that make it more valuable, but you can't eat it, clothe yourself with it, etc. Consumers would use gold not as wealth but as a medium of exchange for what they actually can use. They would use it as a unit of account and a store of value. Whatever piglet pay is would be the currency of your scenario. Fractional reserve banking is when you print more receipts to currency than exist. It is when you have 10 ounces of gold but 20 dollars. Lending that is not fractional reserve lending would have 10 ounces of gold and 10 dollars (assuming 1 dollar is a receipt for 1 ounce of gold). Banks could not loan out more than 10 dollars worth of receipts. If they do, they are practicing fractional reserve banking. I am talking about the system where such banking is illegal.

The problem here may be the confusion over the difference between wealth and money. The money was the note, but the wealth was created by the sow in the form of a piglet. Banks create money for loans but they don't create the wealth which is the collateral that backs the money's value.

I know exactly what you are saying, but that is not my confusion at all. You have it half right. You have paper receipts, you have currency, and you have wealth. You are 100% right that money is not wealth. But when you are talking about a currency backed by something (the piglet) the actual currency is the piglet, or gold. Gold is used as a medium of exchange, but rather than use gold directly you can use paper receipts to gold. Wealth is everything that gold can be exchanged for, and what is considered to be wealth is subjective and changes based on circumstance. For example, if you are dying of thirst in a desert and all you have is gold, the gold will be worthless because you only used it for a medium of exchange.
Under a gold standard, gold is used as currency, and banks issue paper money receipts to that currency. Fractional reserve banking is when banks create more receipts to currency than exists, creating the illusion that there is more currency in the banks than there is (and because currency is exchanged for wealth, it creates the illusion more wealth exists). Under the system I am talking about, you could never legally have more receipts to gold than gold existed. The money supply would be fixed. Funds for loans would always be tied to actual savings of currency.

Under a fiat system, the explanation is not quite the same. The currency becomes the receipt, thus the currency is backed by nothing. A fiat is an "arbitrary order or decree." Defining the currency as the receipt never would occur in a true free market monetary system.

It is easier to realize this if you look at the history of money and banking. At first, people bartered. Then people began to use a common commodity to barter with (beads, gold, shells, etc.). This common commodity became the money or currency. Gold arose as the commodity currency of choice in much of the world. Rather than look for somebody who had what you wanted to buy and also wanted the commodity you produced yourself, you could always guarantee that you would have something everyone would accept as payment (gold).

Then banking came along, in which people stored their gold currency in banks rather than carry it with them. Banks would give receipts to the gold currency. However, banks realized that if they created more receipts than gold currency existed, they could profit so long as people did not rush to cash in their receipts at the same time. And you get the problem and fraud of fractional reserve banking where you have multiple receipts claiming title to the same currency. These banks would ultimately fail if there was a run, and they risked losing all their real holdings of currency. To solve this problem, governments decreed that the currency would be the receipts and confiscated the gold. A central bank would function to control the money supply, so if there ever was a run the banks could go to the central bank for more receipts to nothing. People would always get their money, but because it was not fixed to an actual commodity currency, the value of the receipts would continually fall over time as the supply of money increased.

This is inherently fraudulent. The problem is not that I am conflating wealth and currency, the problem is you are conflating currency and paper receipts. Given our current system of fit money, paper receipts are currency, so you would be correct, and the piglet example would not matter. But with a currency backed in a commodity, paper receipts would be just that--receipts--functioning as the currency but not the actual currency themselves.

 

[Toddsterpatriot]

Your data show time deposits are part of the money supply. It does not show that putting money in time deposits creates new money. When you put money into a time deposit, all you are doing is transfering the money from somewhere else. You aren't creating anything. That is like saying if you have 1 cracker and you give that 1 cracker to a friend, you all of a sudden have 2 crackers. Transfer is not creation!

You give the bank 50 $20 bills for a one year CD. Your time deposit is part of M2. I come to the bank for a loan and they give me 50 $20 bills with a term of one year and an interest rate of 6%. Now the money supply includes currency in my hand ($1000) part of
M1 (and part of M2, of course)and your time deposit of $1000 (part of M2 but not part of M1)
The money supply grew by $1000 with my loan, not with your deposit.

If a bank does that poorly, it will go out of business. That is the natural free market check on bad loans. But making a bad loan is not a bank run. With time deposits, a run cannot happen because all of the banks funds will not be withdrawable on demand at the same time. If bad loans were made, to stay solvent banks would have to pay people with other time deposit loans that have a later maturity date or with their own profits. Of course bank failure is still possible, but you are conflating bank failure with a run on the bank. Runs refer to demand deposits. Because demand deposits are not loaned out, they will always be in the bank. If 100% of bank customers withdrew their funds from demand deposits today, only 10% of those customers would get their money. If the same thing happened without fractional reserve banking, all the money would be there and all customers would have their funds.

I though a bank run occurred when a bank didn't have enough funds to cover withdrawals. That wasn't the case in my example?

That is not true at all unless you have a fractional reserve banking system that allows for the creation of new money. If you have an economy with $100, and $30 is put in time deposits to be loaned, you still have $100 in the economy. All of what I am saying is simply basic economics regarding banking and the two types of deposit accounts. You fail to make the distinction between the two, which obviously has led to your confusion.

You are mistaken. If the $30 is loaned, the money supply is now $130.

That is not true at all. If I have $100, and loan you $100, there is not $200 in the economy because i no longer have $100 dollars. You are grossly confusing what it means to transfer money and what it means to create money. If I buy something at the store for $10, I am not creating $10 of money. The same is true if I loan $10.

Explain to me how money is created through loans without the existence of fractional reserve banking.

If my IOU is considered part of money supply, the money supply has increased. Bank IOUs are part of the money supply, so when they take your deposit and loan it out, the money supply increased.

 

[Toddsterpatriot]

It is a common fallacy to mistake interest payments with the creation of money. The creation of money occurs when banks create more receipts to money than depositors have in the bank on the ledger sheet. Instead of loaning out the deposits, the banks just create more money and loan that out. That is not possible unless fractional reserve banking exists, and any act of creating new receipts in such a way would be illegal.

I've never mistaken an interest payment for the creation of money. And if you think a bank can loan out more than their total deposits by just "creating money", you're wrong about that as well.

 

[ShackledNation]

Your data show time deposits are part of the money supply. It does not show that putting money in time deposits creates new money. When you put money into a time deposit, all you are doing is transfering the money from somewhere else. You aren't creating anything. That is like saying if you have 1 cracker and you give that 1 cracker to a friend, you all of a sudden have 2 crackers. Transfer is not creation!

You give the bank 50 $20 bills for a one year CD. Your time deposit is part of M2. I come to the bank for a loan and they give me 50 $20 bills with a term of one year and an interest rate of 6%. Now the money supply includes currency in my hand ($1000) part of
M1 (and part of M2, of course)and your time deposit of $1000 (part of M2 but not part of M1)
The money supply grew by $1000 with my loan, not with your deposit.

Ah...I see what is going on now. The loan does not grow the money supply. The currency in your hand you got from the loan is a liability. It is debt, not money. You don't really have $1000, you owe the bank $1,000. Money has not been created. The time deposit is a liability of the bank owed to the depositor. The loan is a liability of the debtor to the bank. Indirectly, the depositor is loaning money to the debtor. The bank functions as a middle man.

No money is created. Your logic is good, but the premise around which that logic is based is incorrect. Loans are liabilities, not assets, and thus new loans do not function as new money (unless you have fractional reserve banking, where the value of money loaned out is greater than the value of money deposited).

I though a bank run occurred when a bank didn't have enough funds to cover withdrawals. That wasn't the case in my example?

Not quite. What you describe is a regular bank failure. A bank run is a bank failure caused by a large group of depositors all withdrawing funds at the same time and refers to demand deposits. Under a full-reserve system, if every single depositor tried to withdraw funds from their demand accounts, the money would always be there so there would be no failure. Because time deposits cannot be withdrawn on demand by everyone at the same time, a bank run is not really possible. Also keep in mind a bank run can occur even if every single loan made is a good loan and the bank is profitable.

If my IOU is considered part of money supply, the money supply has increased. Bank IOUs are part of the money supply, so when they take your deposit and loan it out, the money supply increased.

Unless you have fractional reserve banking, the IOUs will always equal deposits. Money is created when you create more IOUs than exist in deposits, but that is fractional reserve banking. Don't forget that when a bank loans money, the debtor owes the bank. The bank does not owe the debtor. When the bank loans out money, it is not loaning out IOUs, but U-O-Mes. When talking about time deposits, the depositor does not have access to the deposited money, the bank does. A time deposit is essentially a loan made to a bank, and then the bank loans that money out again.

Here is another scenario for the purpose of explanation. In this scenario, the currency is gold (for simplicity). Bob is a depositor, and has 100 ounces of gold in a time deposit. He cannot access that money until 10 years is up. When putting the gold in the time deposit account, no new gold was created. It was only transferred to the account. The time deposit pays 5% interest total after 10 years. The bank loans out the 100 ounces of gold to a debtor and charges 10% interest. Again, no gold has been created. Under your logic, there would be 200 ounces of gold in the economy because loans + deposits = money supply. That is not how it works, and it is clear to see when you are looking at using only gold. Under this type of system, fractional reserve banking is literally impossible because there are no receipts. You cannot create gold out of thin air. (I do not advocate this pure commodity standard due to the impossibility of credit cards, and the difficulty of carrying gold around all the time).

Say the bank issues paper receipts to that gold rather than the gold itself, and those receipts circulate as currency and are called dollars. 1 dollar=1 ounce of gold. The situation is more complex, but has the same results. Bob deposits 100 ounces of gold in a time deposit. He does not get any receipts. His gold is temporarily loaned to the bank. If he had put the money in a demand deposit, then he would get receipts. The bank then issues out 100 paper dollars in the form of a loan to someone else. The money supply is not 100 ounces of gold + 100 paper receipts to gold. The money supply is 100 ounces of gold. The receipts are just that...receipts. You could say the money supply is 100 ounces of gold or 100 receipts. If you have 100 ounces of gold but then 200 receipts, you have fractional reserve banking. Receipts exceed currency deposits.

A fiat system makes it even harder to see the basic economics behind banking, which is just what the government wants. The receipts become the money. A depositor no longer deposits gold, but receipts. Say you have $100 dollars in a time deposit. The bank would then loan out that same $100 to a debtor. Again, no money is created. But because receipts and currency have become one and the same, it is harder to explain fractional reserve banking. You can't say receipts exceed deposits because they are one and the same. Here, all we can say is that fractional reserve banking would be occurring if bank loans exceed deposits (bank profits used to loan would also be included, but that is even more complicated). This bizarre system is our current one. Banks are giving us receipts...to our deposited currency, which is...receipts.

 

[Toddsterpatriot]

Your data show time deposits are part of the money supply. It does not show that putting money in time deposits creates new money. When you put money into a time deposit, all you are doing is transfering the money from somewhere else. You aren't creating anything. That is like saying if you have 1 cracker and you give that 1 cracker to a friend, you all of a sudden have 2 crackers. Transfer is not creation!

You give the bank 50 $20 bills for a one year CD. Your time deposit is part of M2. I come to the bank for a loan and they give me 50 $20 bills with a term of one year and an interest rate of 6%. Now the money supply includes currency in my hand ($1000) part of
M1 (and part of M2, of course)and your time deposit of $1000 (part of M2 but not part of M1)
The money supply grew by $1000 with my loan, not with your deposit.

Ah...I see what is going on now. The loan does not grow the money supply. The currency in your hand you got from the loan is a liability. It is debt, not money. You don't really have $1000, you owe the bank $1,000. Money has not been created. The time deposit is a liability of the bank owed to the depositor. The loan is a liability of the debtor to the bank. Indirectly, the depositor is loaning money to the debtor. The bank functions as a middle man.

You are mistaken. the $20s in my hand are an asset, not a liability and not a debt. Money has been created because the $20s you held only added $1000 to M2 money supply but after your deposit and my loan, those $20s and your time deposit total $2000. $2000 is larger than $1000 so the money supply has increased. If I pay back $20, the money supply is now $1980. The $1000 in your time deposit account plus the $980 in my hand. Cash held by the bank does not count in money supply calculations.

No money is created. Your logic is good, but the premise around which that logic is based is incorrect. Loans are liabilities, not assets, and thus new loans do not function as new money (unless you have fractional reserve banking, where the value of money loaned out is greater than the value of money deposited).

My loan is a liability to me and an asset to the bank. The loan does not function as new money, the $20s they gave me do.

Not quite. What you describe is a regular bank failure. A bank run is a bank failure caused by a large group of depositors all withdrawing funds at the same time and refers to demand deposits. Under a full-reserve system, if every single depositor tried to withdraw funds from their demand accounts, the money would always be there so there would be no failure. Because time deposits cannot be withdrawn on demand by everyone at the same time, a bank run is not really possible. Also keep in mind a bank run can occur even if every single loan made is a good loan and the bank is profitable.

As I have shown, a bank run can also occur with time deposits, whether thru early withdrawals or loan default.

 

[ShackledNation]

It is a common fallacy to mistake interest payments with the creation of money. The creation of money occurs when banks create more receipts to money than depositors have in the bank on the ledger sheet. Instead of loaning out the deposits, the banks just create more money and loan that out. That is not possible unless fractional reserve banking exists, and any act of creating new receipts in such a way would be illegal.

I've never mistaken an interest payment for the creation of money. And if you think a bank can loan out more than their total deposits by just "creating money", you're wrong about that as well.

You do realize that currently banks loan out more money that exist in deposits, don't you? The money creation is simply done electronically. That is the definition of fractional reserve banking and what is happening...this isn't some conspiracy theory. Nowadays banks all use the same receipt, dollars, so they can't create the physical currency. That is why they go to Federal Reserve banks, which can get physical money printed from the US treasury.

 

[westwall]

It should be but it won't. The government has more control over the economy with the Fed and they don't want to relinquish that control. The problem is eventually (not that to far in the future thanks to Obama) the debt will become too great and the whole house of cards will collapse.

Then it is going to be an interesting ride. I suggest lots and lots of ammo.

 

[ShackledNation]

You give the bank 50 $20 bills for a one year CD. Your time deposit is part of M2. I come to the bank for a loan and they give me 50 $20 bills with a term of one year and an interest rate of 6%. Now the money supply includes currency in my hand ($1000) part of
M1 (and part of M2, of course)and your time deposit of $1000 (part of M2 but not part of M1)
The money supply grew by $1000 with my loan, not with your deposit.

Ah...I see what is going on now. The loan does not grow the money supply. The currency in your hand you got from the loan is a liability. It is debt, not money. You don't really have $1000, you owe the bank $1,000. Money has not been created. The time deposit is a liability of the bank owed to the depositor. The loan is a liability of the debtor to the bank. Indirectly, the depositor is loaning money to the debtor. The bank functions as a middle man.

You are mistaken. the $20s in my hand are an asset, not a liability and not a debt. Money has been created because the $20s you held only added $1000 to M2 money supply but after your deposit and my loan, those $20s and your time deposit total $2000. $2000 is larger than $1000 so the money supply has increased. If I pay back $20, the money supply is now $1980. The $1000 in your time deposit account plus the $980 in my hand. Cash held by the bank does not count in money supply calculations.

Here is your scenario. You deposit $1000 in a bank in the form of a time deposit. Without fractional reserve banking, the bank would loan out that same $1000. You are incorrect that the loaned money is counted as currency in your hand. To YOU, that $1000 is not an asset, it is a liability. You owe the bank money. It is not new money, it is the depositor's money. If you read my example with a commodity currency (gold), this would be much more apparent. Again, you are assuming fractional reserve banking is occuring. Everything you say is true of a fractional reserve banking system because the deposits can be used both by the depositor and the debtor at the same time. With true time deposits and no fractional reserve banking, the depositor can never use his time deposit money if it is being loaned out. That is what you are not understanding.

As I have shown, a bank run can also occur with time deposits, whether thru early withdrawals or loan default.

In order for there to be a run, you have to have a large number of depositors withdrawing at the same time. Unless every single depositor has time deposits that mature at the exact same time, this won't happen. Keep in mind a bank can fail without a bank run. That is what you are describing, but it is not a bank run. I never said banks could not fail.

 

[expat_panama]

...The instant my stinky pig farmer neighbor wrote me the "dollar's worth of piglet pay on demand" note, he created money...

I don't understand your example. Is that $1 supposed to be a loan?

It was a note promising payment to the bearer the value of a dollar's worth of piglet, satisfaction guaranteed to the bearer by the writer of the note. Same as 'bearer bonds' used today.

...Also, it seems like in your economy a dollar is backed by pigs...

Hey, you can't pawn this goofy idea of yours as somehow my economy when you were the one who dreamed up this $100 economy in the first place. All I'm doing is telling you what people do with money. Gold can be money, pigs can be money, one time I was in a grocery store and a girl walked in and paid for a can of beans with two coconuts (on an island off the coast of Panama).

...but our economy has a dollar backed by nothing... ...Gold is the true money...

You're absolutely right, and I feel so sorry for you having all those worthless dollars I'll be perfectly happy to give you real gold that's valuable for all those worthless dollars of yours. I'll take all the dollars you got, even if you got stuck with 50 grand I'll come right over and give you a tenth of an ounce of gold for all 50,000 of them because that's just the kind of guy I am.

[NOTICE TO OTHER PEOPLE ON THIS THREAD, I FOUND HIM FIRST SO GO FIND YOUR OWN PATSY]

 

[Wiseacre]

I'm sure I'm just roiling the water here, and probably wrong to boot. But here goes:

Say I put in 100 bucks into the bank at 5% interest (yr). The bank loans out 100 bucks to somebody at 10% interest (yr) to go into business. Evidently a small one. (Assume the bank has reserves so it can pay me if I want my money.)

Now it's one year later, and the appropriate payments have been made. I now have 105 bucks in the bank, which is both money and wealth. The bank made a $5 net profit (also money) on the two deals, and the guy who took out the loan made however much profit in his enterprise after he pays off the interest to the bank. If his ROI is 20% then he made 20 bucks minus 10 to the bank, so he's now got $10 money and wealth that he did not have before.

So - that 100 bucks is now grown to 120 bucks, in one year. Is the money supply still 100 or 120? Dunno, but the total wealth is now 120 bucks. Of course this is before taxes, no doubt those effers will wipe us all out.

 

[ShackledNation]

...The instant my stinky pig farmer neighbor wrote me the "dollar's worth of piglet pay on demand" note, he created money...

I don't understand your example. Is that $1 supposed to be a loan?

It was a note promising payment to the bearer the value of a dollar's worth of piglet, satisfaction guaranteed to the bearer by the writer of the note. Same as 'bearer bonds' used today.

Ok, so dollars in your scenario are backed by the commodity pig. That is what I assumed in my explanation. Care to reply to the actual argument I made?

Hey, you can't pawn this goofy idea of yours as somehow my economy when you were the one who dreamed up this $100 economy in the first place. All I'm doing is telling you what people do with money. Gold can be money, pigs can be money, one time I was in a grocery store and a girl walked in and paid for a can of beans with two coconuts (on an island off the coast of Panama).

What are you talking about? I am referring to your pig example, and saying how our current economy does not function that way. Our current dollar is not backed by any commodity. I am not pawning any ideas on anyone, I was comparing our current economy with the type of economy your example contained (commodity backed, the fact it was piglets was never relevant). Let me requote myself.

Also, it seems like in your economy a dollar is backed by pigs, but our economy has a dollar backed by nothing. If the economy is backed by piglet pay, piglet pay is the actual money. The paper receipts are used as representations of that money.

That was the point I was trying to make. I never once was insinuating anything about pawning off some economy on you. Do you care to reply to everything else I said?

...but our economy has a dollar backed by nothing... ...Gold is the true money...

You're absolutely right, and I feel so sorry for you having all those worthless dollars I'll be perfectly happy to give you real gold that's valuable for all those worthless dollars of yours. I'll take all the dollars you got, even if you got stuck with 50 grand I'll come right over and give you a tenth of an ounce of gold for all 50,000 of them because that's just the kind of guy I am.

Wow. Talk about taking an entire reply out of context and then following up with ad hominem. Here is the entire statement you misquoted:

Gold is the true money with a fixed gold standard.

Obviously we do not have a fixed gold standard, so gold is not our current money. You have literally not even responded to what I said, you created a strawman and attacked that. Let me remind you of your original claim:

Money is created by people with or without banks and is created by banks whenever they can pay interest on deposits.

That is what you are defending. I offered numerous examples why that is not true unless you have fractional reserve banking. Judging by the shortening length of your replies, and your strawman arguments, my guess is you don't know how to defend that position. I ask you to remain mature and debate like a civil human being, refrain from ad hominem, and quote what I actually said. There are plenty of other people who I can have this conversation with that can do that if you cannot.