Should and will the Fed be abolished?

[Triton]

End the Fed and revoke the 16th amendment.

Get rid of corporations as legal persons

 

[expat_panama]

...You do realize that currently banks loan out more money that exist in deposits, don't you?...

Here's the website that spells out the federal reserve requirements and it has links to publications that get into more detail. The bottom line is that there is a maximum portion of the bank deposits that banks are allowed to loan out and private banks are required by the Fed to hold the remainder (eg. $31B in 1989) in vaults as cash or as deposits with the district banks.

 

[ShackledNation]

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.

Excellent question, wiseacre. This lies at the heart of the discussion. Let us assume there is no fractional reserve banking, (meaning 100% reserves so demand deposits like checking accounts cannot be loaned) and the banking loans are thus from standard time deposits.

At the end of the process, you have $105 in your time deposit account, which you can now withdraw funds from. You now have $5 more dollars than before. The bank loses no longer can use that $105, but it too has $5 more than before the deposit because of interest. The guy who got the loan has $10 more due to his new profitable business (albeit a tiny one).

The depositor is richer, the bank (creditor) is richer, and the debtor is richer with a total of $20. They all have more money. But did the money supply increase? No. And the reason is quite simple. Where did the debtor get that $20 from that he used to pay the interest and keep as profit? Likely, he got that money from people purchasing his product or using his services. But to do that, those same people had to remove money from their own checking accounts.

You see, in this example, the total money supply of the economy was never $100. $100 was just the amount deposited. The total money supply was $120. The consumer started with $20. The debtor started with nothing. The bank started with nothing. And the depositor started with $100. In the end, the consumer has the product he needs (but no money), the debtor has $10, the bank has $5, and the depositor has $105. And there you have the engine of economic growth. The purpose of this entire process was ultimately to give the consumer something to buy. The purpose of all production is ultimately consumption. The reason the depositor gets money is because he sacrificed his current consumption (you cannot spend money in a time deposit) in order to get an additional $5 of consumption in the future. Really, the depositor is indirectly loaning money to the debtor that takes the loan from the bank. The bank is the middle man to go to. Banking is to individual loans and money is to bartering. It allows for a better economy, but only if banks are restricted to loaning out real savings. Otherwise, you are attempting to create something out of nothing.

Does that all make sense? Fractional reserve banking is when the depositor and the debtor both hold claims to the same money in the bank. That is when money is created. And that is the system the Federal Reserve helps to sustain, while creating even more money in the process.

 

[ShackledNation]

...You do realize that currently banks loan out more money that exist in deposits, don't you?...

Here's the website that spells out the federal reserve requirements and it has links to publications that get into more detail. The bottom line is that there is a maximum portion of the bank deposits that banks are allowed to loan out and private banks are required by the Fed to hold the remainder (eg. $31B in 1989) in vaults as cash or as deposits with the district banks.

Yes, so banks will always have to be able to meet 10% of the demand deposits. But they are still loaning out money to debtors while still claiming that the money of all depositors is there. Your bank account will say you have $1000 even if your $1000 was loaned out, and you will still have access to it. Both the depositor and the creditor under the current system have claims to the same money.

When a bank gets a deposit of $100, assuming a reserve requirement of 10 percent, the bank can then lend out $90.
So it looks like this:
reserves: $10 loans: $90 money owed to depositors: $90
That $90 goes back into the economy, purchasing goods or services, and usually ends up deposited in another bank. That bank can then lend out $81 of that $90 deposit, and that $81 goes into the economy to purchase goods or services and ultimately is deposited into another bank that proceeds to lend out a percentage of it.
That is how money is created by banks. The reserve requirement serves to limit how much money can be created. The lower the requirement, the greater the degree of fractional reserve banking. I argue completely banning fractional reserve banking, meaning reserves on the demand side would have to always be 100%. Time deposits are a different type of banking because they are not demand accounts.

I think we had ourselves confused because you were talking about fractional reserve banking, and I was talking about full reserve banking, and it must not have been clear when we were talking about what. With full reserve banking, because the debtor and depositor do not have access to the same funds at the same time, money cannot be created.

 

[Polk]

Is this the point at which I note money is an illusion anyway? I guess it is...

 

[expat_panama]

...Wow. Talk about taking an entire reply out of context and then following up with ad hominem...

Hey that's neat, and I did all that while doing a level 4 mission for EveOnline too! OK, you're giving me credit for mental abilities far beyond my meager resources here, I was just getting us to agree that regardless of what "dollar backed by nothing" means you and I both know dollars are good money and the mere thought of someone helping themselves to our own private dollars can make us mad.

 

[ShackledNation]

...Wow. Talk about taking an entire reply out of context and then following up with ad hominem...

Hey that's neat, and I did all that while doing a level 4 mission for EveOnline too! OK, you're giving me credit for mental abilities far beyond my meager resources here, I was just getting us to agree that regardless of what "dollar backed by nothing" means you and I both know dollars are good money and the mere thought of someone helping themselves to our own private dollars can make us mad.

Ok, that is fine then lol. I don't want anyone to touch my private dollars. Although...their value is constantly decreasing.

 

[ShackledNation]

Is this the point at which I note money is an illusion anyway? I guess it is...

Fiat money, at least.

 

[Polk]

Is this the point at which I note money is an illusion anyway? I guess it is...

Fiat money, at least.

Commodity and representative money are too.

 

[expat_panama]

...banks will always have to be able to meet 10% of the demand deposits. But they are still loaning out money to debtors while still claiming that the money of all depositors is there. Your bank account will say you have $1000 even if your $1000 was loaned out, and you will still have access to it. Both the depositor and the creditor under the current system have claims to the same money...

True, and the reason it's worked so well for half a millennium is the fact that since the early 1600's, both the depositor and creditor have had claims on collateral too. Given how banks habitually make loans for a fraction of the property being mortgaged, we end up with recourse way over face value of deposits.

 

[ShackledNation]

...banks will always have to be able to meet 10% of the demand deposits. But they are still loaning out money to debtors while still claiming that the money of all depositors is there. Your bank account will say you have $1000 even if your $1000 was loaned out, and you will still have access to it. Both the depositor and the creditor under the current system have claims to the same money...

True, and the reason it's worked so well for half a millennium is the fact that since the early 1600's, both the depositor and creditor have had claims on collateral too. Given how banks habitually make loans for a fraction of the property being mortgaged, we end up with recourse way over face value of deposits.

Yes, but money is still created under fractional reserve banking. Also, bank runs have shown how the system is inherently unstable. Some economist even like the idea that money is created, saying it is necessary. My view is that when money is created, it is not good.

 

[ShackledNation]

Is this the point at which I note money is an illusion anyway? I guess it is...

Fiat money, at least.

Commodity and representative money are too.

You will have to explain that a little more, at least what you mean by illusion. Because if you use gold (not paper receipts to gold) as money, the gold is not an illusion. Are you saying money is not synonymous to wealth? Because I agree with that. You can't eat gold anymore than you can eat paper.

 

[Polk]

Fiat money, at least.

Commodity and representative money are too.

You will have to explain that a little more, at least what you mean by illusion. Because if you use gold (not paper receipts to gold) as money, the gold is not an illusion. Are you saying money is not synonymous to wealth? Because I agree with that. You can't eat gold anymore than you can eat paper.

Exactly. Any form of money is worth what people will give you in exchange for it.

 

[Toddsterpatriot]

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.

Your claim is incorrect. Go back to my example. You deposit 50 $20s in the bank. The only deposit the bank has received. I claim they can loan less than $1000 because they hold 10% in reserve as vault cash.
Please run thru the scenario which allows them to loan out more than that deposit amount of $1000. Please show all your steps. Thanks.

 

[Toddsterpatriot]

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.

Ummmmm.....I was the borrower, you made the deposit. After I borrowed the $20s, they were indeed an asset in my hand, not a liability. And if I were the depositor in my example, the $1000 isn't a liability to me, the depositor had no liability, just the bank and the borrower.

So how is $1000 in loans based on $1000 in deposits somehow safer than $900 in loans based on $1000 in deposits anyway?

If you're convinced that loans from time deposits don't increase the money supply, feel free, but maybe you need to convince the people who came up with the M2 measurement?

 

[Triton]

Maybe if we stop believing the dollar is losing value it will stop losing value

 

[ShackledNation]

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.

Your claim is incorrect. Go back to my example. You deposit 50 $20s in the bank. The only deposit the bank has received. I claim they can loan less than $1000 because they hold 10% in reserve as vault cash.
Please run thru the scenario which allows them to loan out more than that deposit amount of $1000. Please show all your steps. Thanks.

With the $1000 deposit, the bank loans out $900. Often banks loan to their own customers, and the bank electronically adds the money to the customer's own deposit account with the bank. This means the bank has an additional $900 all of a sudden that it can loan out. It will loan out $810 in the same fashion. (It may loan it to non customers of the bank, but that doesn't change anything for all banks do the same thing). So the bank loaned out $900 and then $810, totaling $1710 (and the process continues so the final number is much higher). The only real money deposited is the original $1000. It is harder to see what is going on with a fiat currency.

Let me use a gold backed currency as an example. You deposit 1000 ounces of gold in the bank in a checking account. The bank gives you $1,000. Because the economy uses the bank receipts as money, actual gold is not lent out. The bank simply issues more receipts to gold. The bank will loan out, say, $900, then $810, even though it is not loaning out any gold. Clearly, there are more receipts than real currency deposited.

The reason it is more complicated today is because currency and paper receipts are now the same thing, so it is harder to see. Much of it is also done electronically.

Banks create money by loaning out funds that were already loaned out. The original deposits that were rooting in savings are outnumbered by loans (that turn into deposits, although what is ironic is that deposits of loaned out funds are basically deposits in which the bank says it owes funds to the debtor, but the debtor owes those same funds to the bank. It is all very fraudulent, because the original depositor's money is being used for loans greater than $1000).

$1,000 deposited in a bank with a 10% reserve requirement ends up becoming roughly $10,000 in loans and new money.
Here is a simple illustration
How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic

 

[ShackledNation]

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.

Ummmmm.....I was the borrower, you made the deposit. After I borrowed the $20s, they were indeed an asset in my hand, not a liability. And if I were the depositor in my example, the $1000 isn't a liability to me, the depositor had no liability, just the bank and the borrower.

I don't think you are following me.

So how is $1000 in loans based on $1000 in deposits somehow safer than $900 in loans based on $1000 in deposits anyway?

You are forgetting time deposits vs. demand deposits.

If you're convinced that loans from time deposits don't increase the money supply, feel free, but maybe you need to convince the people who came up with the M2 measurement?

Please, explain to me how time deposits can expand the money supply when you have a full-reserve system (referring to the demand side of course).

If you have $1000 in a time deposit, you can no longer use that money. If you have $1000 in a demand deposit:
1. Under fractional reserve banking, you can still spend that money and the same money is lent out. So you may have only $50 left in your account, but the bank has at the same time loaned out the full $900. That is what I am trying to explain to you by saying loans exceed real deposits. I do realize I am being unclear, because the whole system is odd and confusing and I am not the best at explaining it.
2. Under 100% reserve banking, you can still spend that money but that money is not loaned out to debtors. You are the only one who can access that money. Demand deposits will never be loaned out.

What about time deposits? In fractional reserve banking, they can create new money just like any other deposit would if the money is loaned out and put into a demand deposit. The bank can reloan this demand deposit out depending on the reserves, just like it does with all others. But under 100% reserve banking, the bank cannot loan out the demand deposit funds, so if the money is put in a demand deposit, it will just sit there.

If the money is put in another time deposit, no matter the system, then money will not be created. This is all because once money is put in a time deposit, unlike a demand deposit, the depositor no longer has access to the money. If the time deposit financed loan is put into another time deposit, the bank will reloan the money out. But no money is created because neither the original depositor nor the loan financed depositor has access to the money any more. The money will only be used by one person. Under fractional reserve banking, demand deposit money is used by multiples of people all at once, in the form of loans much more than the initial deposit.

I really am just trying to explain this to you. Here is a more streamlined explanation.

SCENARIO A: FRACTIONAL RESERVE BANKING IN $100 ECONOMY
1. Bob deposits $100 in a checking account (demand deposit).
2. Bank A loans out $90 to Jill because the RRR is 10%
3. Both Bob and Jill can actively use $90. Bob also can use $10 more. There are now $190 in the economy.
4. Jill deposits the $90 into Bank A.
5. Bank A loans $81 out to Moses.
6. Both Bob, Jill, and Moses can actively use $81. Bob and Jill both can use an additional $9, and Bob finally can use $10 more. There are now $271 in the economy.
7. Bank A loans out...etc. Process continues until all possible money is loaned, resulting in about $1,000 total of created new money (it may be more or less, but that is irrelevent. What is certain is there is more money than before. It depends on the money multiplier. I used 10).

Starting deposit: $100.
Loan values financed directly or indirectly because of that deposit: $900
Final money supply: $1,000.

SCENARIO B: FULL RESERVE BANKING IN A $100 ECONOMY
1. Bob deposits $100 in a time deposit.
2. Bank B loans out $100 to Jill.
3. Jill can use $100. Bob cannot use $100. Money is only transferred. The money supply is $100.
4. Jill deposits the $100 in Bank A.
5. Bank A loans out $100 to Moses.
6. Moses can use $100. Neither Bob nor Jill can use any money. The money supply is $100.
7. The final money supply is $100.

This scenario in itself is unlikely, for people borrow money to spend or invest it. It would make no sense to borrow $1,000 and then put it in a time deposit for 1 year. Because you have to pay interest on the loan, you will cancel out any interest made on the time deposit. It would be useless for anyone to do this. The only way you could make money via this method is if banks paid more interest to depositors than it charged in interest to debtors. So in order for Bob to making money by depositing it in the time deposit, banks would have to pay depositors, say, 15% interest, but only charge the borrowers it loans those deposits to a rate of less than 15%. In other words, the bank would always be losing money because it would have to pay more to depositors in interest than it takes in interest. That would never realistically happen.

Anyway, the Federal Reserve does count time deposits in M2. (This detail does not matter because even if you accept the Fed's bogus measurements time deposits under full reserve banking will not be re-deposited into more time deposits. Doing so will only waste money). So in my example, according to M2, you could indefinitely increase what M2 defines as money supply via time deposits being deposited over and over again, even though only $100 would ever be circulating in the economy as use able money. Including time deposits are double counting. In the end, only Moses has $100. The $100 resides in either his demand deposit or his pocket. Nobody else has $100. The $100 will be counted when somebody deposits it in a demand deposit or keeps it in his pocket. Time deposits only alter the ownership of money, not how much of it there is.

Just another reason why the Fed is out of touch with reality. It is easy to manipulate people uneducated about monetary policy when it creates the measures used to defend itself (and when those measures are wrongly calculated).

 

[Toddsterpatriot]

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.

Your claim is incorrect. Go back to my example. You deposit 50 $20s in the bank. The only deposit the bank has received. I claim they can loan less than $1000 because they hold 10% in reserve as vault cash.
Please run thru the scenario which allows them to loan out more than that deposit amount of $1000. Please show all your steps. Thanks.

With the $1000 deposit, the bank loans out $900. Often banks loan to their own customers, and the bank electronically adds the money to the customer's own deposit account with the bank. This means the bank has an additional $900 all of a sudden that it can loan out. It will loan out $810 in the same fashion. (It may loan it to non customers of the bank, but that doesn't change anything for all banks do the same thing). So the bank loaned out $900 and then $810, totaling $1710 (and the process continues so the final number is much higher). The only real money deposited is the original $1000. It is harder to see what is going on with a fiat currency.

You said banks loan out more than their deposits. In your example, you have 2 loans totalling $1710 based on 2 deposits totalling $1900. The only "real money" is the original $1000? LOL!
I just deposited $1000 in the bank, is my deposit real? If my employer paid me the $1000 from a loan, is my deposit now fake?

 

[Toddsterpatriot]

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.

Ummmmm.....I was the borrower, you made the deposit. After I borrowed the $20s, they were indeed an asset in my hand, not a liability. And if I were the depositor in my example, the $1000 isn't a liability to me, the depositor had no liability, just the bank and the borrower.

I don't think you are following me.

I am following you.....and correcting you.

So how is $1000 in loans based on $1000 in deposits somehow safer than $900 in loans based on $1000 in deposits anyway?

You are forgetting time deposits vs. demand deposits.

No I'm not. You seem to think loans strictly from time deposits (0% reserve requirement) are somehow safer for the banks or safer for the economy. So explain how a 0% reserve is safer than a 10% reserve.

If you're convinced that loans from time deposits don't increase the money supply, feel free, but maybe you need to convince the people who came up with the M2 measurement?

Please, explain to me how time deposits can expand the money supply when you have a full-reserve system (referring to the demand side of course).

I already told you, the time deposit doesn't increase the money supply, the loan from the deposit does.

If you have $1000 in a time deposit, you can no longer use that money. If you have $1000 in a demand deposit:
1. Under fractional reserve banking, you can still spend that money and the same money is lent out. So you may have only $50 left in your account, but the bank has at the same time loaned out the full $900. That is what I am trying to explain to you by saying loans exceed real deposits. I do realize I am being unclear, because the whole system is odd and confusing and I am not the best at explaining it.

That is a liquidity issue for the bank, doesn't change the fact that loans, whether based on 0% reserves or 10% reserves, increase the money supply.

2. Under 100% reserve banking, you can still spend that money but that money is not loaned out to debtors. You are the only one who can access that money. Demand deposits will never be loaned out.

Under your 100% reserve banking, time deposits still have a 0% requirement.

What about time deposits? In fractional reserve banking, they can create new money just like any other deposit would if the money is loaned out and put into a demand deposit. The bank can reloan this demand deposit out depending on the reserves, just like it does with all others. But under 100% reserve banking, the bank cannot loan out the demand deposit funds, so if the money is put in a demand deposit, it will just sit there.

If you make a time deposit and I get a loan and spend the money, the new money holder can make a time deposit and a new borrower can take the money and spend it, etc. etc.
More new money can be created from time deposits than from demand deposits. 0% requirement, remember?

I really am just trying to explain this to you. Here is a more streamlined explanation.

Please stop. LOL!

SCENARIO A: FRACTIONAL RESERVE BANKING IN $100 ECONOMY
1. Bob deposits $100 in a checking account (demand deposit).
2. Bank A loans out $90 to Jill because the RRR is 10%
3. Both Bob and Jill can actively use $90. Bob also can use $10 more. There are now $190 in the economy.
4. Jill deposits the $90 into Bank A.
5. Bank A loans $81 out to Moses.
6. Both Bob, Jill, and Moses can actively use $81. Bob and Jill both can use an additional $9, and Bob finally can use $10 more. There are now $271 in the economy.
7. Bank A loans out...etc. Process continues until all possible money is loaned, resulting in about $1,000 total of created new money (it may be more or less, but that is irrelevent. What is certain is there is more money than before. It depends on the money multiplier. I used 10).

Starting deposit: $100.
Loan values financed directly or indirectly because of that deposit: $900
Final money supply: $1,000.

SCENARIO B: FULL RESERVE BANKING IN A $100 ECONOMY
1. Bob deposits $100 in a time deposit.
2. Bank B loans out $100 to Jill.
3. Jill can use $100. Bob cannot use $100. Money is only transferred. The money supply is $100.
4. Jill deposits the $100 in Bank A.
5. Bank A loans out $100 to Moses.
6. Moses can use $100. Neither Bob nor Jill can use any money. The money supply is $100.
7. The final money supply is $100.

Stop, get out your calculator. Bob has an account with $100 (that's M2) , Jill has an account with $100 (that's M2) , Moses has a hand full of cash (that's M1 and M2) , the money supply is $300.