No, I misunderstood how the system worked. What I realized was that banks can issue credit which in essence is really like printing money as long as it is continually recycled back into the banks.
What I meant by “only on paper” is that if a bank has 100$. It loans out 90$ but keeps 10$. Then the bank claims it has 100$. Then you could say that the money supply is 190$ when the physical money is still only 100$. However, what I realized was the bank can loan out credit because it pretends to still have 100$ even though it lent out 90$. That process does increase the amount being spent and therefore increases the price level.
Anyways, it sounds confusing but I understand.
“…since they are part of the Federal Reserve System, they ask for and receive a temporary line of credit from the Fed of $50”. THEY CAN DO THAT??? The reason in this case that fractional reserve banking is inflationary is because they would be receiving a “temporary line of credit”. The Federal Reserve would be expanding the money supply, not fractional reserve banking in itself. Right??"
have fractioanl reserve banks existed in the past without the central bank mechanism???
if they did did the fractional reserve banks inflate the money supply??
im not quite sure what you consider a current reserve piece of currency to be…this was told to me "
"… jl April 24, 2010 at 11:27 am
We have a fiat money system. So money is whatever the central bank declares it to be. Currency is only printed to satisfy the demands of people to hold cash OUTSIDE of banks, or for banks to have cash in their vaults. In this sense, a paper dollar is just a placeholder. An entry in a book is just as good a placeholder as a piece of paper…"
i guess a reseve can be a physical dollar bill or coin or different in on paper that doesnt circulate except in people minds.
i have asked several times if fractional resrve banking actually takes place but received two differnt answers..one said yes and one said no. so i am not sure.
if the reserve dollar can be both a paper bill and or coin and simply a bookkeeping entry then i am not sure how the fractional part occurs.
with arcane currency i guess whatever form the dollar takes and however it increases it would be inflationary…(i also asked if teh historical meaning of teh word inflation meant just an increase in the money supply). whether it causes woe as videos at mises have clainmed i am not sure and thats is wha ti have been tryin gto find out.
We have a fiat money system. So money is whatever the central bank declares it to be. Currency is only printed to satisfy the demands of people to hold cash OUTSIDE of banks, or for banks to have cash in their vaults. In this sense, a paper dollar is just a placeholder. An entry in a book is just as good a placeholder as a piece of paper.
"Bob: Comes in to Bank A to request his $100 so he can buy a lawnmower. Bank A does not have the funds on hand but, since they are part of the Federal Reserve System, they ask for and receive a temporary line of credit from the Fed of $50, with which they pay Bob. Bob immediately goes out and buys his lawnmower.
There is now really $150 in existence where there had been only $100 before. This can be seen because Alice has purchased fertilizer with the $50 loan and Bob buys his lawnmower immediately. This would not have been possible in the full-reserve system where the money on loan must first be repaid before it can be spent to buy anything else."
is any part of this fractional reserve banking at all??
by saying there are $150 does are 50 of the $ in a differnt form than the other 100 of teh $ ???
did 50 $ come into teh economy in a differnt way than the previous 100 $s ?? i
No, in that case the money supply didn’t expand because of credit expansion by the banks. The money supply occurred because the Fed printed. If you want to understand credit expansion you should look at Southern’s diagram, it’s very instructive.
@p kruger: I was giving a simplified illustration that does not even begin to explain the complexities of the ways in which money are created in the real world. In the real world, the whole process is cloaked in layers and layers of obfuscation to try to hide the essential nature of what is going on. If a layman says to Mr. Bernanke, “Does the Federal Reserve create money out of thin air?” he can respond, “No, it does not. The Federal Reserve purchases securities from the open market, backed by the full faith and credit of the United States government, and adds these as assets to its balance sheet to offset the dollars which enter the market as liabilities on the Federal Reserve balance sheet. If the Federal Reserve simply printed money out of thin air, we would not bother purchasing US government securities or any other asset as reserve backing for the money that enters the economy issued for the purpose of adding these assets to our balance sheet.” If the layman was exceptionally well-educated on the intricacies of the Federal Reserve, his eyes might not yet have glazed over. If he proceed to ask Mr. Bernanke whether or not the issuance of securities by the US government was inflationary, Mr. Bernanke could respond, “There is no necessary connection between the issuance of US government securities and inflation. You can go back and look at the historical CPI and the issuance of new government securities has often corresponded with times of decreasing CPI (deflation).”
By making the system so complex, there is always an answer that “honestly” avoids the question. Look at Mr. Bernanke’s demeanor during questioning by the House Banking Committee (by Ron Paul, in particular). No one could be more furtive, honest and straightforward. Mr. Bernanke even goes so far as to admit that inflation is indeed a surreptitious tax that hurts the poor the most. But he would categorically deny that the Federal Reserve is responsible for inflation, in fact, quite the opposite, one of the jobs of the Federal Reserve is to combat inflation and its use of open market operations - even quantitative easing - are all done to accomplish this very thing. As with the Lord, the ways of the Federal Reserve are mysterious, however. Quantitative easing is a euphemism for “printing money like a march hare” but this is done to promote stability by preventing deflation, not to cause inflation. When the Federal Reserve determines that we are no longer in danger of deflation, it will end QE and will begin raising interest rates in order to prevent inflation! My, what great guardians of the national money we have! Three cheers for the Federal Reserve!
Clayton -
By making the system so complex, there is always an answer that “honestly” avoids the question. Look at Mr. Bernanke’s demeanor during questioning by the House Banking Committee (by Ron Paul, in particular).
In the context of the current banking system in place and power that the fed weilds over the economy it may be a good thing the the chairman is cryptic. Considering that alluding to certain policies or admitting certain truths can cause dramatic shifts in the economy.
Of course, this is just another arguement to end the fed.
PS. I also think that they genuinely believe that what they are doing to good and neccessary. (have to break a few eggs to make an omelet mentality) I dont think the motivation is to get over on people.
“But you’re missing the point… the money has been withdrawn and spent and all that is left at the bank are ledger entries or paper notes that give individuals the illusion that they have gold in the bank when, in reality, the gold is out there being spent and driving up prices (inflation).”
is it both the lent gold and and the ledger-entries/paper-notes that are out there bidding up prices??
which all perpetuated the bubble.
is a bubble as you call it produced by inflation??
if teh federal reserve were abolished how would paper dolalrs and currency be created??
would teh treasury just print them directly to meet some type of reserve issues with individual banks??
would this in itself with existing paper cash requirments jsut keep teh same level of dollar inflation occurring with banks lending to banks directly without a fed but there own networks??
the current deposit insurance schemes are separate from the federal reserve right???
is ther feds mission to combat price inflation or monetary inflation???
did the dollars credits that were expanded spend in the economy just as the printed dollars did?
Inflation is an expansion of the money supply. The Fed supposedly fights price inflation. However, it is important to remember that they create the inflation. They sometimes raise interest rates to make prices rise slower than they otherwise would have. They can’t fight monetary inflation, they create the inflation.