[Steve_American]

Recently I had this discussion with some of you here. I want to add to my argument.
I claim that we all pay our taxes with a mix of both sorts of dollars, but vastly mostly bank created dollars.
I understand the fact that in the payment process the dollars in the check we write is converted into “reserve” only dollars. I claim that that fact is not relevant.

Most Americans are familiar with the Biblical story of Jesus vs the Temple moneychangers. I strongly feel that the Jews who took their Roman coins to the Temple to give them to God were giving those Roman coins to God. I claim that the fact that the moneychangers converted those coins into Hebrew coins that were appropriate to give to God does not effect the fact that the Jews used their Roman coins to give them to God. They had no other coins to give. The Temple authorities used those coins for whatever they needed to buy. They just had to get them from the moneychangers in exchange for the Hebrew coins the Jewish taxpayers had given them.

In the same way, (as a self-employed carpet cleaner) I got most of my income in the form of checks which I deposited. The dollars in those checks were part of the money supply. The money supply is a combination of bank created dollars and reserve dollars; even though the reserve dollars never actually leave to Fed. Res. system. The dollars I got from my customers were what I used to pay my taxes, the fact that they were converted into pure reserve dollars does not change the type of dollars they were at the time they left my control and came under the control of the banking system.

This is how I see this question.
.

[Negotiator]

Yes ... most money is bank created.

Here in germany a bank needs 100 euros to create 1000 euros that it can give out as a loan.

Other countries might be worse.

Personally I think its riddiculous and needs to change. Nonstate entities shouldnt be allowed to create money.

[Baff]

Dollars are either created by the Federal Reserve or a counterfeiter.
Probably not a good idea to pay taxes with the later.

[Baff]

Yes ... most money is bank created.

Here in germany a bank needs 100 euros to create 1000 euros that it can give out as a loan.

Other countries might be worse.

Personally I think its riddiculous and needs to change. Nonstate entities shouldnt be allowed to create money.

You haven't quite grasped that one right, I'm afraid.

I deposit, 1,000 Euro's in a bank.

The bank is then allowed to lend on for profit, 900 of those Euro's. And must keep back in it's vaults, 100 Euro's as it's reserve against my asking to withdraw some of my 1,000 Euro's

This is called Fractional Reserve Banking.
And in this case the Fractional Reserve is 10%.

Euro's are only "created" or "printed", by the European Central Bank.


Internet mythology has it that Fractional Reserve Banking means, when you deposit 100 Euro's the bank can lend out 1,000 Euros.
Obviously this is entirely as stupid as it sounds and is not true.
Anti capitalist conspiracy theory. /untrue.

Pretty much this is the oldest stupid in any economics forum debate.
You won't believe how many hundreds of people have come out with it over the years. As far as I can tell it stems back to movie by Zeitgeist
So with the best will in the world, sorry chaps, but you two have been barking up entirely the wrong tree with this one.
Might want to rethink your assumptions before you expand on them any further.
Good luck!

[Steve_American]

@Baff,
Lordy, lordy, lordy you are certain, aren't you.
Google and find the statement by the Bank of England where it says that banks do create currency by making loans.
Also read this article --- https://www.sciencedirect.com/science/a ... 1914001070 about an experiment in 2014 that proved it.
PS, if economics is a science then it MUST accept that experimental results overrule all previous theories to the contrary.

[Baff]

It's a social "science".
Not an empiric one.

The Bank of England does not say that commercial banks create currency.
Sorry.
Perhaps you have misunderstood or miss sourced.

And yes sir. I am entirely confident.
Sorry to be the bearer of this news.

Unfortunately, while I am willing to offer you correction, I am not inclined to offer you debate.

If you build theories based on a flawed assumption, all your theories will be wrong. Castles built on sand.
This is a fundamental of banking and monetary policy. A fractional reserve. It is my considered opinion that you really need to master this before going on.
Respectfully. I am offering you this hint and not seeking to challenge your intellect. It is yours to follow up or ignore as you see fit.

[Crantag]

You haven't quite grasped that one right, I'm afraid.

I deposit, 1,000 Euro's in a bank.

The bank is then allowed to lend on for profit, 900 of those Euro's. And must keep back in it's vaults, 100 Euro's as it's reserve against my asking to withdraw some of my 1,000 Euro's

This is called Fractional Reserve Banking.
And in this case the Fractional Reserve is 10%.

Euro's are only "created" or "printed", by the European Central Bank.


Internet mythology has it that Fractional Reserve Banking means, when you deposit 100 Euro's the bank can lend out 1,000 Euros.
Obviously this is entirely as stupid as it sounds and is not true.
Anti capitalist conspiracy theory. /untrue.

Pretty much this is the oldest stupid in any economics forum debate.
You won't believe how many hundreds of people have come out with it over the years. As far as I can tell it stems back to movie by Zeitgeist
So with the best will in the world, sorry chaps, but you two have been barking up entirely the wrong tree with this one.
Might want to rethink your assumptions before you expand on them any further.
Good luck!

Actually you haven't grasped it correctly.

Money is defined as M1, M2, M3, in descending order of liquidity.

It's not true that only the Central Bank printing money creates money. The supply of money (an antiquated term) is not equivalent to the number of bank notes.

With respect to fractional reserve banking, you also got it wrong.

You deposit $1000. The bank lends $900.

This $900 is typically deposited in a bank. That bank lends $810.

This $810 is deposited in a bank.

This bank lends $729.

And so on.

That's the theory of fractional reserve banking.

So, $100 does become $1000.

Also, fractional reserve banking theory has nothing at all to do with anti-capitalist internet conspiracy theories. It is, in fact, mainstream economics.

[Truth To Power]

It's a social "science".
Not an empiric one.

The Bank of England does not say that commercial banks create currency.

True; it says they create money. Not the same thing.

Perhaps you have misunderstood or miss sourced.

Just misquoted. Not all money is currency, just as not all currency is money.

And yes sir. I am entirely confident.
Sorry to be the bearer of this news.

But you are actually wrong. Private commercial banks do indeed create money, as examination of their ledger entries will confirm: loan proceeds are not taken out of any other account, but are simply entered into the borrower's account as a liability that balances the newly created loan asset.

Unfortunately, while I am willing to offer you correction, I am not inclined to offer you debate.

Couldn't have said it better myself.

If you build theories based on a flawed assumption, all your theories will be wrong. Castles built on sand.

Right. Like yours.

This is a fundamental of banking and monetary policy. A fractional reserve. It is my considered opinion that you really need to master this before going on.

Or at least it would be, if it were not flat wrong.

Respectfully. I am offering you this hint and not seeking to challenge your intellect. It is yours to follow up or ignore as you see fit.

As above. And before you make a fool of yourself, you should be aware that I once edited an accounting textbook. Your move.

[Steve_American]

@Crantag, &
@Truth To Power,
Thank you guys for explaining it to him. I tried and he just doubled down. I expect he gets it now and slinks off into the bushes, but I hope that he is man enough to come back and admit that he was wrong. However, that has a 0.1% (or maybe more like 0.001%) chance of happening. This is the internet after all.

[Steve_American]

You deposit $1000. The bank lends $900.
This $900 is typically deposited in a bank. That bank lends $810.
This $810 is deposited in a bank.
This bank lends $729.
And so on.
That's the theory of fractional reserve banking.
So, $100 does become $1000.

Crantag, if you don't mind a tiny, tiny quibble. You should have ended this with ---
"That's the theory of fractional reserve banking.
So, $1000 does become $10,000."

He started with $1000 and you continued that level of deposit and lending until you got to the end, and then you fell back into the way it is usually said. Quite understandable. But, it might confuse a few people.
.

[Baff]

Actually you haven't grasped it correctly.

Money is defined as M1, M2, M3, in descending order of liquidity.

It's not true that only the Central Bank printing money creates money. The supply of money (an antiquated term) is not equivalent to the number of bank notes.

With respect to fractional reserve banking, you also got it wrong.

You deposit $1000. The bank lends $900.

This $900 is typically deposited in a bank. That bank lends $810.

This $810 is deposited in a bank.

This bank lends $729.

And so on.

That's the theory of fractional reserve banking.

So, $100 does become $1000.

Also, fractional reserve banking theory has nothing at all to do with anti-capitalist internet conspiracy theories. It is, in fact, mainstream economics.

Bad maths sorry.

It's not 729 + 810 + 900

It's 729 lent out, plus what is left in the bank.
In bank 3 there is 81, in bank 2 there is 90 and in bank 1 there is 100.

729 + 81 +90 +100 = 1,000.

The amount deposited.

Nothing has been created. The 1,000 has been distributed. That is all.
It is a zero sum gain.

[Crantag]

Bad maths sorry.

It's not 729 + 810 + 900

It's 729 lent out, plus what is left in the bank.
In bank 3 there is 81, in bank 2 there is 90 and in bank 1 there is 100.

729 + 81 +90 +100 = 1,000.

The amount deposited.

Nothing has been created. The 1,000 has been distributed. That is all.
It is a zero sum gain.

You are plainly wrong about the theory.

The way I described it is exactly the way it is described in conventional theory.

The $900 lent is recorded as a deposit. Sure some of it might be withdrawn and spent immediately. But that's not what the theory states.

The $900 lent, is recorded as a deposit (often in the same bank, actually). That $900 is available to be re-lent.

I already explained it in my last post, and as I explained it is exactly as the theory goes.

It isn't a zero sum game.

A suggestion. If you want to debate economic theory, I suggest you read the theory first, and not just make it up.

[Baff]

No mate sorry.

You misunderstand.
I don't want to debate your economic theory with you at all.

I wish to teach you Fractional Reserve Banking.
And I have done so.

You understand the words I have written and what they mean.
I have corrected your error. My work here is done.

[Crantag]

No mate sorry.

You misunderstand.
I don't want to debate your economic theory with you at all.

I wish to teach you Fractional Reserve Banking.
And I have done so.

You understand the words I have written and what they mean.
I have corrected your error. My work here is done.

You have done no such thing.

Go on and run off though.

You won't be missed.

And you don't understand fractional reserve banking whatsoever.

But good riddance. Keep your word and don't come back.

[Steve_American]

@Baff,
Let me do the math more plainly. To do this I'll make the rule 50% instead of 10%. The change changes only the final number.
Instead of $64 becomes $640 with a 10% reserve requirement, it is $64 becomes another $64 with a 50% reserve requirement .
OK, the bank lends $64 and deposits it in the borrower's acc., he then moves it all to another bank.
That bank has $64 on deposit and can lend out $32, that $32 allows some bank to lend $16, that $16 allows some bank to lend $8, that $8 allows the bank it ends up in to lend $4, that $4 lets some bank lend $2, that $2 lets some bank lend $1, that $1 leats some bank lend 50 cents, and we can go on until we reach 1 penny. To summarize ---
The original $64 allowed the following loans (all in dollars) ==> 32+16+8+4+2+1+1/2 = $63.5, and the last $0.50 will come from the rest that I left off.
So, increasing the reserve requirement from 10% to 50% results in total allowed lending equal to the total original loan amount. The total original loan is what you said was the RESULT with a 10% reserve requirement. But it takes a 50% reserve requirement to make what you claim happens with a 10% requirement, therefore you are wrong.
Is that simple enough for you?
.

[SueDeNîmes]

Bad maths sorry.

It's not 729 + 810 + 900

It's 729 lent out, plus what is left in the bank.
In bank 3 there is 81, in bank 2 there is 90 and in bank 1 there is 100.

729 + 81 +90 +100 = 1,000.

The amount deposited.

Nothing has been created. The 1,000 has been distributed. That is all.
It is a zero sum gain.

Wow, it must be interesting when all those bank customers find that 90% of their deposits have disappeared without them spending a penny.

[Steve_American]

It's a social "science".
Not an empiric one.

The Bank of England does not say that commercial banks create currency.
Sorry.
Perhaps you have misunderstood or miss sourced.

And yes sir. I am entirely confident.
Sorry to be the bearer of this news.

Unfortunately, while I am willing to offer you correction, I am not inclined to offer you debate.

If you build theories based on a flawed assumption, all your theories will be wrong. Castles built on sand.
This is a fundamental of banking and monetary policy. A fractional reserve. It is my considered opinion that you really need to master this before going on.
Respectfully. I am offering you this hint and not seeking to challenge your intellect. It is yours to follow up or ignore as you see fit.

Now that you have tripled down on your erroneous idea, I will reply to this early post. I'm replying to just the part I bolded.

You error here is to change my word "dollars" into your word "currency".
You are of course right that banks don't create currency.
However, they do create dollars. They create dollars that are deposited in their bank. Those dollars are then spent and and can be deposited into the same bank, but, usually into a different bank. But, that doesn't matter. Either way, the inter bank payment system converts those dollars into reserve dollars deposited at the Fed. Res. Bank.

Banks can convert deposited dollars (not create them) into currency simply by giving the customer currency when he makes a withdrawal. It doesn't matter in this case if the dollars are newly created by the bank or are deposits that must be reserve dollars because they came through the inter bank payment system.
.

[Steve_American]

Bad maths sorry.
It's not 729 + 810 + 900
It's 729 lent out, plus what is left in the bank.
In bank 3 there is 81, in bank 2 there is 90 and in bank 1 there is 100.
729 + 81 +90 +100 = 1,000.
The amount deposited.
Nothing has been created. The 1,000 has been distributed. That is all.
It is a zero sum gain.

Now, I see your mistake, Baff.
SueDeNines pointed it out before, but I didn't get it. I'll try to be more clear for you, Baff.

What you forgot is that every recipient of a loan in the chain will still have the full amount of his loan in his account at his bank until he spends it.

Laying it out step by step. Using American dollars as an example.
1] Guy A gets a Soc. Sec. check for $1000 from the Gov. and deposits it at Bank 1, his bank.
2] Guy B goes to Bank 1 to get a loan. Bank 1 loans him $900 (the limit allowed by the reserve rule). Now Guy B has an account at Bank 1 for $900 and Guy A still has his $1000 that he deposited and has not spent yet.
3] Guy B spends the whole $900 on stuff he buys from Guy C. Guy C deposits it in his bank, = Bank 2. Now Guy C has $900 more in his account at Bank 2. And Guy A still hasn't spent any of his $1000.
4] Bank 2 now has $900 more on deposit so it can make a loan for $810 to Guy D. Guy D can take the whole $810 out in cash and deposit it in his account at Bank 1. Now Guy still has his original $1000 on deposit, Guy C still has the $900 he deposited, and Guy D has his $810 that he deposited.
5] At this point only 2 loans have been made, plus the original deposit. The 3 Guys [A, C, &D] have $1000+$900+$810 on deposit. This totals $2710.

If we keep making loans the total of all the loans will total $10,000.

So, to repeat, you forgot that each recipient of a loan gets to keep his money. The bank does NOT take money out of his account to make loans.

Please read carefully the article with the experiment that I linked way up thread. It describes the history of the argument (does or doesn't a bank loan create money) and describes the experiment which showed that the German bank didn't move any euros from 1 place on its balance sheet to another when it made the loan. It just added 200,000 euros to the borrower's account at that bank. By "just" there, I mean the article said the bank did nothing else.


BTW Baff --- I'm sorry in my original reply to you I did in fact use the word "currency". I should have used the word "money" or "dollars". Sorry.
.

[SueDeNîmes]

I suspect Baff simply makes the common mistake of thinking "reserves" means proportion of deposits retained. Which, TBF, is what it sounds like and confuses a lot of people (the tedious bloviation is less forgivable).

Reserves are a unique kind of money which never leave the banking system and which commercial banks have in their accounts at the central bank. Commercial banks use reserves to clear transactions or borrow from each other "overnight". Since banking customers vastly outnumber banks, the transactions mostly cancel out, so central banks only require commercial banks to have a fraction of deposits as reserves. etc.. Crucially, a banking license allows commercial banks to make loans first and borrow reserves from other banks afterwards.

It was, broadly, Margaret Thatcher and Ronald Reagan who thought the free market fairy would ensure that this wouldn't turn into a godawful clusterfuck.

[Rancid]

When we say bank created dollar are we saying money banks get on loan from the central bank to then further lend out?