Posted by Edmond Dantes on Mon, 06/02/2008 - 01:17 in
I just finished reading Ron Paul's new book and the chapter on the Federal Reserve was excellent however I still have a few questions. Numerous times he states that they make money out of thin air except fails to explain the relationship between the Federal Reserve and the treasury department which is to my knowledge the executive branch department responsible for actually coining and designing the currency. Do they just hand over the money to the Federal Reserve or is there some sort of transaction that takes place? Is there actually a bill for every digit in the system and when they bail out their buddies in Bear Stearns and the like are they simply allowing them to change the digits in their bank accounts?
Subscribe to this thread- Flag as offensive
- Login or register to post comments
- 518 reads
One aspect that nobody has mentioned is the fact that the treasury doesn't even have to print money when the Fed creates it. This makes it much easier to inflate money even faster.
The amount of tangible money in the world is very small. The dollars and coins you see are a small fraction of what actually moves around the world. Most money is electronic, stored on hard drives instead of in vaults, and it's transferred over wires.
And really, what's the point of carrying around a wallet of worthless money anyway? If I'm gonna have worthless money, might as well store it on a computer where it takes up less room and doesn't make a bulge in my back pocket. ;o)
I didn't read the entire thread so please excuse my laziness. The point I did not see, is that banks create money when they write a loan. This is why we are in the situation we are in. If I have $10,000.00 in my BofA savings account. BofA can write loan up to 10X of that deposit or $100,000.00. The next thing they do is securitize it and sell it to another party. Then they go and write another $100,000.00 loan and do this over and over again. This is actually a ponzi scheme because while the banks create the $100,000.00 for the loan. They do not create the interest that needs to be paid. In the end, someone will end up holding the bag, mostly likely US tax payers. Another good book on the subject is "The web of Debt"
(using Bobo's illustrative term) only constitutes 4% of the supply of dollars in our monetary system. The other 96% is commercial bank magic money created from thin air as debt. The fractional reserve debt money system is where our money comes from, to the tune of 96%. Bobo argues that this debt money is not money since it is only a loan. But, respectfully, Bobo's formulation is premised on the assumption that visible "paper with pictures" (the 4%) is what matters, while the not so visible debt money (96%) is somehow less worthy of importance in the analysis of what money is; and where money comes from. This is a core misunderstanding-- and it is precisely what allows the bankers to get away with their fractional reserve scam. We have difficulty absorbing the truth about what our bankers have been doing because the 96% is not as easy to "see" as the 4%, but like all good magicians our banksters are simply using illusion to carry out their trick. Check out the "Mandrake the Magician" chapter in Creature From Jekyll Island-- Griffin explains it well. R
as much as a federal reserve paper note, because it is accepted as legal tender. We are talking about a bank cutting a check and the borrower depositing it in his checking account. How is that not money? When the loan is made to a developer, the developer uses that electronic account to purchase lumber, pay employees, etc. to build his buildings. THose employees and vendors then use that money to buy things they need. If that's not money, I don't know what is.
What is really scary is that once the bank makes the loan, holding only 10% in reserve, and the developer uses the money to pay his employees (for example), some of those employees will deposit that money back into the same bank, allowing the bank to loan it out again! This is how the banks loan out up to 10 times what is deposted. It is also why there is always a strong desire for consolidation among banks.
THe more you learn, the scarier it is.
Tom Mullen
www.tommullen.net
www.myspace.com/skepticsongs
Spot on, Tom. Throughout history, civilisations have recognised as money: feathers; clay tablets; smooth stones and precious stones; precious metals; notched sticks (even the Bank of England used Tally Sticks!); notes on slips of paper; pictures of dead guys on slips of paper; pictures of birds, fish, flowers, bears, bison, freight trains, sailing ships, and even pictures of volcanoes on slips of paper.
Morality and violence have always been at the root of human institutions such as nation-states, and their currencies reflect morality and law far more than the currency reflects pure economics. After all, ink and paper are practically worthless, compared to the denomination printed on those legal tender notes, right?
Since morality and violence must eventually give way to immorality and currencies in 'civilisation', you're always talking about morality and law when you consider a currency. The most comprehensive history of American currency is Dr. Edwin Vieira's "Pieces of Eight", a 2-volume, 1600-page tome that is all but impossible to find nowadays outside of law libraries.
But from the basic ethical/moral perspective, perhaps the most cogent book in print today is Stephen Zarlenga's "The Lost Science of Money: The Mythology of Money, The Story of Power". Stephen started his career working for a British life insurance company, then built the American network of the leading mutual fund (at the time) dealing in gold shares. His specialty was trading the CRB Futures Index on the NY Futures Exchange.
I mention his 'gold bug' background (he also published Professor Carrol Quigley's book "The Anglo American Establishment") because his new book "The Lost Science of Money" digs at the ethical, moral, and legal roots of all the monetary shenanigans from European barter 3,500 years ago to today's Euro play and collapse of the USD.
Zarlenga posits that (pace Adam Smith and today's gold-bugs and bimetallists) there's no moral or legal reason to demand a currency be backed by a precious commodity that can itself be controlled by those who hold the world's gold, silver, or whatever you choose to peg to. The fascinating aspect of this argument (also favored by lawyer Pat Carmack, author of "The Money Masters") is that if the American people wanted to have a totally sound currency tomorrow, we could have it! Yes, the Congress would have to return to the Constitution as written; they would have to be 100% responsible for coining our money and regulating the value thereof.
Whether they coined it out of gold, silver, some combination of tin and silver, or out of tin...or recycled Pepsi cans!...the question is moral and legal as much as economic. The Constitution is tantalyzingly silent on how the Congress should do this, but they DO have the duty to do it.
And WE have the duty to MAKE them obey the Constitution.
Read Zarlenga's book; you'll be fascinated by the sheer evil of the money powers -- especially in England and all over Europe. Gold is not the answer; it's not a god to save us from profligate, mendacious politicians. We the People have that duty...alas, the more godless we become, the more unable to make ethical decisions and the more unable we are to exert moral force as communities.
So the weakness of the USD in today's market, like every other public dissaster in America today, is really our own damned fault. (Big surprise, right?)
Go to the America Again! declaration, and see that I included this issue as a major demand that we must make of our member of Congress every 4th of July. It doesn't have to be Stephen Zarlenga's draft monetary reform bill, or Pat Carmack's draft bill...but we do need to stop the corruption in Congress; need to force corrupt people to do what they will obviously not do on their own: return to the U.S. Constitution's requirement that they (Congress) alone will take authority and accountability for producing America's currency and setting its value.
Equally important in stopping the freight-train of American debt is outlawing institutionalised theft and fraud (what bankers call 'fractional-reserve' banking). Stop referring to your friendly neighborhood thief as "bankster"; start DEMANDING that your member of Congress outlawing this theft IMMEDIATELY.
So many people on this site love to rail about the Federal Reserve. Have you considered how much worse your local bank is, that doesn't even bother to have fake money printed up so it can charge the federal government interest on it...but just types some numbers into a bank teller's workstation and the "money" just pops out of thin air, with only 10% 'deposits' to cover that supposed 'loan'? (actually it's worse than that, because so much of the 'deposits' are air-money, too!)
There is a great deal of fraud and injustice abroad across America; people love to make jokes about scummy lawyers and used-car salesmen. But the guys and gals in nice business suits driving a Lexus to their office at the brokerage, bank, or CPA firm are a thousand times more venal (and effective) than the gang-banger who breaks a window to steal a $200 stereo.
So what can a people do, when evil runs as rampant as it does in America today? Well, we can start by looking in the mirror with a sense of humble repentance. We can let the taunts of atheists, sexual deviants, and liberals go in one ear and out the other, and we can start kicking some serious criminal butt!
The place to start is with the one who calls him/herself your "U.S. Representative"; make that sleazy crook start actually representing your interests...by OBEYING the Constitution! The money stuff flows from that, and from the ripple effect on all the corrupt institutions and industries that the corrupt government empowers. You have to grab the ones you can; the average American has no way to restore sound money or any other ethical soundness in this civilisation, until we start enforcing the Constitution and putting some very public crooks into leg-irons and orange jumpsuits!
With the America Again! project, We the People essentially begin to hold our members of Congress hostage, pending real results -- just as they are doing to us and have done for generations! If (s)he won't stop violating the law, (s)he goes to the State Penitentiary to think about it. What's not to like?
OK, your bank stock is going to tumble. If fractional-reserve ponzi scamming is outlawed, you'll want to sell your bank stock (those of you who own any). Big deal.
We can have serious, far-reaching reform in this nation if we will join the REAL War on Terror in this country. If we citizens will start cracking down on government corruption, the entire culture will begin to get the hint, eventually. Crime must not pay; right now it pays BIG. If you can get a national bank charter, you can make incredible wealth...out of NOTHING. It's immoral and it's fraud; both of which must be made illegal, for real.
No reform will ever come until Americans do some soul-searching. Play it out in your head: what will a real restoration of our Constitution require? Are you willing to start living and acting as a self-governing citizen? Are you willing to stand, in public, regularly, against government corruption? To see criminal politicians and bureaucrats brought to justice? Are you willing to start learning basic firearms use, maintenance, and tactics? Willing to buy decent, military-grade firearms for your family's regular use and practice in homeland defense? Willing to join the local 'Citizen Homeland Security Association' pursuant to a full-blown militia of your area once your group sponsors a strong, constitutional militia law in your state?
That's the cost of restoring the full faith and credit of the national government of these 50 States of America on the world stage -- and thus our currency to an international zenith of value.
It's not about gold; it's about morality and law.
Closer to home: restoring America's currency (and international reputation) is about you reading big fat books...and having backbone.
www.america-again.blogspot.com
http://www.monetary.org
Wachovia announces today that it has retained Goldman Sachs to try to help it figure out how to deal with its loan portfolio. Bye bye Wachovia; nice knowing you (not). R
The federal reserve purchase the currency at a per unit price of about $1.33 (approximately) per bill.
a dollar bill cost $1.33 and a hundred dollar bill cost $1.33 ( bet you they buy more of these). The treasury notes are mostly electronic credit. Currency is mostly needed for public use.
I think what Bobo means is that there is no additional money created in the sense of 'hard currency', but what Tom is pointing out is that money is created if someone has the ability to purchase goods even if it is from cheques or electronic data...
When you deposit $100 in a savings account, the bank is only required to keep $10 of that $100 "in reserve." They then loan out the other $90. That would be fine if you were loaning money to the bank. However, they also tell you that the entire $100 is still there and available for withdrawal whenever you want it. THerefore, $90 has just been created out of thin air. This is "fractional reserve banking," and it has been around causing the same problems for thousands of years. HEre is a link to a great book you can read on it: http://www.mises.org/books/desoto.pdf.
So, it is not just the Fed that creates new money. It is every bank practicing fractional reserve banking, which is EVERY bank. There is a limit to how much credit expansion there can be, which is basically 10 times the total amount of money in circulation (somewhere near $14 trillion right now!). However, when the Fed creates new money (by buying treasury bills from the government), it puts new money into the system that can then increase exponentially.
Tom Mullen
www.tommullen.net
www.myspace.com/skepticsongs
You're absolutely right, as long as a debt instrument is the
same as money. (That I don't accept.)
It is, until it expires, as all debt instruments must, in order to
have value. The distinction I make is that money doesn't expire
and all debt instruments do(whereupon they become demand
notes, like checks, and can be presented for payment at any time;
at this point they are money, and the money claimed by them
can be taken at any moment and therefore cannot be counted
separately from and in addition to the instrument that claims it.)
The money you say has been created by fractional reserve
banking actually came from someplace else in the economy.
The fractional reserve system only facilitated its transfer in a
more efficient manner.
OK, there's the hundred dollars you deposited and withdrew.
The $90 for the loan payout came from elsewhere in the
banking system. Starting from scratch, in a hypothetical system,
strictly for the purpose of illustration, if half the people in the
system deposited $100 and then withdrew it, and between
those two events the other half of the people each got loan
commitments for $1000, after the savers whose accounts justified
those commitments made their withdrawals, there would be no
cash to honor those loan commitments left in the system. Therefore:
no new money was created. The bankers now must somehow
raise cash to honor their loan commitments, and they'll do it by
selling assets, like debt instruments, even freshly created ones,
stock or houses they've foreclosed on. Still: no new money has
been created.
This situation could occur even if only gold coins were money,
and the reserves required were 100% of the loan commitment,
or as well, with fiat money and a 10% reserve requirement, or
any combination of those circumstances.
Whether you like a managed economy or the fractional reserve
system, think the central bankers are crooks, or want a gold
standard, are all irrelevant to this controversy.
I will not accept an assertion and a reference to a nine hundred
page book in lieu of a coherent argument. I don't think there is
one.
The fractional reserve system can be inflationary in a fiat money
economy, by speeding the flow of money through the economy
and causing a faster rise in price levels in response to the
issuance of new fiat. This is why reserve requirements are often
raised in times of inflationary pressure. The practice allows the
early receivers of the new money a longer period of access to
low prices yet unaffected by the new currency issued. Changing
reserve requirements changes the velocity of money.
Whether a managed economy is a good thing or not is a theoretical
issue; we've never been without one. Fractional reserve banking
is not incompatible with a gold standard. It simply allows a more
efficient use of the money that exists. In its absence, something
else would probably be devised to achieve the same end.
"The $90 for the loan payout came from elsewhere in the
banking system"
No, it didn't. It was created at that moment out of thin air. That is the reason why we've suffered rampant bank failures for all of human history. If they were getting the "money" from somewhere else in the banking system, then there would never be a danger from a run on the bank. The whole problem is that the $90 doesn't come from anywhere. It is not deducted from anyone else's account.
Tom Mullen
www.tommullen.net
www.myspace.com/skepticsongs
. . . to the banksters. Think about it a bit more carefully. You'll see on further study that the banksters do indeed create new money (for themselves; out of thin air) every time they engage in a fractional reserve banking "loan" transaction. There is no existing money lent to the borrower-- it's brand new money appearing by magic via computer bookkeeping entry. 96% of the total dollars in our monetary system are created in this manner. The banksters are collecting interest 24/7 on this fractional reserve magic money; money they never had; money that didn't exist until they created it for themselves. This is precisely the way that a small group of people has gotten very wealthy (banksters; purchased politicians; their war profiteer cronies), and everyone else (the debtor class) has been made very poor. R
I've thought about this very carefully, and at great length. I have no appreciation
for the banksters, but seeing people who I admire and respect like you and Tom
fooled into confusing money with credit is a source of great annoyance to me.
Did you actually read all of my writings on this above? It's a difficult thing to explain, and
I'm forced into using reductionist examples in my attempt to clarify the matter, and it still
appears I haven't done my job properly. I feel ashamed, since I've been aware of this
issue since 1965 and had many long discussions with my father on this and other
finance issues during the years since, aside from having read and participated a great
deal.
Credit behaves much like money. The fractional reserve system works like a 'just in
time' inventory system for money. It allows more people access to the same money,
but it doesn't actually become money until it's used, whereupon it becomes unavailable
to others who may have open loan commitments and the concomitant checking account
balances. The bankers are collecting interest on numerous loan commitments far in
excess of the actual funds they have on hand. This creates incentive for them to make
capital widely available, and for those with loan commitments to use the money efficiently,
which they all too often don't. Those loans should be drawn out and put in interest
bearing money market accounts. Then the "stolen" interest you perceive would be returned
to the borrower. If everyone with a loan commitment did that the bankers would get no
extra interest, and no more money could be loaned than actually exists, reserve requirements
notwithstanding. The banksters simply prey on the inefficiencies and stupidity of borrowers
and exacerbate the situation by issuing them "convenient" checking accounts to hold their
loaned money. This is entirely fair and anyone who thinks otherwise can seek redress by
opening their own bank, buying bank stock(the latter of which admittedly would make them
vulnerable to the various fraudulent and duplicitous practices of management.), or informing
all holders of loan commitments of their loss in not keeping the money in money market funds.
This is free enterprise. Mess with it and suffer unanticipated consequences.
Bankers as a group can make loan commitments far in excess of their actual cash holdings,
and collect interest on same, but cannot pay out more money than they actually have as
a group. *These* bankers are not empowered to print money, which is a separate process
reserved to the central banks. Maybe the problem is that so many people agree with your
and Tom's position that you feel excused from thinking about the issue in any depth.
Like Tom, you appear to prefer to make bold and incorrect assertions without any supporting
information, which is reasonable, since there is none. What is unreasonable is that you
expect me to accept that. Meanwhile I'm searching the book Tom points to and haven't
found any indication as yet that the author shares his beliefs. How about a relevant excerpt
or page number, Tom? Let's not waste our ammo on false targets.
Update: Top of page 155 DeSoto asserts that fractional reserve banking increases the money
supply and promises to support that statement in later chapters.
"It allows more people access to the same money,
but it doesn't actually become money until it's used, whereupon it becomes unavailable
to others who may have open loan commitments and the concomitant checking account
balances."
I understand the distinction that you are trying to make, but I don't think it holds water.
The statement above is a case in point. The whole problem is that the money IS available to more than one party at the same time, so for all intents and purposes, new money has been created.
If anything, we should be distinguishing between "money" and "currency," because Federal Reserve Notes are not money. Money is a real store of value. What you hold in your hand, if it is real money, has intrinsic value itself, whether it is a gold coin or grain, or whatever you are using. I like illustrating this point with societies that used grain as money even more than the use of gold, because it really drives the point home. With grain, if there is absolutely nothing to buy with your money, you can always eat it!
Tom Mullen
www.tommullen.net
www.myspace.com/skepticsongs
Tom:"so for *all* intents and purposes, new money has been created"
Not if everyone wants the cash at the same time, and by cash I mean
paper with pictures of dead presidents, not promises of such.
DeSoto has the same problem:
p.179
"From an economic
standpoint, for Mr. X the 1,000,000 m.u. are fully available to
him at all times and therefore contribute to his cash balances: that is,
even though the monetary units were deposited in Bank A,
from a subjective viewpoint they remain as available to Mr. X
as if he carried them in his pocket."
bobo: false- no, the bank has it.
khalifah:
I think what Bobo means is that there is no additional money created in
the sense of 'hard currency', but what Tom is pointing out is that money
is created if someone has the ability to purchase goods even if it is from
cheques or electronic data...
Posted by khalifah on Thu, 06/19/2008 - 00:58
Tom now introduces a new issue, gold as money, to further muddy the waters.
Better to define your terms when making outrageous statements if their
meaning is different than that most widely held in society. Ask any High School
student, money is paper with pictures of dead presidents, or coins.
You WIN based on your claimed right to constantly redefine your terms. You could
have said that a long way back. Not good form at all.
By the way, my absolute favorite line from Ron Paul's new book is when he explained the transaction bobo just described above. RP writes, "If you think this sounds fishy, then you understand it just fine." LOL! You really have to love that guy.
Tom Mullen
www.tommullen.net
www.myspace.com/skepticsongs
To create new money, the U.S. Treasury buys cash or data entry money
from the Federal Reserve System by exchanging it for U.S. government
debt instruments, which they are then free to sell or buy back through the
securities markets. The Federal Reserve gets that cash for free from the
U.S. Treasury, which arranges the printing. Beyond this humongous larceny,
the Fed has somehow taken possession of America's gold reserves.
This should not be confused with the money not created by fractional reserve
banking. I saw this debated at length on the gold-eagle forum. The upshot
of it was that the practice of allowing banks to loan multiples of the money
on deposit (5X was the last I heard, but I never followed it.) creates no new
money, but does affect the velocity of money, which certain people feel an
occasional need to change. Basically it's a sop to allow banks to charge
interest on the same money to multiple borrowers. This isn't unfair, but
rewards the borrower's efficiency and punishes the waste of credit created
by leaving borrowed money in lower interest paying accounts. The reason it
creates no new money is that if all those borrowers decided they wanted to
keep the money in their wall safes, they'd have that right, and it would be
a mad scramble for cash, with banks and people short callable paper selling
stocks, debt instruments(likely discounted), and other assets to raise cash to
put in all those safes. After the huge resultant shakeout with everyone
exercising their full contractual rights so they could fulfill their their full
contractual obligations, and keep their safes as full as possible, there would
not be any more money in existence than there was originally. If you don't like
it, go start your own bank; it's a free country. This system allows and rewards
a more efficient use of money.
The situation just described would obtain unless the FED decided to "provide
liquidity" to avert the "crisis", in which case the mechanism described in the first
paragraph of this post could come into play,or the Fed could relax reserve
requirements, or lend cash from its own reserves.(These latter two have no effect
on the amount of money in existence.) If the Fed wants to issue more new
money, I think they may have to get permission, maybe from the Senate banking
committee. With the amount of influence they exert I think they don't hear many
objections to their requests. The selection of Fed Chairman from among their
three appointed candidates by the President gives the lie to the nature of the
relationship. The government strives to appear to control the Fed, while the Fed
actually is in the driver's seat.
I don't get the idea they want me to start my own central bank though. I
wouldn't anyway; it's completely unethical, coercive, conspiratorial and
predatory. They're effectively GIVEN all new money, to lend or keep as they see
fit, in perpetuity. They have first knowledge of policy changes and can discreetly
ride long term financial trends without risk. JFK wanted to stop it, but spoke
before he acted. The big bankers have been leeching off the world for centuries.
Those of them who've died were all extortionists, since it's impossible to libel the
dead, and I suspect the living among them avoid that appellation mainly by
breathing.
Countries that issue gold backed currency (exclusively) are disinvited from the
World Trade Organization. I don't think any do at this time.
One motive for dumbing down the population is to keep people from finding
this stuff out, or even understanding it when they're told. Another confusing
financial crime. Slow news day! What's up with Brittany?
http://www.ustreas.gov/bureaus/
Here it says,"The Bureau of the Public Debt borrows the money needed to
operate the Federal Government. It administers the public debt by issuing
and servicing U.S. Treasury marketable, savings and special securities."
That means selling I.O.U.'s for cash. Aside from taxes, this is where the
federal government gets money for operations. They are huge. I've seen
the estimate that thirty percent of our labor force is either directly employed
in government, or works for companies that primarily work on governmental
contracts.
This debt to the Federal Reserve is an interest bearing loan. A larger loan needs
to be taken out in the future when it comes due for payment, unless other
revenues like taxes are used to retire it. Anyone who has ever examined a
mortgage amortization table can see the obverse of the 'miracle of compound
interest'. Consider the effect of our borrowing our national debt all these years
of the life of the Fed, since 1913, and how much they've gained for lending us
money we are Constitutionally obligated to simply print for ourselves, and hold
a certain amount of gold in the Treasury to support it's value. This is compulsory
loansharking, with the principle amount being stolen from us outright , in lieu of
charging usurious interest rates.
Any shipping of gold overseas from America by any central bank should be
immediately halted. The Federal Reserve should have never gotten any gold from
America. Nothing in their official function requires it.
"For the new “benefit” of being allowed to use FRNs, aka U.S. Government debt
instruments -- in lieu of Gold Certificates or Silver Certificates -- the US agreed to
redeem the newly issued FRNs in gold and in addition to pay interest for their use
in gold. Only in gold. In essence, the Fed issued paper, in which the US paid gold
for the “privilege” of using it. This was the basis of the Federal Reserve Act. "
http://www.halexandria.org/dward296.htm
I say the above transaction should be ruled void in a court of law as not satisfying
the "rational man standard" probably evidencing fraud, bribery or some other
coercion, even mental incompetence, and all the gold at the Fed in NY should be
seized by the treasury.
"The gold is owned by many foreign nations, central banks and international
organizations. The Federal Reserve Bank does not own the gold but serves as
guardian of the precious metal, which it "protects" at no charge as a gesture of
good will to other nations."
http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_York
And I'm Mother Teresa. Their gold is offshore, as would be expected. Well, they
stole it first, so they can pay their depositors (themselves, posing as the central
banks of other nations) from their private stash, and be happy if they stay out of
jail.
Wow, bobo, it's hard to believe that a debate like that actually occurred. I'm not sure if the participants were trying to deceive people, or if they truly did not understand fractional reserve banking. If I understand their example correctly, the borrowers put the money in their safes, and this prevents the creation of new money. Not true. The problem is that the savings account from which that money is lent still makes that money available to the savings depositor.
For example, if deposit $100 in my savings account, and the bank loans out $90 (the reserve ratio is actually 10%), then by our present banking rules, I still have $100 available to me and you now have $90 available to you - whether you put it in a safe, your wallet, and checking account, etc. Thus, my $100 has become $190 and new money has been created.
The Ludwig Von Mises institute has just translated an excellent book by a Spanish author called Money, Bank Credit, and Economic Cycles (Jesus Huerta De Soto). It is about 875 pages long, and I am about 170 pages in. So far, it is really great - a lot more interesting than the title would make it sound. He starts with a legal analysis of fractional reserve banking, showing that since ancient times, the practice has violated traditional legal principles. It is quite enlightening to learn that the ancient Assyrians were dealing with this problem just as we are today.
Part of his argument is that fractional reserve banking, being unsustainable, always leads to the need for a central bank. He shows that this has been the consistent trend throughout history. He also shows that the unholy alliance between bankers and governments has inevitably sprung in every society in history. The bankers self interest in creating new money is a perfect compliment to governments that always want to spend more than they have. Often, governments have taken over the central bank for just this purpose.
I bought the book because I travel a lot, and read it on planes, but you can read it online for free here:
http://www.mises.org/books/desoto.pdf
Tom Mullen
www.tommullen.net
www.myspace.com/skepticsongs
"If I understand their example correctly"
Not.
It was not about "safes". The bank in your example couldn't pay out $190
without it actually being in the banking system somewhere. Fractional
Reserve banking only allows money to move through the banking system
faster, kind of like a 'just-in time' inventory strategy for liquidity. The
reason I structured my example as I did was not to create a strawman
argument, but to experimentally freeze the banking system and take inventory
of the money in existence at a time when fractional reserve banking had
been practiced, and show how it could be that no new money had been created:
not maybe, but definitely.
I'll concede that the economy may function as if more currency existed, than
it would without fractional reserve banking. If people were more efficient in
their financial planning they might have contract forms and customs that would
achieve the same money availability as fractional reserve banking, if it didn't
exist first.
A bank can issue credit, even way more than allowed, but it can never pay out
money that doesn't already exist. It can't print it. If the banking system issued
more loans than existing money...that money never materializes. It sits in
checking accounts. If it's drawn out and paid to somebody, it's back in the bank
the same day. Turn the whole banking system and all of their customers
upside down and shake 'em: no new money. Lot of IOUs that zero out though.
There may be good reasons for not using this banking system, but I can't see
how any new money is created. Neither could anyone else at gold-eagle when
the dust settled.
I also don't see how fractional reserve banking is unsustainable, at least not
in the context of a metal based currency, like we're supposed to have. Without
a gold standard, it's gonna be central banks taking over governments or vice
versa; the business is so lucrative that whoever runs it runs everything.
Sounds like a good book. Thanks for sharing that.
You are missing the fact that the bank is also keeping that money that it loaned to someone else available to you on demand. So, you can withdraw your money while the borrower still has possession of it. That loan to the borrower constituted creation of new money. I'll expand my example (and use small numbers just for simplicity's sake - i.e. i'm going to build a house with $100).
Example:
I deposit $100 in a savings account.
The bank loans out $90 of those dollars, which is the only reason a savings account can pay interest (instead of charging a safekeeping fee).
The bank loan goes to a home builder, who pays construction workers to build a house
I withdraw the $100.
At this point, I am spending that $100 into the economy, as are the construction workers ($90 of the $100).
At some point, the $90 gets paid back. This is sometimes described as "destroying money," but in fact the construction workers still have their $90, and I still have all of my original $100. Therefore, $90 has been created.
The justification behind this inflation of the money supply is that it coincides with a new good or service - in this case, the new house - that is available to be purchased with that new money. Therefore, as the supply of available goods and services grows, the money supply should grow by a similar proportion. In a perfect world, it would be great. It has never worked in thousands of years.
Tom Mullen
www.tommullen.net
www.myspace.com/skepticsongs
"At this point, I am spending that $100 into the economy, as are the construction
workers ($90 of the $100)."
OK, there's the hundred dollars you deposited and withdrew. The $90 for the loan
payout came from elsewhere in the banking system. If half the people in the system
deposited $100 and then withdrew it, and between those two events the other half
of the people got loan commitments, in the end there would be no cash to honor
those commitments and a liquidity crunch like I described in my first example would ensue.
You appear to be confusing credit and money. They can behave similarly in an economy.
A debt instrument, unlike money, always has a due date. An IOU or promissory note,
or any other debt instrument has no value whatever without a due date. Ask a collection
attorney. When that date arrives it's either paid or it isn't, but either way, it disappears.
A new debt instrument may have been created in its place, and that would also have a
due date. The amount of money in existence remains the same.
An IOU can be resold, or even used as a medium of exchange like money, but it becomes
payable at its due date. If there is no such date, or it can be infinitely postponed by the
borrower, it never needs to be paid and therefore has no value.
When the Bureau of the Public Debt borrows the money needed to operate the Federal
Government by issuing treasury securities (IOU's)the money is had by either selling them
into the securities market, or selling them to the Fed. If the Fed sees fit to increase the
money supply, they'll issue newly printed money, otherwise they'll buy the IOU's with
cash they have on hand (from the sale of IOU's at an earlier time .) The Fed buys and
sells this paper constantly as a way of moving interest rates to their target number,
mostly working at the short end of the yield curve.
Some say that increasing the amount of credit is inflationary. It may help inflation become
more of a self reinforcing trend, but the only 'cause' is the printing of new fiat money. By
increasing the velocity of money, increasing the level of borrowing makes the effects of
the newly created fiat felt throughout the economy faster, by increasing the number of
transactions and activity generally.
"At some point, the $90 gets paid back. This is sometimes described as "destroying money,"
but in fact the construction workers still have their $90, and I still have all of my original
$100. Therefore, $90 has been created."
The 90$ that gets paid back comes from the sale of the house. Construction financing is
a little more involved than your example implies, but that's not the issue. The issue is
"Where did your 'created' money come from?" The answer: "Elsewhere in the economy."
That 'elsewhere money' could ultimately be newly printed money, but isn't necessarily. It
is limited in supply by the greed/caution coefficient of the owners of the Federal Reserve.
'bobo',
The value to any currency within a particular national economy is derived either intrinsically (being backed by a valuable commodity such as a precious metal, as America's currency is required to be) or by regulatory fiat, when a government accepts it in payment of taxes.
This matter of taxes is not a secondary issue; it is of primary importance to politicians getting to build their personal estates by playing with godawful sums of money. Tax revenues are the 'relief valve' to regulate, however ham-fistedly, the velocity of currency in a nation's economy.
There are two major players in the illegal, immoral counterfeiting racket that the D.C. al Qaeda has run since 1913: the Federal Reserve banking cartel, and the corrupt Washington D.C. political class (especially Congress). Until the birth of the Tax Honesty Movement, the latter had been skimming American checks since before WWI, and almost every American paycheck since after WWII. According to the Grace Commission Report that was ordered by President Reagan, not one dollar of the (approx. $1 trillion) in individual income tax revenues that the American middle-class thinks is going to pay for 'government', is actually paying for diddly squat. Every dollar of individual income tax revenues (and then some) goes to pay the interest on all those notes signed to the Federal Reserve cartel by the politicians that YOU elect to represent you.
Can the Congress print its own currency? Of course; in fact, the Constitution demands it! But since most people are extremely dense when it comes to money, politicians have a fairly easy time of bilking those they pretend to 'serve'. (Congress is 'servicing' you like a bull services a cow.)
America's counterfeiting scam with the Fed is illegal and immoral. But it's also 100% YOUR FAULT if you're still an ignorant Taxpayer; the IRS scam is the other side of the coin and the Fed can't continue its scam without the Congress using the IRS for the revenue side of the scam.
If every Taxpayer in America that doesn't engage in taxable activities or categories listed in the Internal Revenue Code, stopped self-assessing and signing away 1/3 of his paychecks (mostly out of sheer ignorance, or terror, or both) then the currency scam would shut down overnight. It would be all but impossible to replace it with something like the Fairy Tax (a national sales tax, an even BIGGER scam than the present one).
The essentially worthless U.S. Dollar is propped up because the Congress accepts it from America's Taxpayers in payment of taxes. If we had a few tens of millions more (law-abiding, well-educated) Nontaxpayers, the jig would be up within about one election cycle.
It's not fiat money or funny money; it's idiot money. It's "elsewhere", in the bank accounts of all those ignorant (or terrorised, or lazy, or all three) 'Taxpayers' out there.
Buy a copy of the Tax Code and stop being an idiot! No amount of theorising about the Fed scam will change anything, until the average American grows a brain with a spine to go with it.
Happy Father's Day, dads!