wikipedia states that money destruction also exists and can exist during these FRB transactions.
maybe that isnt saying much.
www.economagic.com displays an m1 money chart - year 1959 140 billion dollars ; year 2009 ~1600 billion dollars.
i dont know what portion of that is base money (the paper dollars and coins).
if i am incorrect, or the charts are, it seems that the frb credit inflation always outpaces the credit destruction. which i guess has an overall net inflationary effect?
would this be differerent (create more economic disruption) than than a mined gold/commodity-metal money system where probobly very small amounts of ‘gold-ed’ money would be destroyed?
i am not sure.
some at mises have posted online that gold/commod. money provides greater monetary stability.
less control via govts and ther agents in large banks, iow.
with fractional notes for so long used in the aquisition of gold, fo me it hard to tell.
correct. the problem is that banks treat future money as discounted present money. this is called maturity transformation. it is allowable due to legal tender laws. in a free market loans and actual cash wouldnt be freely fungible.
Nazgulnarsil, can you create an example of money creation, followed by money destruction so as to further my understanding of these concepts. I am still only half understanding it.
sure david.
part of the confusion arises from the fact that banks do several different things simultaneously and juggle the numbers around in order to look solvent.
say a bank makes an loan of $1000. Let’s also say the fractional reserve requirement is 10%. So $100 of the loan is backed and $900 is unbacked. That $900 represents future productive value being injected into the economy today. There is now $900 more in the economy than there was before. As the loanee pays back the loan that future productive value is transformed into actual value. Thus the $900 turns from virtual wealth into real wealth over time. The “checkbook money” is destroyed and replaced with real money.
So what is actually happening here? The loanee wants to purchase real goods using a promise to produce value in the future to pay for it, but normal corporations aren’t in the business of dealing with loan contracts, so they use an intermediary, the bank. The bank is allowed via legal tender laws to accept the promise from the loanee and in exchange type the amount of the loan into his account (minus the reserve requirement of course, that has to be actually backed). Without legal tender laws banks could only pay for things with money they actually have, and trading actual assets for a loan would only happen in scenarios where the person you want to buy from is willing to accept your promise. Under free banking fractional reserve banking would still exist, it just wouldn’t be in high demand. Loans would just be another investment type, with the loaners taking on the full risk of defaults. Under the current system EVERYONE who has money in a bank is in the loan market. This has created an artificial demand for future money that doesn’t really exist. Enter the FDIC. If people with savings in a bank were financially responsible for the banks losses do you think people would invest with fractional reserve institutions? Doubtful. So hand in hand with legal tender laws the state props up banks with the FDIC. Take away the FDIC and people only do business with banks they trust.
Can I ask you guys a very crucial question (at least for me), if something is paid through credit card, will this payment POTNETIALLY create new money?
But isnt that a payment through credit card is like transfering money in buyer’s bank account to the seller’s bank account, so provided these two people (the buyer and the seller) use different banks, then the seller’s bank kind of get new money electrically (through this credit card payment ,from the buyer’s account) therefore enbaling itself to loan new money in accordance with the fractional reserve ratio on top of the new money?
You have to take into acoount that there is one central bank running the show, so if they did their job (the central bank), the credit that you use to buy that plasma TV you want would be paid for by your credit company (Bank A) and deposited in Best Buy’s Bank (Bank B) and that would be the end of the travelling of the credit money that does not really exist. But because the LT laws are so twisted (one of the inefficiencies of government involvement in EVERYTHING), Bank B is now allowed to make loans based on the electronic money Bank A gives them, lets say creating a line of credit for another person, wash, rinse, repeat with a Bank C. Basically this creates a bulk of now nonexisitent money based on promises to pay by the debtors on future earnings…
What does BANKB do with the newly created 10,000? Is it counted as a reserve? How does BANKB know that it was lent to him by a bank or by some other means? Maybe he sold alot of gold? As ManA Pay’s back his loan over time, what transpired with the deposited 10,000 in BANKB? The 10,000 gets paid off at BankA and that newly created money supposedly leaves the system but how is it handled by BankB?
This part of the process always confused me. Thanks all.
i guess i could be wrong depending on how the banks decide to juggle the numbers that day. banks balance assets against liabilities to remain solvent. to do this they assume some theoretical selling price for their loans. this is treating a loan as money. it is also what leads to moral hazard.
You are assuming that Bank A and B never communicate…
The loan check is a check from Bank A, so Bank A will let Bank B know that it is “credit”, in the US system, that allows “B” to lend out 90% of the checks value ($9000). Once the loan is paid off with real money (in the future of the loan) the 10K comes off Bank “A”'s sheet (theoretically), the interest is paid to the bank, and from the bank to costs, deposit interest and profit. IF, and this is a big IF, handled properly, FRB is not in and of itself a bad thing, it is the hazard for immoral practices that makes it bad…
I am not assuming anything, merely asking. My question was made in complete ignorance of the process at hand.
With that said though, and offering no evidence of my own, I find that claim extremely hard to believe. Do you have any citations or references which I could read up on? Considering the assumed hundreds of thousands of deposits which occur between thousands of banks nationwide such an accounting system to keep track of this seems impossible from a cost efficiency standpoint.
Perhaps they have some built in system with Checks but every deposit I’ve made has only had 2 sets of numbers. 1 account number, 2 routing number. Had there been some other serial code on a check that the depositing bank could reference that may make sense. However to my knowledge there is no open standard used. However I am not very knowledgeable in the banking field.
Additionally many loans to individuals are deposited directly into their checking accounts. The individual may use his normal checks to spend some of his new money. How does BankB know where this money came from? It seems far fetched that there is a transaction police department watching every single transaction that takes place nationwide in a single bank.
One of my clients happens to be a bank and I know that they have no technician subsystem or staffing to perform such a task. I know this because I do their IT. Unfortunately I cannot share the details.
Now as I said I could be wrong. My rebuttal is made in complete ignorance and shock that such live auditing of the banking system is even fathomable. It would be good for me to get some more information regarding FRB and it’s mechanics.
For that matter it may be beneficial to the original poster if the mechanics of FRB were summarized here as an answer. Explaining how $1000 of reserves can be expanded to create new money and how paying that off retracts the original expansion.
I have heard some make the argument that while paying off massive amounts of dept does retract the money supply there is still a residual amount of new money that is created from the process. It would be nice if any one knowledgeable can expand on this.
Thanks for your response Harry, I appreciate your intellect and time.