Whenever deposits or deposit certificates are generally accepted in exchange, there is by definition debt money.Originally Posted by Black Flag
Whenever deposits or deposit certificates are generally accepted in exchange, there is by definition debt money.
No, it doesn't.
The basics can be had from even a basic source like WikipediaGreat responses though I want to dig a bit on the responses of credit not being created during the housing bubble.
I'm fairly new to the concept of debt-based money (couldn't you tell?) and I watched a video I found Money As Debt to get a better understanding
Around the 13:50 point they mention that using the 9:1 reserve ratio the bank can "conjure" up to 9x the "money" the bank has. Is this video wrong or is my take on their explanation not right?
http://en.wikipedia.org/wiki/Money_supply
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Fractional-reserve banking
Main article: Fractional-reserve banking
The different forms of money in government money supply statistics arise from the practice of fractional-reserve banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created. This new type of money is what makes up the non-M0 components in the M1-M3 statistics. In short, there are two types of money in a fractional-reserve banking system[16][17]:
1. central bank money (obligations of a central bank, including currency and central bank depository accounts)
2. commercial bank money (obligations of commercial banks, including checking accounts and savings accounts)
In the money supply statistics, central bank money is MB while the commercial bank money is divided up into the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts are categorized in M2 and M3, with M3 having the largest.
In the US, reserves consist of money in Federal Reserve accounts and US currency held by banks (also known as "vault cash").[18] Currency and money in Fed accounts are interchangeable (both are obligations of the Fed.) Reserves may come from any source, including the federal funds market, deposits by the public, and borrowing from the Fed itself.[19]
A reserve requirement is a ratio a bank must maintain between deposits and reserves.[20] Reserve requirements do not apply to the amount of money a bank may lend out. The ratio that applies to bank lending is its capital requirementExample
Note: The examples apply when read in sequential order.
M0
Laura has ten US $100 bills, representing $1000 in the M0 supply for the United States. (MB = $1000, M0 = $1000, M1 = $1000, M2 = $1000)
Laura burns one of her $100 bills. The US M0, and her personal net worth, just decreased by $100. (MB = $900, M0 = $900, M1 = $900, M2 = $900)
M1
Laura takes the remaining nine bills and deposits them in her checking account (current account) at her bank. (MB = $900, M0 = 0, M1 = $900, M2 = $900)
The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra money. If the minimum reserve is 10%, this means $90 will remain in the bank's reserve. The remaining $810 can only be used by the bank as credit, by lending money, but until that happens it will be part of the banks excess reserves.
The M1 money supply increased by $810 when the loan is made. M1 money has been created. ( MB = $900 M0 = 0, M1 = $1710, M2 = $1710)
Laura writes a check for $400, check number 7771. The total M1 money supply didn't change, it includes the $400 check and the $500 left in her account. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
Laura's check number 7771 is accidentally destroyed in the laundry. M1 and her checking account do not change, because the check is never cashed. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
Laura writes check number 7772 for $100 to her friend Alice, and Alice deposits it into her checking account. MB does not change, it still has $900 in it, Alice's $100 and Laura's $800. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
The bank lends Mandy the $810 credit that it has created. Mandy deposits the money in a checking account at another bank. The other bank must keep $81 as a reserve and has $729 available for loans. This creates a promise-to-pay money from a previous promise-to-pay, thus the M1 money supply is now inflated by $729. (MB = $900, M0 = 0, M1 = $2439, M2 = $2439)
Mandy's bank now lends the money to someone else who deposits it on a checking account on yet another bank, who again stores 10% as reserve and has 90% available for loans. This process repeats itself at the next bank and at the next bank and so on, until the money in the reserves backs up an M1 money supply of $9000, which is 10 times the M0 money. (MB = $900, M0 = 0, M1 = $9000, M2 = $9000)
M2
Laura writes check number 7774 for $1000 and brings it to the bank to start a Money Market account (these do not have a credit-creating charter), M1 goes down by $1000, but M2 stays the same. This is because M2 includes the Money Market account in addition to all money counted in M1.
Foreign Exchange
Laura writes check number 7776 for $200 and brings it downtown to a foreign exchange bank teller at Credit Suisse to convert it to British Pounds. On this particular day, the exchange rate is exactly USD 2.00 = GBP 1.00. The bank Credit Suisse takes her $200 check, and gives her two £50 notes (and charges her a dollar for the service fee). Meanwhile, at the Credit Suisse branch office in Hong Kong, a customer named Huang has £100 and wants $200, and the bank does that trade (charging him an extra £.50 for the service fee). US M0 still has the $900, although Huang now has $200 of it. The £100 notes Laura walks off with are part of Britain's M0 money supply that came from Huang.
The next day, Credit Suisse finds they have an excess of GB Pounds and a shortage of US Dollars, determined by adding up all the branch offices' supplies. They sell some of their GBP on the open FX market with Deutsche Bank, which has the opposite problem. The exchange rate stays the same.
The day after, both Credit Suisse and Deutsche Bank find they have too many GBP and not enough USD, along with other traders. Then, To move their inventories, they have to sell GBP at USD 1.999, that is, 1/10 cent less than $2 per pound, and the exchange rate shifts. None of these banks has the power to increase or decrease the British M0 or the American M0; they are independent systems.So there's "central bank money" & "commercial bank money" which are basically "obligations" as in promises to pay gold. Formerly, under gold-standard, notes were an IOU & since it was gold-backed, it was "IOU gold", after the gold-standard was taken out, it's since been "IOU.....nothing"Some politicians have spoken out against the Federal Reserve's decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal Reserve to do so. Congressman Ron Paul (R-TX) claimed that "M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation."
Even during those days, banks pyramided on top of gold through fractional-reserve-banking & issued more "receipts" than they'd gold & that's what often led to bank-runs because they wouldn't have the gold when people tried to cash in their notes for gold because they usually lend it out
Fractional-reserve-banking is problematic when banks lend against demand-deposits (it's ok to lend time-deposits in any system) which due to re-depositing & re-lending of the same causes an "illusion" of there being more money than there actually is & that fools market-participants into thinking they're richer than they actually are & they spend more lavishly than they otherwise would have & the resultant increased demand causes a rise in prices, which in turn causes producers to invest & try to produce more than they would have & eventually the frenzy ends when the "correction" starts to set in & then the moneysupply tries to shrink back to equilibrium & then of course, central-banks get all busy trying to prevent the catastrophy by re-inflating the bubble & so on
Consider the initial $100 in green color as 100 ounces if you will if that would help your understanding & see how fractional-reserve-banking creates the illusion, it will also answer your question about banks leveragin 1x9, it's due to 10% reserve-requirement & as you can see banks keep 10% of every "new" deposit & lend the rest & that way demand-deposits are re-deposited & re-lent which causes the wider moneysupply to increase & fools the market-participants
Yes, and for reasons I already explained. A "gold standard" only means that gold is "valued" in weight and purity - not "price" (the exchange value against anything else).
Fractional reserve lending is a mechanism to circumvent the gold standard, thus artificially manipulating the value of gold. The exchange value of gold is distorted and manipulated by conflating mathematically, physically impossible contradictory claims to the same gold, and future promises to pay, albeit with future gold. Under fractional reserve lending, it is possible for the paper (or column entries) that deliberately MISrepresents the amount real gold to outnumber the real gold many times over. It is not a case where real money happens to be in use by others. It is a case where FICTIONAL money is in use by others, but passing itself off as real money, and all because it has a trail leading back to an original deposit -- which was loaned out over and over again to different parties over the same time period.
Again, see how FRB works - even under a gold standard - slightly different than the one I posted earlier, note the red arrows showing the first part of the cycle, and the bottom line numbers, how $100 (or 100 ANYTHING) is inflated by FRB:
MYTH about "debt-money" - A lot of conspiracists & people who have ulterior communist/socialist motives are trying to peddle the myth that so long as there's interest, the debtors can't pay back their debt, etc but that's pure nonsense because money is NOT static, it's dynamic & it circulates so there's no basis for such arguments, but yes, as mentioned before by others, it gets harder to pay off debt in deflating economy, that is, the deflation preceded by inflationary boom of fractional-reserve-banking & that deflates pretty quickly & can be troublesome but the deflation under a gold-standard WITHOUT fractional-banking will have GRADUAL deflation as supply of goods & services outpaces the supply of gold & due to which, savings will be worth more & more into the future
Here's the link about "debt money" & interest - http://mises.org/daily/4569
About how Fed & Treasury & debt brings "money" into existence - http://mises.org/daily/4029
Another one on how moneysupply works - http://mises.org/daily/4631
Ron Paul's plan for parallel gold/silver standard - http://mises.org/daily/2826
A good video about history of gold-standard, fractional-reserve-banking & so on from an Austrian perspective
Last edited by Paul Or Nothing II; 03-07-2012 at 04:48 AM.
There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
- Milton Friedman
Exactly, Paul.
As the article states, money is only created at the FED, generally by buying T-bills.
The nuances are important because it highlights the problem precisely.
Just as you presented, it is NOT the FRN that is the issue - replace "gold bar" to be the money instead and STILL the fractional reserve system will pervert and damage the economy.
It is important to understand this because the gold bugs demand for a "gold based" economy will not fix a darn thing in this matter (it will fix another matter, however - but this one is the REAL problem - fractional reserve banking - that risk the massive undermining of the economy - in my opinion)
Further M1 is not money - it is IOU's denominated in money. The banking system, as it is today, insists on calling this money so to impart some legitimacy to M1 - but it is an illusion of historical evil.
Again, back to the monopoly game - as it really does help understand the system and its dangers:
The FED is holding all the real money ($100), and the bank has accounting entries saying it owes Steven a $100, Paul a $100 and Travlyr a $100 and that the bank is owed by BF $300.
If we view this from the banking system perspective, it is:
$300 it owes
$300 owes it.
Now, Paul, Steven and Travelyr moving their IOU's between them doesn't change a thing from the perspective of the banking system - whether Steven has IOU's worth $200, and Paul and Travelyr $50 each ... so what? says the banking system.
This trade of "fiduciary media" as Mises called it assumes the role of money, a role it has no business of assuming - and it is this trade of fiduciary media that is the real risk in the banking system..
There is pretty much nothing wrong with what you wrote that I can see (especially about M1) which brings us full circle to the real problem - one that will NOT go away - and that is the very word "money"; how it's bastardized, how it's used and misused, but most importantly, how it is commonly used - which really is how words are defined, possession of the common usage being 9/10ths of lexicon law. AFAIK that is not ever going to change. You need words/terms that are specific enough not to be misconstrued by anyone (lay and expert simultaneously), or the problem will remain firmly and permanently in Obfuscation-ville.
Currency is a good catch-all (read="current", "circulating"). Fiduciary media is a good term, but not familiar to lay people. However, IMO, I don't think you can use the word money. Period. Ever. For anything. Because lay people will count the plastic, paper and coins in their pocket - the Fed will count multiple types (including M1) and call/define that as money. Many sound money advocates will only count commodities. But there will be no agreement, even though the terms will be bandied about as if everyone was on the same page.
Last edited by Steven Douglas; 03-07-2012 at 10:26 PM.
21 pages later, and we appear to be on the same page
Words got in the way.21 pages later, and we appear to be on the same page
I don't know which "goldbugs" you're talking about but most of the "goldbugs" here perfectly understand that FRB is the problem, gold is used for exemplification purposes because it allows people to understand the nature of money a lot better because when it comes to money as how people perceive it right now, they don't differentiate between central bank money & commercial bank money because both are fungible & laymen don't understand the banking system entirely but with gold (or fish, chips or whatever) the difficulties of the system become more obvious because gold & gold-receipts aren't the same thing
As I've said previously, you're just stuck on your definitions & your demand that everyone only use your definitions
You just want to call paper & coin as "money" but those themselves are merely "promises to pay" & so is all commercial bank money so there's little point in saying one kind of "promise to pay" is "money" & another kind of "promise to pay" is notSo if you accept one as "money" then you should accept the other as "money" as well for consistency's sake & if you're going to reject one as "money" then reject the other too
Again,
Central bank money = promise to pay
Commercial bank money = promise to pay
So there's no point in saying one is "money" & other isn't
Now, let me give you an example :
Let's say we get rid of all the paper & coins & only deal in checks, electronic transfers, cards, etc & there would STILL be central bank money which they'd issue & then commercial bank money which they bring into existence when they lend by pyramiding on central bank money & it's re-deposited & re-lent & so on BUT in your unique worldview "there's no money" because you think paper & coins is money- let me repeat, there's STILL central bank money & there's STILL commercial bank money, even though there's no paper or coins
Again, the point being that both central bank money & commercial bank money are just as fictional so saying one is "money" & the other isn't is preposterous
There is enormous inertia a tyranny of the status quo in private and especially governmental arrangements. Only a crisis actual or perceived produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable
- Milton Friedman
So your answer is to ignore the definitions and use what the confused layman use as definition.
Good plan - if you want to add to the confusion.
That's the point - no it is not.
Money is something that does not obligate someone else to pay or do something.
When I hold a dollar bill, there is no one who I have to hunt down to get payment or force someone to act on my behalf. Money stands on its own.
An IOU is not money, because for that IOU does obligate someone to actually do or pay something. The IOU value is not the IOU but the money or action that underwrites it. If there is no money or no action, the IOU has no value at all
You convoluting two -completely - different things adds to the confusion that the layman suffers - and makes solutions even more difficult to discuss, let alone implement.
Last edited by Black Flag; 03-08-2012 at 12:54 PM.
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