As I've said in my reply to Acala, I think people who understand & support gold-standard should more readily understand what "money" is & that FRB doesn't create it because when a person deposits 100 ounces of gold in a checking account & the bank lends 90 out ounces, they are NOT "creating money" because they aren't creating more gold; yes, it could be argued that FRB creates a perception of more money but only a perception.
Originally Posted by
helmuth_hubener
It's the same thing. It's the same result.
Of course, the results are important but so is the process that leads to those results; sometimes, it's the "how" that makes all the difference in how we view something. If a person has died, the HOW matters; whether he died of natural causes or if he was killed. So from that point, 100, 90, 81, 72....thing isn't the same thing as 100 to 900 thing.
Originally Posted by
helmuth_hubener
Pedagogically, for teaching new people my explanation is better, because it's much simpler than the traditional 90, 81, 72, 65,... series explanation. Salerno does go into 90, 81, 72, 65,... in the video above, right? My explanation is also superior for being closer to actually how it really works in reality. If a bank has a million dollars sitting in reserve, it does not cash out $900,000 of it to hand to people as dollar bills for loans. No, if it has a million dollars sitting in reserve, it has -- in reality -- ten million dollars of checking account balances on its ledger. That's how it works! It really, really is. Go ask your local bank president.
My explanation's shortcoming is that it's sometimes hard for people who have already learned a little about fractional reserve banking to accept it, because it's presenting things differently. But it really is true, and no, you're not an idiot, and neither is Professor Salerno and in fact I'm very sure that if I were to explain to him how I explain fractional reserve banking as I did in those other two threads, he would agree completely with it and pronounce it entirely sound.
Again, no, if a bank has a million dollars in checking accounts then it can ONLY lend $900,000. And yes, such high amounts are rarely handed over in cash but that does NOT mean they can't be converted to bills/coins; of course, they can be.
Look, if you have yourself convinced that you know something that Salerno & so many Austrian as well as non-Austrian scholars & economists don't know then it wouldn't matter what point anyone raises & we'll just have to agree to disagree. But just because I'm so inclined, I'll just try to try one last time to show how the process works & how Fed's Balance Sheet would look like under certain circumstances.
Ok, initially, Person A has $100 in cash.
Code:
Liabilities Assets
Money in circulation Gold + Treasury Securities + MBS - $100
Person A - $100
Bank reserves held by Fed
Bank A - $0
Person A deposits his cash in Bank A. Typically, banks don't keep more cash than what is necessary to meet their daily cash-transactions so they send it over to Fed & ask for cash as & when necessary but just to keep things simple & because there's no fixed criteria for how much vault cash each bank keeps, I won't show "Vault Cash" as a separate item on these Balance Sheets.
Code:
Liabilities Assets
Money in circulation Gold + Treasury Securities + MBS - $100
Person A - $0
Bank reserves held by Fed
Bank A - $100
Bank A loans $90 to Person B, who has an account with Bank B.
Code:
Liabilities Assets
Money in circulation Gold + Treasury Securities + MBS - $100
Person A - $0
Bank reserves held by Fed
Bank A - $10
Bank B - $90
Person B buys stuff from Person C & pays by check, which Person C deposits in his bank, which is Bank C. It goes without saying that Person B could have encashed the money on his account & paid in cash.
Code:
Liabilities Assets
Money in circulation Gold + Treasury Securities + MBS - $100
Person B - $0
Bank reserves held by Fed
Bank A - $10
Bank B - $0
Bank C - $90
Now, Bank C lends $81 to Person D, who banks with Bank D.
Code:
Liabilities Assets
Money in circulation Gold + Treasury Securities + MBS - $100
Person C - $0
Bank reserves held by Fed
Bank A - $10
Bank C - $9
Bank D - $81
Now, Person D buys stuff from Person E, who banks with Bank E.
Code:
Liabilities Assets
Money in circulation Gold + Treasury Securities + MBS - $100
Person D - $0
Bank reserves held by Fed
Bank A - $10
Bank C - $9
Bank D - $0
Bank E - $81
And, so on goes the process.
So, as can be seen, no new money is generated by FRB itself; of course, central-bank may create new money by buying assets in order to lower-interest or whatever else it wishes to accomplish out of it but the point is that FRB itself doesn't necessitate creation of new money, the existing merely gets spent & re-lent over & over.
You could say, why can't Bank A lend $900 immediately as soon as Person A deposits $100? Because it doesn't have the money. Of course, it can lend $900 if it takes a loan of $900 from Fed but that's the whole point, that central-banking creates money, not FRB.
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