Let's talk about the fractitional reserve banking system

[dys]

About a year ago, one of these threads was introduced here, and someone (I can't remember who) said "as far as I'm concerned this subject can't ever be discussed enough". I agreed with him/her then and I agree with them now. I'm going to give my understanding of the system and I'd love to here feedback on it as well as the perspective of other members of this forum. BTW I don't consider myself an expert.

A consumer goes to a bank and fills out a credit application. We'll say that it is an application for a credit card, for 5k. The bank approves the loan at, say, 20% interest. The consumer proceeds to cash advance the card for 5k, then the consumer pays off the loan over a year. What just happened?

First of all, I believe that the bank created the 5k out of thin air. Now some people say that the banks have reserve requirements of 10x their deposit base, others 16x, or 20x, and still others say that it's unlimited. Some people concede the reserve requirements, but claim that the bank doesn't necessarily use their reserves to fund loans. I believe that when banks extend credit, it is always created out of thin air. The reason is simple: why risk real money when you don't have to? I think most people on this forum would agree that when banks extend credit, it is money created out of thin air.

I often hear from people that concede that banks create credit out of thin air that the credit extended is not inflationary, only the interest is. They will often say, "when the money is paid back, it dissapears into a black hole from where it came from." I don't agree with this conclusion. I say the credit is inflationary based on the laws of supply and demand. If I take out a 5k cash advance and spend the money, 5k just got added to the system that wasn't there before. The net result is an increase of 5k into the system. First rule of economics: you can't get something for nothing. That 5k is paid for via inflation. However, I don't see how the interest on the loan is inflationary. If the interest is repaid, the money has to come from somewhere...it doesn't simply appear as bank credit loans do. If the interest is repaid, it has to be taken from someone else's pocket. This is one of the ways that the system creates inevitable poverty.

Implications: bank risks nothing and does nothing productive to create the credit. Loan is paid for by the people, via inflation. Bank either a: loses nothing if loan goes unpaid, b: reaps a reward of the loan in the form of interest if loan is repaid, c: reaps the reward of a free asset in the case of collateralized loans that go unpaid and are acquired through what the system calls 'repossession' or 'foreclosure'.
Obviously the loan is fraudulent from the start as the interest charged is predicated on a non existent risk. Furthermore, the bank is engaging in high treason by unlawfully creating money without the authority to do so (much like the federal reserve).

In this world, money is power. Assets are money. Money is money. Bank parlays acquired assets into policical power through bribery, press manipulation, obfuscation of balance sheets, creation of shell companies, favorable legislation, and a million other ways. As bank slowly acquires more and more assets/money/power, bank can effectively hedge their risk in a million different ways including buying enough PMs to insure that even under a system change/reset, they maintain their power.

This is my understanding.

dys

[Joe King]

About a year ago, one of these threads was introduced here, and someone (I can't remember who) said "as far as I'm concerned this subject can't ever be discussed enough". I agreed with him/her then and I agree with them now. I'm going to give my understanding of the system and I'd love to here feedback on it as well as the perspective of other members of this forum. BTW I don't consider myself an expert.

A consumer goes to a bank and fills out a credit application. We'll say that it is an application for a credit card, for 5k. The bank approves the loan at, say, 20% interest. The consumer proceeds to cash advance the card for 5k, then the consumer pays off the loan over a year. What just happened?
What just happened was that the Bank allowed the person seeking the loan to access their future earnings, today.

When enough people do that, it expands the money supply to allow exponentially more economic activity than would otherwise be able to occur without it.

Here's an example I've used.

Ever seen Wimpy in the Popeye cartoon? Why won't the guy let Wimpy pay tomorrow for a hamburger today?
Because he doesn't know if Wimpy is worth it or not. So along comes the banker who the guy knows is good for it as he has a vault full of "money". Surely he can be trusted to pay tomorrow for a hamburger today.

So the banker extends some oh his credit to Wimpy for a price {interest} and Wimpy gets to eat today instead of waiting 'til after he's possibly earned some "money" at some point in the future.
...and because sales are up, the guy selling hamburgers can then spend the newly created private bank credit on more hamburger meat.

Also, now that there is more "money" available in the market place, it will be easier for Wimpy to be able to earn that "money" back so that he may be able to re-pay the banker for having extended him credit yesterday.

Possibly by delivering hamburger meat, because due to people spending private bank credit as "money", they sold a lot more hamburgers than they otherwise would have. So now there's a new job opening at the butcher shop to deliver hamburger meat that wouldn't have otherwise existed.

Now, times that by 300,000,000 people all using the next several decades worth of "future money" today, and we end up with all this stuff you see that's still all owed for.
Everything from the roads you drive on to the houses we sit in to the buildings we work in. {or outside of, as the case may sometiimes be}

So ultimately the loan is just as fictitious or not as your potential future earning ability is, or is not.

The big problem with a system like this is that it doesn't work so good in reverse.
And it goes into reverse when the collective future earning potential falls too much to support the borrowing of the past. Thats when it starts to sputter and die. Which exibits itself in things like lost jobs.

[dys]

What just happened was that the Bank allowed the person seeking the loan to access their future earnings, today.

When enough people do that, it expands the money supply to allow exponentially more economic activity than would otherwise be able to occur without it.

Here's an example I've used.

Ever seen Wimpy in the Popeye cartoon? Why won't the guy let Wimpy pay tomorrow for a hamburger today?
Because he doesn't know if Wimpy is worth it or not. So along comes the banker who the guy knows is good for it as he has a vault full of "money". Surely he can be trusted to pay tomorrow for a hamburger today.

So the banker extends some oh his credit to Wimpy for a price {interest} and Wimpy gets to eat today instead of waiting 'til after he's possibly earned some "money" at some point in the future.
...and because sales are up, the guy selling hamburgers can then spend the newly created private bank credit on more hamburger meat.

Also, now that there is more "money" available in the market place, it will be easier for Wimpy to be able to earn that "money" back so that he may be able to re-pay the banker for having extended him credit yesterday.

Possibly by delivering hamburger meat, because due to people spending private bank credit as "money", they sold a lot more hamburgers than they otherwise would have. So now there's a new job opening at the butcher shop to deliver hamburger meat that wouldn't have otherwise existed.

Now, times that by 300,000,000 people all using the next several decades worth of "future money" today, and we end up with all this stuff you see that's still all owed for.
Everything from the roads you drive on to the houses we sit in to the buildings we work in. {or outside of, as the case may sometiimes be}

So ultimately the loan is just as fictitious or not as your potential future earning ability is, or is not.

The big problem with a system like this is that it doesn't work so good in reverse.
And it goes into reverse when the collective future earning potential falls too much to support the borrowing of the past. Thats when it starts to sputter and die. Which exibits itself in things like lost jobs.

Thank you special agent. Considering that the your employer is beholden to the bankers, I would surmise that you have a very uniqure perspective on the system.

dys

[Joe King]

Thank you special agent. Considering that the your employer is beholden to the bankers, I would surmise that you have a very uniqure perspective on the system.

dysI'm just tellin' you what it is they're actually doing. ie lending you your own "money" you haven't earned yet.

When you go submit that 5K loan application, they tend to look at your assets, payment history and future earning potential. Why do you think the guy who's held a good job for many years with a good solid company can get a loan for a nice big house, a car, a vacation, his daughters wedding, etc etc etc, but a guy workin' at McDonalds for the past 8 months can't get a loan for a new scooter?


The bad part is that once this treadmill of fractional reserve lending gets going, there's no real good way to stop it without a lot of hurt being inflicted. Which is where I blame those alive at the time for letting this crap get started to begin with. Did they really think permanent growth would actually become a permanent thing?

[letter_factory]

Not just permanent growth, but permanent exponential growth. That's where globalism comes in. Now once sovereign countries are dependent on other countries for trade, and that's where globalist merchants become the master. The west talks about this as if it's something new, but from my readings, china has been doing this for thousands of years.

[palani]

When you figure it out you might want to keep quiet about it and not try to put the same system into practice for your benefit.

The Montana Freemen (it is said) were right on with their approach and some still have not been either charged nor released.

Abandon all hope, yea who enter here.

[dys]

I'm just tellin' you what it is they're actually doing. ie lending you your own "money" you haven't earned yet.

When you go submit that 5K loan application, they tend to look at your assets, payment history and future earning potential. Why do you think the guy who's held a good job for many years with a good solid company can get a loan for a nice big house, a car, a vacation, his daughters wedding, etc etc etc, but a guy workin' at McDonalds for the past 8 months can't get a loan for a new scooter?


The bad part is that once this treadmill of fractional reserve lending gets going, there's no real good way to stop it without a lot of hurt being inflicted. Which is where I blame those alive at the time for letting this crap get started to begin with. Did they really think permanent growth would actually become a permanent thing?

No sir. The bank risks nothing when they lend money save the lendee receive something for nothing.

dys

[Joe King]

No sir. The bank risks nothing when they lend money save the lendee receive something for nothing.

dysThey risk becoming insolvent on their balance sheets if they make bad loans to people whose future earning potential was badly overestimated. Why do you think all those banks have been going belly-up over the past few years? We used to have threads about it every week.

The bank has a certain amount of credit based upon their assets. They extend some of that credit to those they find to have the ability to keep their promise to pay.
As long as they do pay, all is well. As I said, the problem only manifests itself when the limits of the peoples earning potential is out-stripped by the monetary systems demand for constant growth. Which is where we find ourselves today.

ETA: Also, if those bank assets drop in value, the amount of credit extended via fractional reserve lending has to be reduced. Which is why you've seen existing lines of credit cut back and tighter standards for new ones.
ie it weeds out those less likely to be able to pay.

[iOWNme]

I see 2 distinct problems:

1- money created out of thin air, exponentially
2- interest on something that doesnt exist


Couldnt the US Treasury print fiat currency and charge 0% interest?


OOOPS. Sorry, didnt mean to give away the big secret. Not that im a fan of paper (Im not), but its the interest that is never printed into circulation, that KILLS all of us and our country.


The whole deal with credit is this: You can freely increase the money supply WITHOUT AN INCREASE IN GOODS AND SERVICES.

THAT is what causes inflation.

[Joe King]

I see 2 distinct problems:

1- money created out of thin air, exponentially
2- interest on something that doesnt exist


Couldnt the US Treasury print fiat currency and charge 0% interest?


OOOPS. Sorry, didnt mean to give away the big secret. Not that im a fan of paper (Im not), but its the interest that is never printed into circulation, that KILLS all of us and our country.Yep, they sure could but the they'd blow the economy wide open if you put the throttle in Congress' hand.
ie there'd be "money" for more bridges to nowhere than there are nowheres to get to.

ETA which is why the Founders wanted only gold and silver as money.
ie they know that politicians don't like having to do real work.

ETA2: and the people mostly go along with it because people tend to like the idea of paying for past promises with cheaper/easier "money" than that which they borrowed.

[dys]

I see 2 distinct problems:

1- money created out of thin air, exponentially
2- interest on something that doesnt exist


Couldnt the US Treasury print fiat currency and charge 0% interest?


OOOPS. Sorry, didnt mean to give away the big secret. Not that im a fan of paper (Im not), but its the interest that is never printed into circulation, that KILLS all of us and our country.


The whole deal with credit is this: You can increase the money the money supply WITHOUT AN INCREASE IN GOODS AND SERVICES.

THAT is what cause inflation.

Well there are 2 seperate issues...credit created out of thin air, and interest created out of thin air. Thank you for clarrifying that. The interest created out of thin air is not the interest repaid by those requesting credit, it is the interest owed to those that use the exponential function when they put their money in the bank or buy T-bills or whatever. Correct?

dys

[letter_factory]

When you figure it out you might want to keep quiet about it and not try to put the same system into practice for your benefit.

The Montana Freemen (it is said) were right on with their approach and some still have not been either charged nor released.

Abandon all hope, yea who enter here.

So let's say my tribe doesn't like the montana freemen because my tribe thinks their hair looks funny, so I wage a war against them. Since I use fractional reserve banking, credit, digital money, and the freemen use gold and silver, i drastically grow my tribe through easy credit and amass a huge cache of weapons, missiles, bombs, and military specialists. Since I now vastly outnumber you, I decide to invade you....you lose.


how do you fight that?

[palani]

So let's say my tribe doesn't like the montana freemen because my tribe thinks their hair looks funny, so I wage a war against them. Since I use fractional reserve banking, credit, digital money, and the freemen use gold and silver, i drastically grow my tribe through easy credit and amass a huge cache of weapons, missiles, bombs, and military specialists. Since I now vastly outnumber you, I decide to invade you....you lose.


how do you fight that?

The Montana Freemen decided to use the same techniques as the bankers.

One aspect of lawform is the type of money that is used.

You don't beat someone by joining them (5th column techniques?)

You propel yourself into a different plane of existence, one where your lawform is predominant and the others methods don't even exist. In this plane it doesn't matter that the other side is using ficticious notes. Gravity doesn't apply to them either in this plane . They float. Their feet don't even touch the soil. They don't own anything because they have nothing of substance to purchase what they might own.

Possession is, as it were, the position of the foot. When your feet don't touch soil then you don't even have possession.

[Spectrism]

I think that as soon as you stated "inflation" you went off track.

Inflation or deflation are relative to the market and the supply of products for which there will be a demand.

You sign a contract (promissory note) to pay back any "borrowed" (licensed) FRNs with interest. This is not inflationary in itself. The note you signed becomes an "asset" held by the bank. As long as you keep that asset healthy by making the payments, the bank is not at risk. And, as long as the economy is growing with more supply and more demand increasing, there is a need to increase money supply to match that market.

Now, when you pay off the note, you extinguish the money supply borrowed (principal) leaving only the interest as the new and immortal money. The growth of interest amounts make up the longterm and permanent growth of the money supply. All else is temporary.

To aggravate this, if suddenly the market begins to falter and the notes are not serviced- delayed or missed payments, the note becomes unhealthy and the growth of that immortal portion is now attacked. The immortal interest is then being killed. If the note is defaulted, all its future interest growth is killed and the lost principal counteracts the growth of the old interest amounts in the money system. This is a deflationary cycle, but is not really deflation unless we have a surplus of goods and buyers with decreasing money available. We always need to compare the market with the money supply, including, very importantly its velocity, to see whether we have inflation or deflation.

One more monkey wrench. The money masters manipulate the numbers, dispersement of funds and exchanges among world banks as well as with private corporations. They answer to noone so it is impossible to track what they do.

[dys]

I think that as soon as you stated "inflation" you went off track.

Inflation or deflation are relative to the market and the supply of products for which there will be a demand.

You sign a contract (promissory note) to pay back any "borrowed" (licensed) FRNs with interest. This is not inflationary in itself. The note you signed becomes an "asset" held by the bank. As long as you keep that asset healthy by making the payments, the bank is not at risk. And, as long as the economy is growing with more supply and more demand increasing, there is a need to increase money supply to match that market.

Now, when you pay off the note, you extinguish the money supply borrowed (principal) leaving only the interest as the new and immortal money. The growth of interest amounts make up the longterm and permanent growth of the money supply. All else is temporary.

To aggravate this, if suddenly the market begins to falter and the notes are not serviced- delayed or missed payments, the note becomes unhealthy and the growth of that immortal portion is now attacked. The immortal interest is then being killed. If the note is defaulted, all its future interest growth is killed and the lost principal counteracts the growth of the old interest amounts in the money system. This is a deflationary cycle, but is not really deflation unless we have a surplus of goods and buyers with decreasing money available. We always need to compare the market with the money supply, including, very importantly its velocity, to see whether we have inflation or deflation.

One more monkey wrench. The money masters manipulate the numbers, dispersement of funds and exchanges among world banks as well as with private corporations. They answer to noone so it is impossible to track what they do.

Regardless of the technical terms, I don't agree with this. Again, if the bank is not loaning money that is on deposit, they are not practically/effectively risking one penny. Their methods of accounting may suggest that they are taking a risk, but how can you risk something that you never had in the first place? I say, you can't. Their only risk is that they won't earn money that they weren't entitled to in the first place. Furthermore, if the money loaned is placed into the system, that is new money that didn't exist previously. New money= new supply. Increased supply effects the scarcity of money and thus translates into higher prices (and yes, I know this is not the technical definition of inflation) as long as all other factors are equal.

dys

[letter_factory]

The Montana Freemen decided to use the same techniques as the bankers.

One aspect of lawform is the type of money that is used.

You don't beat someone by joining them (5th column techniques?)

You propel yourself into a different plane of existence, one where your lawform is predominant and the others methods don't even exist. In this plane it doesn't matter that the other side is using ficticious notes. Gravity doesn't apply to them either in this plane . They float. Their feet don't even touch the soil. They don't own anything because they have nothing of substance to purchase what they might own.

Possession is, as it were, the position of the foot. When your feet don't touch soil then you don't even have possession.

Surely you have a physical body. Surely I can see you. What if I just don't like what I see and decide to kill you just because that's how I am? what if I'm just a bloodthirsty, demonic, complete devil-worshiping satanic luciferian that wants to kill, and I've got you in my sights? (note this is completely hypothetical).

The native indians were living in their own other reality too until the europeans came. Look what happened to them.

[Joe King]

Regardless of the technical terms, I don't agree with this. Again, if the bank is not loaning money that is on deposit, they are not practically/effectively risking one penny. Their methods of accounting may suggest that they are taking a risk, but how can you risk something that you never had in the first place?Based upon your ability to repay, they are allowing you to access "money" you haven't yet earned, so that you can enjoy spending it today rather than having to wait til you've slowly saved it up.
The bank didn't create the "money", you did when you promised to pay it back.
ie they've assigned "value" to your signature and have permitted you to access that value for a price.




Furthermore, if the money loaned is placed into the system, that is new money that didn't exist previously. New money= new supply. Increased supply effects the scarcity of money and thus translates into higher prices (and yes, I know this is not the technical definition of inflation) as long as all other factors are equal.

dysIf there are more people tomorrow creating greater demand for goods and services, it's never really equal. The problem comes in when the "money" side of the equation is increased faster than the goods and services side.

[palani]

Surely you have a physical body. Surely I can see you. What if I just don't like what I see and decide to kill you just because that's how I am? what if I'm just a bloodthirsty, demonic, complete devil-worshiping satanic luciferian that wants to kill, and I've got you in my sights? (note this is completely hypothetical).
People tend to mess with their own kind. Violence by Chinese is committed upon Chinese. Bystanders who become involved are going to have violence extended towards them as well.


The native indians were living in their own other reality too until the europeans came. Look what happened to them. Same thing as what happened to the English when the William the Conqueror happened along. With war there is generally a winner and a loser. The loser has to put up with some changes. If they learn to adapt then they might outlive the winners' occupation.

[Spectrism]

Again, if the bank is not loaning money that is on deposit, they are not practically/effectively risking one penny. Their methods of accounting may suggest that they are taking a risk, but how can you risk something that you never had in the first place? I say, you can't. Their only risk is that they won't earn money that they weren't entitled to in the first place. Furthermore, if the money loaned is placed into the system, that is new money that didn't exist previously. New money= new supply. Increased supply effects the scarcity of money and thus translates into higher prices (and yes, I know this is not the technical definition of inflation) as long as all other factors are equal.

dys


Here is how I see it. I may not be perfectly accurate.

The bank is LICENSED to AUTHENTICATE Federal Reserve Notes. They are licensed and audited by their regional bank. If they fail the audit they are bankrupt. Just like any corporation a bank can lose its sanction to operate if their balance sheet is in the red. Yes, they can lose from loan defaults. They must account for the FRNs that they AUTHENTICATED in accordance with their LICENSE. The bank is a franchise of the federal reserve system.

[Bigjon]

http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1

Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.

The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Federal Reserve Board's Regulation D to an institution's reservable liabilities (see table of reserve requirements). Reservable liabilities consist of net transaction accounts, nonpersonal time deposits, and eurocurrency liabilities. Since December 27, 1990, nonpersonal time deposits and eurocurrency liabilities have had a reserve ratio of zero.

The reserve ratio on net transactions accounts depends on the amount of net transactions accounts at the depository institution. The Garn-St Germain Act of 1982 exempted the first $2 million of reservable liabilities from reserve requirements. This "exemption amount" is adjusted each year according to a formula specified by the act. The amount of net transaction accounts subject to a reserve requirement ratio of 3 percent was set under the Monetary Control Act of 1980 at $25 million. This "low-reserve tranche" is also adjusted each year (see table of low-reserve tranche amounts and exemption amounts since 1982). Net transaction accounts in excess of the low-reserve tranche are currently reservable at 10 percent.

Beginning October 2008, the Federal Reserve Banks will pay interest on required reserve balances and excess balances.

For more history on the changes in reserve requirement ratios and the indexation of the exemption and low-reserve tranche, see the annual review in the H.3 statistical release. Additional details on reserve requirements can be found in the Reserve Maintenance Manual (682 KB PDF) and in the article (119 KB PDF) in the Federal Reserve Bulletin, the appendix of which has tables of historical reserve ratios.

http://gold-silver.us/forum/attachment.php?attachmentid=2007&d=1325644922


At the end of any loan, after the loan is paid off, the only money left in the system from this loan is this reserve money and as we can see the reserve may be as low as zero.

[dys]

Here is how I see it. I may not be perfectly accurate.

The bank is LICENSED to AUTHENTICATE Federal Reserve Notes. They are licensed and audited by their regional bank. If they fail the audit they are bankrupt. Just like any corporation a bank can lose its sanction to operate if their balance sheet is in the red. Yes, they can lose from loan defaults. They must account for the FRNs that they AUTHENTICATED in accordance with their LICENSE. The bank is a franchise of the federal reserve system.

I think this is an excellent explanation. The way I look at it (and I can't prove this), is that even though certain banks may 'fail' when too high of a percentage of their loans default, someone is benefitting from the asset aquisitions that accompany 'failed' loans. How? I'm not sure. Possible explanations= shell companies, payoffs/briberies, mergers or partial mergers, golden parachutes, et al in combinations or singularly among other gamuts. I guess what I'm saying is that these banks only pretend to fail.

dys

[Sparky]

This thread is fraught with errors. In the original example, there's no reference to the deposits that the bank has on hand, which critical to the discussion. So let's start over:

Amy is an artist who sells paintings, and has a $1000 surplus which she deposits in Angus Bank. To understand, we'll assume that this is all the money in the world. We're also going to assume that Amy gets about 0% interest on her deposit, which is sadly realistic.

Under a fractional reserve system requiring 10% reserve (which is variable, but let's keep it simple), Angus Bank is allowed to loan out all but 10%. So they lend $900 to Builder Bob at 10% annual interest. Bob's not ready to invest the money yet in his construction project, so he deposits it in Beta Bank.

Amy has $1000 in demand deposit. [+1000]
Angus Bank has a $1000 liability to Amy, plus $100 in reserve., plus a $900 asset in the money that Bob is going to pay back. They didn't really "create" the $900; it's money that Amy gave them. So they are neutral [+0]
Bob has a $900 demand deposit at Beta Bank. But he owes $900 to Angus Bank. [+0]
Beta bank has a $900 liability owed to Bob, plus $900 in reserve. [+0]

So in terms of net value, it remains at $1000. However, the "M1 money supply" is Amy's demand deposit ($1000) plus Bob's deposit ($900). This is the amount of liquid assets available for withdrawing and spending. (The money in bank reserve can't be spent, because it must remain in reserve to meet the fractional requirement). So in this sense, the available spending money supply has been increased out of thin air. But it required Amy's initial cash deposit, which she created by being productive.

Now Beta Bank loans $810 to Chef Charlie at 10% interest rate, keeping $90 (10%) in reserve. Charlie deposits the money in Cantina Bank.

Then a year goes by. Now:

Amy has $1000 deposited in Angus Bank. [+1000]
Angus Bank has $100 in reserve, plus a $1000 liability to Amy, plus a $900 asset from Bob, plus Bob owes $90 in interest. [+90]
Bob owes $900 to Angus Bank, and he owes them $90 interest, and he has a $900 deposit with Beta Bank. [-90]
Beta Bank has $90 in reserve, plus a $900 liability to Bob, plus a $810 asset from Charlie, plus Charlies owes $81 interest. [+81]
Charlie owes $810 to Beta Bank, and he owes them $81 interest, and he has a $810 deposit with Cantina Bank. [-81]
Cantina bank has $810 in reserve, an $810 liability to Charlie [+0]

So the net value in the system remains +1000.

But the spendable/loanable money supply not "trapped" by reserve requirements is:
Amy's $1000 deposit
Angus Bank's $90 interest.
Bob's $900 deposit.
Beta Bank's $81 interest.
Charlie's $810 deposit.

This totals to $2881. You can see if this process were to continue, the money "created" would be the interest owed to the banks when it is repaid, but the supply of money to grease the economy would be much greater than that. Brought to its extreme limit, it could increase the money supply by 10x of Amy's original earned $1000. So the increase in the money supply is much greater than the money "created". But remember, there's still only $1000 in FRNs to support the whole system.

The next lesson would be how the loaned money unwinds...

[Joe King]

So what happens when Builder Bobs plans fall flat and the stuff he bought with the $900 is now worth $250, Charlies asset the Bank holds is worth half and Amy, due to lack of work, withdraws $500 to live on? What happens to the Banks balance sheets and the money supply then?

[dys]

This thread is fraught with errors. In the original example, there's no reference to the deposits that the bank has on hand, which critical to the discussion. So let's start over:

Amy is an artist who sells paintings, and has a $1000 surplus which she deposits in Angus Bank. To understand, we'll assume that this is all the money in the world. We're also going to assume that Amy gets about 0% interest on her deposit, which is sadly realistic.

Under a fractional reserve system requiring 10% reserve (which is variable, but let's keep it simple), Angus Bank is allowed to loan out all but 10%. So they lend $900 to Builder Bob at 10% annual interest. Bob's not ready to invest the money yet in his construction project, so he deposits it in Beta Bank.

Amy has $1000 in demand deposit. [+1000]
Angus Bank has a $1000 liability to Amy, plus $100 in reserve., plus a $900 asset in the money that Bob is going to pay back. They didn't really "create" the $900; it's money that Amy gave them. So they are neutral [+0]
Bob has a $900 demand deposit at Beta Bank. But he owes $900 to Angus Bank. [+0]
Beta bank has a $900 liability owed to Bob, plus $900 in reserve. [+0]

So in terms of net value, it remains at $1000. However, the "M1 money supply" is Amy's demand deposit ($1000) plus Bob's deposit ($900). This is the amount of liquid assets available for withdrawing and spending. (The money in bank reserve can't be spent, because it must remain in reserve to meet the fractional requirement). So in this sense, the available spending money supply has been increased out of thin air. But it required Amy's initial cash deposit, which she created by being productive.

Now Beta Bank loans $810 to Chef Charlie at 10% interest rate, keeping $90 (10%) in reserve. Charlie deposits the money in Cantina Bank.

Then a year goes by. Now:

Amy has $1000 deposited in Angus Bank. [+1000]
Angus Bank has $100 in reserve, plus a $1000 liability to Amy, plus a $900 asset from Bob, plus Bob owes $90 in interest. [+90]
Bob owes $900 to Angus Bank, and he owes them $90 interest, and he has a $900 deposit with Beta Bank. [-90]
Beta Bank has $90 in reserve, plus a $900 liability to Bob, plus a $810 asset from Charlie, plus Charlies owes $81 interest. [+81]
Charlie owes $810 to Beta Bank, and he owes them $81 interest, and he has a $810 deposit with Cantina Bank. [-81]
Cantina bank has $810 in reserve, an $810 liability to Charlie [+0]

So the net value in the system remains +1000.

But the spendable/loanable money supply not "trapped" by reserve requirements is:
Amy's $1000 deposit
Angus Bank's $90 interest.
Bob's $900 deposit.
Beta Bank's $81 interest.
Charlie's $810 deposit.

This totals to $2881. You can see if this process were to continue, the money "created" would be the interest owed to the banks when it is repaid, but the supply of money to grease the economy would be much greater than that. Brought to its extreme limit, it could increase the money supply by 10x of Amy's original earned $1000. So the increase in the money supply is much greater than the money "created". But remember, there's still only $1000 in FRNs to support the whole system.

The next lesson would be how the loaned money unwinds...

The thing is, when Amy deposits the 1000$, does the bank literally use that deposited money to loan out, OR does it simply press a button on their keyboard and create the money? It's a subtle difference, but an important one. I have heard some people claim that banks have unlimited reserve requirements. How could this be if they are literally loaning out Amy's money?

dys

[Joe King]

How could they physically loan out Amys "money" if the total "money" created via loans is 10x her deposit?

The problem in that analogy IMHO, is that the original $1000 couldn't have just been FRN's if FRN's is what was loaned into existence because of fractional reserve lending.
ie something of substance had to exist first, that was then expanded upon via the money multiplier.

[Bigjon]

And then there is the case where the bank takes Amy's $1000 and puts the whole amount on deposit with their FRB.

[Sparky]

So what happens when Builder Bobs plans fall flat and the stuff he bought with the $900 is now worth $250, Charlies asset the Bank holds is worth half and Amy, due to lack of work, withdraws $500 to live on? What happens to the Banks balance sheets and the money supply then?

The system goes to shit. That's the next lesson.

[Sparky]

Good questions about Amy's actual currency.

In real life, Angus Bank would only keep enough of Amy's FRNs such that they could cover cash withdrawals, and then they would send the rest to their regional Federal Reserve Bank. If they later needed more FRNs, they would request some back from the Federal reserve as necessary, with all of the proper accounting done digitally. All other subsequent transactions with the other borrowers and banks would be via bank checks and digital accounting.

For illustrative purposes, though, you could envision that all borrowers wanted to be paid in cash, so that in the end, 100 FRNs ended up at Angus Bank, 90 at Beta, and 810 at Cantina. Then, Cantina would send some of them to the Federal Reserve.

[Sparky]

How could they physically loan out Amys "money" if the total "money" created via loans is 10x her deposit?

The problem in that analogy IMHO, is that the original $1000 couldn't have just been FRN's if FRN's is what was loaned into existence because of fractional reserve lending.
ie something of substance had to exist first, that was then expanded upon via the money multiplier.

No, the 10x money supply appears digitally as demand deposits. See my previous post as to where the actual paper FRNs would be.

As to your second point, FRNs are not loaned into existence. Paper bank checks and digital entries are what is "created".

[palani]

An asset is not limited to money. A note or a mortgage becomes an asset.

Think double entry bookkeeping. When an asset is expended one is received. Take out a $100k mortgage, the $100k comes off the asset side of the bank and is replaced by a $100k asset called a mortgage and a $100k asset called a note. Then the bank bundles these and sells them for 1-2% over the asset value.

The thing is, at the end of the day, every day, the banks books balance assets against debits, and neither has to be considered a negotiable instrument called a FRN. You are used to thinking "money of exchange" while they are dealing with "money of account".

[Spectrism]

How could they physically loan out Amys "money" if the total "money" created via loans is 10x her deposit?

The problem in that analogy IMHO, is that the original $1000 couldn't have just been FRN's if FRN's is what was loaned into existence because of fractional reserve lending.
ie something of substance had to exist first, that was then expanded upon via the money multiplier.

By definition, Amy could not have "free and clear" FRNs. They are loan notes. Somebody had to borrow from the federal reserve for this to happen. I think you also need to look at other sources than the public for bank reserves. Does not the federal reserve lend money to banks cheaply? This is really no different from Amy placing FRNs into an account for interest. Injecting "liquidity" into the system is the fed lending cheaply to banks.

Here is the catch- what is loaned must be returned with interest.

[woodman]

Now, when you pay off the note, you extinguish the money supply borrowed (principal) leaving only the interest as the new and immortal money. The growth of interest amounts make up the longterm and permanent growth of the money supply. All else is temporary.



The interest is not 'new, immortal' money. The interest can only be paid by robbing Peter to pay Paul. The interest paid back to the bankster comes out of the pool of money that has been loaned into existence. Therefore in this crazy game of musical chairs, if all the loans were paid back there would not be a dollar in existence and no money to pay the interest. There is no primordial money but gold and silver coinage.

[Spectrism]

The interest is not 'new, immortal' money. The interest can only be paid by robbing Peter to pay Paul. The interest paid back to the bankster comes out of the pool of money that has been loaned into existence. Therefore in this crazy game of musical chairs, if all the loans were paid back there would not be a dollar in existence and no money to pay the interest. There is no primordial money but gold and silver coinage.

You misunderstood my intent. When borrowed money is paid off, the loan amortizes- dies. A mort-(death)-gage is a loan with death programmed into it. Ther interest being pais is above the principal being returned. The payment of principal kills the borrowed amount on the note... but the interest survives the transaction. That is what I meant by "immortal". It is not snuffed by repayment, but continues as an increased money supply.

[woodman]

You misunderstood my intent. When borrowed money is paid off, the loan amortizes- dies. A mort-(death)-gage is a loan with death programmed into it. Ther interest being pais is above the principal being returned. The payment of principal kills the borrowed amount on the note... but the interest survives the transaction. That is what I meant by "immortal". It is not snuffed by repayment, but continues as an increased money supply.

I see what you were getting at. I thought you meant it as being 'immortal' to the money supply itself. It is not an increase in the overall money supply, just so we have understanding. It is an amazing thing to contemplate that we use debt as money in this crazy world. Debt is the complete opposite of money to my understanding.

As far as this system of world wide slavery is concerned, I like to let the perpetrators lay it all bare in their own words.
http://quotes.liberty-tree.ca/quotes.nsf/t_space.gif
"Banking was conceived in iniquity and was born in sin.
The Bankers own the earth. Take it away from them,
but leave them the power to create deposits,
and with the flick of the pen they will
create enough deposits to buy it back again.
However, take it away from them, and
all the great fortunes like mine
will disappear and they ought to disappear, for
this would be a happier and better world to live in.
But, if you wish to remain the slaves of Bankers
and pay the cost of your own slavery,
let them continue to create deposits."


Sir Josiah Stamp
(1880-1941) President of the Bank of England in the 1920's, the second richest man in Britain



Speaking at the Commencement Address of the University of Texas in 1927

[woodman]

Gold and silver are intrinsically valuable and therefore stand the test of being money. Debt is intrinsically fraught with risk and is a liability instead of an assett. These sarcastic bastards have done the same thing with money as they've done with fouride and other dangerous toxins. When they were berated for poisoning the countryside with poisons from aluminum smeltering and nuclear processing, they laughed and turned around and put the shit in our water supply. We must consider the fact that they have done the exact same process with debt. We are surviving in a semi-death, a zombie existence by being forced to use this toxic waste as a money supply.

Just think what we could be if we were free of this monstrous vampire that is sucking the vitality out of our lives.

[Bigjon]

The interest is not 'new, immortal' money. The interest can only be paid by robbing Peter to pay Paul. The interest paid back to the bankster comes out of the pool of money that has been loaned into existence. Therefore in this crazy game of musical chairs, if all the loans were paid back there would not be a dollar in existence and no money to pay the interest. There is no primordial money but gold and silver coinage.

Wrong answer again.

Interest is paid by spending (an action) using a thing called money that was earned via your labor. Money is spent over and over and it came from the original loan money.
The only place where money can be extinguished is at the bank that that holds the loan and erases the principal paid against the loan amount. The banker spends the interest portion back into the economy and once he spends it, it is out "there".

[woodman]

Wrong answer again.

Interest is paid by spending (an action) using a thing called money that was earned via your labor. Money is spent over and over and it came from the original loan money.
The only place where money can be extinguished is at the bank that that holds the loan and erases the principal paid against the loan amount. The banker spends the interest portion back into the economy and once he spends it, it is out "there".

You say my answer is wrong. I am often wrong and need to be corrected. Your answer does not show 'where' my answer is wrong. Your statements do not negate my statements. You say the bank spends the interest back into the economy but if all the principle in the system is destroyed then there is no money to pay the interest. We are fighting a battle against everyone else to keep solvent and someone must loose. If someone is loosing then we are all loosing by being bound in such a system.

So where, specifically am I wrong? I wish to have a clearer understanding of this system.

[Bigjon]

You say my answer is wrong. I am often wrong and need to be corrected. Your answer does not show 'where' my answer is wrong. Your statements do not negate my statements. You say the bank spends the interest back into the economy but if all the principle in the system is destroyed then there is no money to pay the interest. We are fighting a battle against everyone else to keep solvent and someone must loose. If someone is loosing then we are all loosing by being bound in such a system.

So where, specifically am I wrong? I wish to have a clearer understanding of this system.

I'm sorry, I just scanned your response and assumed you were making the standard claim that the money for the interest had to come from a source outside of the original loan.

The money to pay the interest for any given loan does come from the loan amount itself.

And you are correct that if all the loans were paid there would be no money.

But if all the loans were paid there would be no need to pay interest as there would be none owed.

[Joe King]

By definition, Amy could not have "free and clear" FRNs.That's what I was getting at. In the example, her $1000 is derived from someone else's loan to begin with. Who made the original deposit in order to allow the expasion to get started in the first place so that Amy could end up with $1000 of it?
ie whose deposit is this all based upon?

[dys]

The interest is not 'new, immortal' money. The interest can only be paid by robbing Peter to pay Paul. The interest paid back to the bankster comes out of the pool of money that has been loaned into existence. Therefore in this crazy game of musical chairs, if all the loans were paid back there would not be a dollar in existence and no money to pay the interest. There is no primordial money but gold and silver coinage.

This is exactly what I was trying to say. Thank you for putting it into words. The other thing I want to say is that interest is not necessarily paid back via labor. This is especially true in today's world...interest is often paid back by borrowing.

dys

[Sparky]

As a parallel thought, a fiat system is not necessarily problematic by itself. In other words, if everyone's tangible resources and labor were convertible to fiat to expedite transactions, the system would work. The problem comes with paying interest on borrowing. Even then it could work up to a point. And that point is when there is too much interest owed relative to the potential future productivity of the borrower. The reason it gets out of control is because that specific point is so difficult to pinpoint. That's where the global financial system stands right now. It's why now is a good time to own precious metals.

[Bigjon]

How could they physically loan out Amys "money" if the total "money" created via loans is 10x her deposit?

The problem in that analogy IMHO, is that the original $1000 couldn't have just been FRN's if FRN's is what was loaned into existence because of fractional reserve lending.
ie something of substance had to exist first, that was then expanded upon via the money multiplier.

Sure they could have been FRN's.

FRN's are just tokens that are passed around and used over and over.

[Joe King]

As a parallel thought, a fiat system is not necessarily problematic by itself. In other words, if everyone's tangible resources and labor were convertible to fiat to expedite transactions, the system would work. The problem comes with paying interest on borrowing. Even then it could work up to a point. And that point is when there is too much interest owed relative to the potential future productivity of the borrower. The reason it gets out of control is because that specific point is so difficult to pinpoint. That's where the global financial system stands right now. It's why now is a good time to own precious metals.
That's exactly it. When past obligations exceed the furure capacity to pay, look out!

The reason the specific point is hard to pinpoint is because the gov, over time, continues to fill larger and larger gaps in the system.
ie they kick the can down the road in order to keep it all goin' awhile longer.

Problem is, the can is getting bigger and it takes increasingly harder kicks to get it even half the distance as it did before.



IMHO, when this system was implimented, anyone who actually thought it through at the time should have been able to see what the inevitable end result would be of such a system and why it shouldn't have been started in the first place.

[Joe King]

Sure they could have been FRN's.

FRN's are just tokens that are passed around and used over and over.If what we're using is inflated "money", what was it inflated from at the fiat systems inception?
ie who made the original deposit that allowed the inflation to start to begin with, and what was that deposit? At one point, FRNs did not yet exist so they could not be the original source to then inflate upon.

[Bigjon]

If what we're using is inflated "money", what was it inflated from at the fiat systems inception?
ie who made the original deposit that allowed the inflation to start to begin with, and what was that deposit? At one point, FRNs did not yet exist so they could not be the original source to then inflate upon.

The US treasury paid the troops, the congress, whatever, etc.

[palani]

FRN's are just tokens that are passed around and used over and over.


Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized.

The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.

This is a good section of US code to review occasionally. Congress authorizes the issuance of Federal Reserve notes for transfer between Federal Reserve banks through Federal Reserve agents AND FOR NO OTHER PURPOSES although if you came by them by mistake then they are redeemable in lawful money.

[Bigjon]

That's exactly it. When past obligations exceed the furure capacity to pay, look out!

The reason the specific point is hard to pinpoint is because the gov, over time, continues to fill larger and larger gaps in the system.
ie they kick the can down the road in order to keep it all goin' awhile longer.

Problem is, the can is getting bigger and it takes increasingly harder kicks to get it even half the distance as it did before.



IMHO, when this system was implimented, anyone who actually thought it through at the time should have been able to see what the inevitable end result would be of such a system and why it shouldn't have been started in the first place.

This only happens when "they" want to bring the system down. Things like the banks making bad loans to people without a job to buy a new house are examples of the "how" they did it and are doing it right now.

If the bankers want the system to work, they can make it work, there is nothing that is inherently bad about the system that will make it fail.

However "they" do want it to fail and they want to make it appear that the system has to fail and that is one of the reasons all these people are pushing this idea that the interest has to come from some source outside of the current loan structure.

[dys]

That's exactly it. When past obligations exceed the furure capacity to pay, look out!

The reason the specific point is hard to pinpoint is because the gov, over time, continues to fill larger and larger gaps in the system.
ie they kick the can down the road in order to keep it all goin' awhile longer.

Problem is, the can is getting bigger and it takes increasingly harder kicks to get it even half the distance as it did before.



IMHO, when this system was implimented, anyone who actually thought it through at the time should have been able to see what the inevitable end result would be of such a system and why it shouldn't have been started in the first place.

So what happens when past obligations exceed future obligations to pay? Banks fail. Governments fail. Those owed money don't get paid what they were promised.

As far as I can tell, the only reason this is seen as a bad thing is that most people can't conceive of using an alternative system that doesn't include usury. The productive capacity is being drained by parasites; such as banks, government, insurance companies, and other limited liabilities. Eliminate parasites and you increase production and thus, you increase wealth.

dys

[Joe King]

The US treasury paid the troops, the congress, whatever, etc.With what did they pay them?



ETA:


FRN's are just tokens that are passed around and used over and over.
Actually, they are but the physical representation of the bank credit that's been previously created.

[po boy]

So what happens when past obligations exceed future obligations to pay? Banks fail. Governments fail. Those owed money don't get paid what they were promised.

As far as I can tell, the only reason this is seen as a bad thing is that most people can't conceive of using an alternative system that doesn't include usury. The productive capacity is being drained by parasites; such as banks, government, insurance companies, and other limited liabilities. Eliminate parasites and you increase production and thus, you increase wealth.

dys

I agree and would say that the alternate is gold and silver which is legal tender btw. One thing I would say though if people shook off usury and practiced using hard money production would not need to be increased as one would be getting more roi for their efforts.

Also governments would not necessarily fail however their size would not be anywhere near what it is now.

[Bigjon]

With what did they pay them?



ETA:
Actually, they are but the physical representation of the bank credit that's been previously created.

Treasury checks.

Banks get money of exchange (FRN's) from their respective FRB.

The amount of primary money in the system is governed by the amount of FRN's plus Treasury Bonds, Bills and Notes that are held by the respective member banks on account at their FRB.

When the Fed wants to bring down the amount of primary money FRN's they sell Treasury"s and conversely when they want to increase the money supply they buy treasury's.

basically I'm not real sure about how this works. Trying to find out is a bitch as they seem not to call FRN's or treasury checks primary money.

[woodman]

This page http://quotes.liberty-tree.ca/quotes.nsf/quotes_about!ReadForm&Count=50&Start=51&RestrictToCategory=banking
has some excellent quotes about banking. Fiat money in itself is not necessarilly a bad thing although it is misused by the criminals in charge in every known instance. Fractional reserve notes are another story entirely, especially when a private corporation is given a charter to issue them. A criminal cartel was born in 1913. They have killed or tried to kill every decent leader who opposed them. They killed Kennedy, no doubt. No doubt they killed Lincoln also.

"The high office of the President has been used to foment a plot to destroy the American's freedom and before I leave office, I must inform the citizen of this plight." ---John F. Kennedy


"The government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity. The financing of all public enterprise, and the conduct of the treasury will become matters of practical administration. Money will cease to be master and will then become servant of humanity."------ Lincoln

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon. ---Hemphill

(http://quotes.liberty-tree.ca/quotes_by/abraham+lincoln)

[Bigjon]

If what we're using is inflated "money", what was it inflated from at the fiat systems inception?
ie who made the original deposit that allowed the inflation to start to begin with, and what was that deposit? At one point, FRNs did not yet exist so they could not be the original source to then inflate upon.

In rereading Joe's post I see I lost track of his original question.
FRN's sprang into existence by our governments willingness to exchange it's bonds for the Fed's FRN's.

https://secure.wikimedia.org/wikipedia/en/wiki/Federal_Reserve_Note

Federal Reserve Note
From Wikipedia, the free encyclopedia
"FRN" redirects here. For other uses, see FRN (disambiguation).

Various Federal Reserve Notes, c.1995. Only the designs of the $1 and $2 (the latter not pictured) are still in print.

A Federal Reserve Note is a type of banknote used in the United States of America. Federal Reserve Notes are printed by the United States Bureau of Engraving and Printing on paper made by Crane & Co. of Dalton, Massachusetts. They are the only type of U.S. banknote that is still produced today[1] and they should not be confused with Federal Reserve Bank Notes.

Federal Reserve Notes are authorized by Section 411 of Title 12 of the United States Code and are issued to the Federal Reserve Banks at the discretion of the Board of Governors of the Federal Reserve System.[2] The notes are then put into circulation by the Federal Reserve Banks.[3] Once the notes are put into circulation, they become liabilities of the Federal Reserve Banks[4] and obligations of the United States.[2]

Federal Reserve Notes are legal tender, with the words "this note is legal tender for all debts, public and private" printed on each note. (See generally 31 U.S.C. § 5103.) They have replaced United States Notes, which were once issued by the Treasury Department. Federal Reserve Notes are backed by the assets of the Federal Reserve Banks, which serve as collateral under Federal Reserve Act Section 16. These assets are generally Treasuries which have been purchased by the Federal Reserve through its Federal Open Market Committee in a process called monetizing the debt. (See Monetization.) This monetized debt can increase the money supply, either with the issuance of new Federal Reserve Notes or with the creation of debt money (deposits). This increase in the monetary base leads to larger increase in the money supply through the fractional-reserve banking as deposits are lent and re-deposited where they form the basis of further loans.

From this I would say are FRN's or items deemed as easily converted to FRN's.
http://wiki.answers.com/Q/What_are_primary_and_secondary_reserves


Primary Reserves
Primary reserves consist of cash on hand in the bank and deposits owed to it by other banks. These are also called the legal reserves. From this cash on hand tellers are able to meet customer demands for withdrawals, exchanges, and loans. Any excess reserves may be invested in larger banks in the form of the loans; in the United States these are called federal funds.
Total cash required to support the operations of a bank, legal or mandatory reserve requirements, and uncollected checks. Primary reserves cannot be loaned or invested, but may be used in a liquidity crisis caused by sudden and heavy cash withdrawals by bank's depositors.
Secondary Reserves
Assets invested in short-term marketable securities, usually Treasury bills and short-term government securities. http://www.answers.com/topic/legal-reserve kept in a Federal Reserve Bank don't earn interest, but secondary reserves are a source of supplemental liquidity. These earn interest and can be used to adjust a bank's reserve position. If loan demand is slow, deposit funds often are invested in short-term securities that are easily converted to cash. Secondary reserves are not listed as a separate balance sheet item.
Securities purchased by a bank for investment purposes are known as secondary reserves. In the United States, much of this investment is in municipals-bonds and notes issued by local or state governments. Banks also buy bills, notes, and bonds issued by the United States Treasury and securities issued by other federal agencies. All such securities are low-risk investments. …
Priti Upadhyay( GZB) ( priti.up@gmail.com)

Once a bank has a firm commitment by anyone who qualifies for a loan, that bank then proceeds to use it's own cash or to get the cash it needs from it's Federal Reserve Bank.

First comes the need for credit and then second comes the need for the reserve.
Credit is money of account or in other words an entry in a bank ledger.


https://secure.wikimedia.org/wikipedia/en/wiki/Federal_funds

Federal funds
From Wikipedia, the free encyclopedia
Main article: Federal Reserve System
This article is about funds maintained by the U.S. Federal Reserve. For the funds provided by the U.S. government in terms of aid and assistance, see Federal aid.

In the United States, federal funds are overnight borrowings by banks to maintain their bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions. Transactions in the federal funds market enable depository institutions with reserve balances in excess of reserve requirements to lend reserves to institutions with reserve deficiencies. These loans are usually made for one day only, that is, "overnight". The interest rate at which these deals are done is called the federal funds rate. Federal funds are not collateralized; like eurodollars, they are an unsecured interbank loan.[1]

Federal funds transactions neither increase nor decrease total bank reserves. Instead, they redistribute reserves and enable otherwise idle funds to yield a return. Banks may borrow these funds to avoid an overdraft (that is, the balance going below reserve requirement) of their reserve account, or in order to meet the reserves required to back their deposits. Federal funds are definitive money, meaning that they are available for immediate spending, while checks and many other forms of money must be cleared by banks and typically take several days before becoming available for spending.

Participants in the federal funds market include commercial banks, savings and loan associations, government sponsored enterprises, branches of foreign banks in the United States, federal agencies, and securities firms. Many relatively small institutions that accumulate reserves in excess of their requirements lend reserves overnight to money center and large regional banks, as well as to foreign banks operating in the United States. Federal agencies also lend idle funds in the federal funds market.


https://secure.wikimedia.org/wikipedia/en/wiki/Monetary_base

Monetary base
From Wikipedia, the free encyclopedia

Monetary base is the bottom blue line[dubious – discuss]

In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) is a term relating to (but not being equivalent to) the money supply (or money stock), the amount of money in the economy. The monetary base is highly liquid money that consists of coins, paper money (both as bank vault cash and as currency circulating in the public), and commercial banks' reserves with the central bank. Measures of money are typically classified as levels of M, where the monetary base is smallest and lowest M-level: M0. Base money can be described as the most acceptable (or liquid) form of final payment. Broader measures of the money supply also include money that does not count as base money, such as demand deposits (included in M1), and other deposit accounts like the less liquid savings accounts (included in M2) etc.

(The narrow money supply is an earlier term used in the U.S to describe currency held by the non-bank public and demand deposits of banks, M1).
[edit]
Management

"Open market operations" are monetary policy tools that affect directly the monetary base; the monetary base can be expanded or contracted using an expansionary policy or a contractionary policy, but not without risk.

The monetary base is typically controlled by the institution in a country that controls monetary policy. This is usually either the finance ministry or the central bank. These institutions print currency and release it into the economy, or withdraw it from the economy, through open market transactions (i.e., the buying and selling of government bonds). These institutions also typically have the ability to influence banking activities by manipulating interest rates and changing bank reserve requirements (how much money banks must keep on hand instead of loaning out to borrowers).

The monetary base is called high-powered because an increase in the monetary base (M0) can result in a much larger increase in the supply of bank money, an effect often referred to as the money multiplier. An increase of 1 billion currency units in the monetary base will allow (and often be correlated to) an increase of several billion units of "bank money". This is often discussed in conjunction with fractional-reserve banking banking systems. A system of full-reserve banking would not allow for an increase of currency in the banking system on top of the monetary base.

The Austrian School of economics is critical of fractional-reserve banking, stating that the increase of money in the banking system is equivalent to an artificial injection of credit, which is the source of the business cycle. This is elaborated in the Austrian business cycle theory, for which Friedrich Hayek won the Nobel Prize in economics in 1974. However, in 1976, in a paper on The Denationalization of Money,[1] Hayek advocated that rather than re-instituting a government-mandated gold standard, a free market in money be allowed to develop, with issuers of money competing with each other to produce the best, most stable and healthy currency. This sparked an entire school of thought within economics, Free Banking, with banks not being banned from having fractional reserves as other Austrians such as Murray Rothbard advocated, but instead being free to experiment and discover the best method of conducting business.