REPORT DEAD LINKS --- we can't keep this site up-to-date without your help
home / Google Poll Introduction / GP #1 / GP#2 / GP#3 / GP#4 / There is no GP6 or 7 / GP#8 / GP#9a / GP#9b / There is no GP#10 / GP#11 / GP#12 / GP#13 / GP#14 / GP#15 / GP#16 / GP#17 & GP#18 / There is no GP#19 / GP#20 / GP#21 / GP#22 / GP#23 & GP#24 / GP#25 / GP#26 / GP#27 .........We are stopping our analysis at GP#27 because #1 to #27 covers most of the different ways that the phrase "Creating money out of thin air" is used.
Please do not blindly accept our analysis -- go to the websites and analyze the articles yourself -- in accordance with Buddha’s dictum “Believe nothing, no matter where you read it, or who said it, no matter if I have said it, unless it agrees with your own reason and your own common sense.” |
This is: http://www.primeronmoney.com/googlepollintroduction.html This page analyzes all Google Poll responses up to # 27 --- the words on the site being analyzed are in black type -- our analysis is in blue type On our website and preceded by the word ANALYSIS both on the website and in our Booklets.
We are trying to find out what people think about the phrase, “Creating money out of thin air”. |
This is a research project in the form of a “poll" of current thought about internet writing which uses the phrase “creating money out of thin air” Conjecture My Bias The results of the search will now be read and compiled in some sort of report analyzing the writing at these links. The first 3 entries have been analyzed as of July 24, 2009 -- we will continue and will probably finish in one month. ... We are making progress -- but we missed that target -- it is now 9/1/09. We have organized and analyzed about 25 of the articles, We should be able to put them on this website in a week or so. We have no idea about how accurate or valid our analysis will be -- primarily because as far as we know, this is the first time this sort of polling on a certain subject was done this way. (mrc) |
Google poll #1. How Banks Make Money :: Creating Money Out of Thin Air :: |
Once you examine the graphic at the above link -- go to the following link here and see how money is really made. Here is how we contend lending works -- <<http://www.primeronmoney.com/how-banks-make-money.html>> ANALYSIS -- This professional magazine article presents a completely erroneous description of “How Banks Make Money” . The article says banks can lend out 90% of the deposits they have on hand. In fact each bank can lend out 10 times the total amount of money they have "on hand" or more correctly "in deposits". ANALYSIS continued -- This might be the most common error uncovered by this Google Poll. The error seems to have originated with Federal Reserve publications and is being promulgated daily by that font of wisdom, Wikipedia. Even Wright Patman makes this error in his otherwise wonderful book, "A Primer On Money". Before we are finished here, we will link to the incorrect wikipedia article, The absurd Federal Reserve article and to Patman's incorrect words. We would rather not do that yet. We would rather have you confront some of the other common errors first ANALYSIS continued -- Details: ANALYSIS continued -- What reserves were then and what they are now -- and always -- a benevolent scam |
Google poll #2 -- Bob McTeer’s Blog / Creating Money Out of Thin Air!!! The words from the examined article by Mr. McTeer are in black -- our analysis is in blue |
ANALYSIS continued -- As you read this, keep in mind that Mr. McTeer says he "ran the Baltimore Branch of the Richmond Fed" and "taught a Money and Banking course in the graduate ... program of The Johns Hopkins University" ... using "standard stuff" ... out of "standard text books". Is there any hope for us when material like this is being taught daily, proudly and boldly to unsuspecting graduate students by professional bankers? It makes me want to cry. If I owned stock in an American company, I would be tempted to sell it tomorrow. How can we compete when our college students are being taught this type of stuff out of "standard textbooks". And remember -- I did not have to scour the internet to find this article. By returning this to me at #2, Google is telling me that this is a very popular site -- it is not easy to get to #2. (mrc) ANALYSIS continued -- Notes by Marty Carbone follow -- I express my negative questions and comments with the words shown in the blue type (mrc) 1. Money creation doesn’t cause inflation until it is spent. ANALYSIS continued -- Isn’t it obvious that the newly created money is aimed at being spent or primarily as a gift to help those who purchased assets that were overvalued in various markets? Isn’t that a recipe for inflation? (mrc) 2. As for the alchemy or voodoo involved in creating money out of thin air, be comforted in the fact that new wealth is not being created in the process. ANALYSIS continued -- Isn’t that precisely what some people fear -- that new money is being created without offsetting new wealth? Isn’t that a classic recipe for inflation.(mrc) ANALYSIS continued -- We believe creating money out of thin air is the only way that new money can be created and is the only way that legal paper money of the past has been created. It is a perfectly normal thing in all modern economies.(mrc) New assets in the hands of the public are not being created. ANALYSIS continued -- I do not understand his point -- that is precisely the problem. New money is being created -- but no new assets as far as I can tell. (mrc) Just new money in exchange for assets that are not defined as money. ANALYSIS continued -- (huh ????) Note that he puts the words in bold type -- he seems to think his point is important. Who cares that the bonds are not defined as money? The Fed considers them money when they collect interest on them. (mrc) We think creating new money to buy old assets is a poor use for new money and is almost certainly inflationary -- unless those old assets are going to be put to a new, more productive use. (mrc) When the Fed buys government securities in the open market -- traditional open market operations -- some sellers of these securities give up assets in the form of government securities for bank deposits that are included in the definition of money. ANALYSIS continued -- (and how is that beneficial to anyone?) It’s an exchange of assets held by the public, from assets not included in the definition of money to assets that are. ANALYSIS continued -- (I do not see how that is of any value to anyone except the Fed who gets to collect interest on those bonds. I consider Mr. McTeer's argument completely bogus. By the way -- why doesn't the Fed create the money and give it as a gift to the U.S. -- rather than buy U.S. bonds and collect interest on those bonds? shame on them.) (mrc) ANALYSIS continued -- If those government securities are owned by someone, those owners consider them wealth and/or assets. Creating new cash and trading that cash for an existing asset -- is a poor use of money -- and should not be defended as not being inflationary. It would be better for the Fed to create the money and pay off some of the existing national debt -- that would, at least, save us the future interest on that debt. (mrc) If a counterfeiter prints new $100 notes, new (illegitimate) money is created; and so is new (paper) wealth since the counterfeiter can spend the new notes for other things.1 Not so with open market operations. For money, people have to exchange something of value that they earned, ultimately by production. I hope this makes some of you feel better. ANALYSIS continued -- (I have no idea what this means or how this is related to the subject -- “creating money out of thin air”). Central bankers aren’t alchemists. -- ANALYSIS continued -- I herewith accuse and convict you of strawmanship and contempt for the court of public opinion -- hardly anyone ever accuses the banks of alchemy -- you pulled that word out-of-thin-air (mrc) |
Google poll #3 Fed Will Inject $1 Trillion More Into the Economy - NYTimes.com Mar 19, 2009 ... Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like ... Full article: http://www.nytimes.com/2009/03/19/business/economy/19fed.html |
Analysis -- This article is written by Edmund L. Andrews a fine writer for the NY Times which probably has the most accurate infomation on Money and Banking. This article makes a number of assumptions that may or may not be correct and should be scrutinized. March 19, 2009 / Fed Plans to Inject Another $1 Trillion to Aid the Economy / By EDMUND L. ANDREWS of the New York Times. WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities. Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. ANALYSIS continued -- (We are surprised to see Mr. Andrews using the phrase “out of thin air” in an ambiguous, slightly disparagingly way. Because he must know this phrase is often misinterpreted -- he should be very careful not to use the phrase that way unless he explains his use.) Aside from the material covered by the short comment we made in the preceding sentence -- nothing seemed to be related to the phrase “creating money out of thin air". Go to << http://www.nytimes.com/2009/03/19/business/economy/19fed.html >> to see the complete article on our site. ANALYSIS continued -- We would like to point out that the " ... interest rate The Fed controls" is not a "key" rate -- it is simply the rate banks are asked to charge each other for short term loans -- and that is relatively incidental. I am under the heresay impression that banks are free to ignore that rate. (mrc) |
This is Google Poll entries #4 and #5 |
The Bank of England’s extraordinary decision to create £75 billion to fight the credit crisis has won praise among the press as a bold, if risky move. / 75 billion = 675 billion available for lending and then portions get deposited etc..... Risky indeed folks. After repeatedly slashing the prime lending rate to a near zero now they are going to be buying more government bonds so they can increase the money supply by increasing debt. This is much like the the US government is doing, except that the UK is admitting that they are printing the money. How can we believe that Helicopter Ben (Bernanke) is not doing the same? Analysis by mrc - This is a rather amiguous, vacuum sealed, mild complaint about Central Banks and the system of having banks create money out of thin air. The writer at least shows that he knows something about the multiple created by the system when he tells that “75 billion = 675 billion available for lending ...” which means the commercial banks wind up lending nine times more money than the Central Bank created. |
There is no Google poll 6 or 7 |
Google poll #8 An urban myth is circulating on the internet that banks have |
Analysis -- This article is quite long and is almost correct (in the sense that 2 + 2 is almost 5). Because fact is mixed with fiction it is very hard to respond-to completely. We suggest you read the article and reserve judgment until you read the rest of our book, where we hope to clear things up. The article is reproduced below. The article essentially promises to lead you out of a wilderness of misinformation -- and it does -- but you quickly wind up in a swamp of fantasy. (mrc) Socialist Standard January 2009 Page 12 / Published since 1904 - Journal of The Socialist Party of Great Britain - Companion party of The World Socialist Movement / An urban myth is circulating on the internet that banks have been creating money out of thin air. Banks, money and thin air ... The following was copied from the Socialist Party website. ANALYSIS continued -- Since it is an official website -- one would think it would at lease make sense throught. It doe not. (mrc) Those who have seen the cult film Zeitgeist and its sequel Zeitgeist Addendum, popular amongst conspiracy theorists and others suspicious of governments and banks, will have heard recounted the argument that banks can somehow create money out of thin air by the stroke of a pen or, these days, by the touch of a computer keyboard. ANALYSIS continued -- (You can find the Zeitgeist films on the internet -- but don’t bother -- they are done by disoriented cultists who take a very strange view of almost everything.) In Zeitgeist Addendum this argument is based on what is stated in an educational booklet published by the Federal Reserve Bank of Chicago. Entitled Modern Money Mechanics it first came out in 1975 and has gone through several editions. ANALYSIS continued -- At #12 of this Google Poll, we review “Modern Money Mechanics” in more detail. This title is the source of lots of misinformation, as are the “Zeitgeist” films and “The Creature from Jekyll Island”. They all seem to feed off of one another. Almost everything you read from these sources is mostly incorrect. Zeitgeist Addendum begins by describing how it thinks the Federal Reserve Bank (the “Fed”) creates money. If, it says, the government wants more money then, through the Treasury, it creates Treasury bonds which it exchanges with the Fed for currency notes of the same face value; as the government has to pay interest on the bonds this adds to the National Debt and so is “debt money”. Both the Treasury bonds and the currency notes have been created out of thin air. This is one way of putting it but it is misleading. It is rather the other way round in that the initiative to create more currency comes from the Federal Reserve Bank. ANALYSIS continued -- (The initiative can come from The treasury, congress or the Fed. -- it makes very little difference who starts the ball rolling) Once it has decided that more notes are needed it asks ANALYSIS continued -- (“orders” would be a better word than “asks”) the Treasury to print them (for which the Treasury charges). The normal way these get into circulation is by the commercial banks converting into currency some of the reserves they are obliged to lodge with the Fed. ANALYSIS continued -- (It would be more correct to say commercial banks can get the created-money’ into circulation in a number of ways -- making loans and investing in securities are probably the two most popular) “Modern Money Mechanics” explains: “Currency held in bank vaults may be counted as legal reserves as well as deposits (reserve balances) in the Federal Reserve Banks. Both are equally acceptable in satisfaction of reserve requirements. A bank can always obtain reserve balances by sending currency to its Reserve Bank and can obtain currency by drawing on its reserve balance” (p. 4). ANALYSIS continued -- (There are a number of unrelated concepts covered in the preceding paragraph -- thus making the paragraph difficult to comprehend) In any event, both the Treasury and the Federal Reserve are part of government so we are talking about internal state accounting arrangements. It is, however, true that the new currency has been created out of nothing. Since it is not backed by gold and convertible on demand into a pre-fixed amount of gold, it is what in the US is called “fiat money”, that is, money created by a mere act of State. ANALYSIS continued -- (“Fiat money” is defined as money that is created by an act of National Law -- that is not a "mere" act of State?) ANALYSIS continued -- (In analyzing the rest of this #8 -- we will ignore everything that is not directly related to “creating money out of thin air”) Modern Money Mechanics does not in fact have much to say about currency creation but concentrates on what it calls “money creation”. It draws a distinction between “currency” and “money”. This is explained clearly enough on the first page of the booklet where money is defined as currency plus bank accounts with a cheque or debit card; which is M1 in the jargon (“In the remainder of this booklet, ‘money’ means M1”). Congressman Ron Paul, from Texas, a critic of “fractional reserve banking” and advocate of a return to a gold-backed currency, has an even wider definition of “money”: “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.” (27 April 2006, see http://www.lewrockwell.com/paul/paul319.html). M3 includes other types of bank deposits and liabilities not included in M1. In claiming that all new money created by the Fed depreciates the dollar he is overstating his case. All the US currency (but, as we shall see, not bank deposits) is created “out of thin air” ANALYSIS continued -- (So here, the author admits that U.S. currency is created out of thin air? Then why is it called an urban myth in the title?) but an increase won’t lead to a depreciation of the dollar as long as it corresponds to an increase in the amount required by the economy for its various transactions (paying for goods and services, settling debts, paying taxes, etc). It is only currency issued in excess of this that will cause a decline in its value and so a rise in the general price level.ANALYSIS continued -- (That last sentence is completely correct) Everybody accepts that cash (currency, notes and coin) is money. Some might be prepared to include cash deposited in banks as well. But Modern Money Mechanics definition of bank deposits is wider than this. It doesn’t mean just deposits by people of the money they already possess but any account for which the holder has a cheque or debit card, i.e. including credit lines granted to those who banks have lent money to (so enabling Zeitgeist to go on talking about “debt money”): “Checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by banks are credited to borrowers’ accounts” (p. 3, emphasis added). So, when it talks about “money creation” it is not talking about currency creation but mainly about “bank deposit” (in the above sense) creation. The Federal Reserve booklet goes on to explain what “fractional reserve banking” involves and how it can lead to the creation of more “money” in the sense of more bank deposits. Banks, it explains, have learned that when cash has been deposited with them they only need to keep a part (a “fraction”) of it as cash as a “reserve” to deal with likely cash withdrawals; the rest they can lend out. What this fraction is depends on the circumstances, but historically it has been around 10 percent. On the booklet’s definition, in making a loan a bank is “creating money” as their loans will take the form of creating a new bank deposit as a credit line which the borrower can draw on as if they had made a deposit of their own money (except they will be paying interest on it). The booklet then asks “What Limits the Amount of Money Banks Can Create” and answers that this depends on the cash reserves it has decided to hold or is required by law to keep. It is here that Modern Money Mechanics, by suddenly shifting from what an individual bank can do to what all banks together (“the banking system”) can, opens the way to the misinterpretation of people like Ron Paul and the makers of the Zeitgeist films that banks too can create “money” out of thin air. The booklet explains that US banks are required by law to keep a “fraction” of deposits as “reserves” in its vaults and/or a balance with the Fed, and says: “For example, if reserves of 20 percent were required, deposits could expand only until they were five times as large as reserves. Reserves of $10 million could support deposits of $50 million” (p. 4). This is a very misleading way of putting as it could suggest that if banks receive total new deposits of $10 million they can immediately proceed to make loans of four times this. This is not so, and not really what the booklet meant to suggest. What it means is that the banks can immediately lend out only four-fifths of $10 million, or $8 million, and that this circulates throughout the banking system leading in theory to new loans totalling in the end $40 million, bringing total “bank deposits” up to $50 million. (The last paragraph is hopelessly confused. See our analysis at Google Poll #1 -- where we explain that new deposits of any amount in a bank can lead to an increase of a minimum of ten times that amount in loans by that bank) Confusingly, the numerical examples the booklet goes on to give to illustrate this are based not on a 20 percent reserve fraction but on a 10 percent one (which is more or less what the law in the US requires for the kind of bank deposits in question). So, to take its example, if $10,000 is deposited in the banking system, initially say in one bank, that bank can make loans (create credit line bank deposits) of $9000. When it is spent this $9000 will be re-deposited in other banks which can then lend out 90 percent of this, or $8100; which in turn will be re-deposited in banks, allowing a further $7290 to be lent out, and so on, until in the end and over the period, a total of $90,000 new loans will have been made. This shows how the Fed can practise “fractional reserve banking” to control the amount of “money” (currency plus bank deposits) in the economy. This is done via “open market operations” as explained in a section headed “Bank Deposits – How They Expand or Contract”: “Let us assume that expansion in the money stock is desired by the Federal Reserve to achieve its policy objectives . . . [T]he Federal Reserve System, through its trading desk at the Federal Reserve Bank of New York, buys $10,000 of Treasury bills from a dealer in US government securities. In today’s world of computerized financial transactions, the Federal Reserve Bank pays for the securities with an ‘electronic’ check drawn on itself . . . The Federal Reserve System has added $10,000 of securities to its assets, which it has paid for, in effect, by creating a liability on itself in the form of bank reserve balances” (p. 6). The bank from which the Treasury bills were purchased now has reserves above the 10 percent limit and so can turn the $10,000 into loans, which starts the process described above rolling, leading to an extra $90,000 bank lending. In theory the Fed could contract bank lending in the same way, but this has never happened. So M1 has gone up and up each year. But what about the currency in all this? It too has gone up but passively and almost automatically. With increased banking activity more currency notes are required, which banks get by converting their reserves into this and which, if it hasn’t enough notes, the Fed just asks the Treasury to print more. But this has consequences -– the depreciation of the dollar and the rise in the general price level Congressman Paul doesn’t like. But has the banking system really created more “money”? Only if you regard “bank deposits” as money. So the banking system does not create money to lend out of thin air but can only lend out money deposited with it and then only when economic conditions permit it. Today, bank deposits are not the only source of what the banks lend. They also borrow on the money market (as has been highlighted by the present banking crisis). This means that their reserves are an even smaller percentage of their total loans, only about 3 percent in fact. This figure is mentioned in Zeitgeist Addendum as if this was now the “fractional reserve” and that therefore banks, or the banking system, can “create” loans of up to 33 times an initial deposit. Another silly mistake. ANALYSIS continued -- (That is not a mistake -- see page 2 of this report) If currency cranks such as the makers of the Zeitgeist films have got the wrong end of the stick about “fractional reserve banking” and imagine that it means banks, whether singly or all together, can create money or credit out of thin air this is partly the fault of the way that booklets like the one produced by the Federal Reserve Bank of Chicago try to explain it. Of course the Fed does not believe the “thin air” claim, but to refute the currency cranks it would have not only to re-iterate that no single bank receiving an additional deposit of $10,000 can forthwith loan out $90,000, but also spell out that the expansion of credit line bank deposits still depends on people making real deposits of their own, unborrowed money (whether in cash or by cheque or by bank transfer). Which would restore a sense of reality and explode the myth that banks can create loans out of thin air. ANALYSIS continued -- (I wonder where Mr. Buick thinks money comes from.) (mrc) ADAM BUICK ANALYSIS continued -- Mr. Buick did a reasonably good job trying to explain the Zeitgeist films, the material from the Federal Reserve Bank Of Chicago, and “Modern Money Mechanics” -- BUT they are confusing and impenetrable as well as mostly wrong. ANALYSIS continued -- See << http://www.primeronmoney.com/frbsimplified.html >> where Fractional Reserve Banking (frb) is almost completely explained on a single page |
This is #9a of our Google Poll |
ANALYSIS continued -- The only part of this article that deals with “creating money out of thin air “ is reproduced below. It evidently comes from Menzie Chinn, an economist at the University of Wisconsin in Madison. The words of the article's author is in black. Our analysis is in blue. |
“Banks then get down to the business of creating money by lending it out. Assume that you put $100 in your bank account. The government requires banks to hold a certain amount in reserve, say 10 percent, so the bank may just take $90 and lend it out to someone else. That person can then buy something with the $90. The store deposits the $90 in another bank, and the lending process continues to inflate the original $100. ANALYSIS continued -- This article, more or less repeats the same error covered in GP #1. Please see our analysis at GP #1 of this report. “The original $100 that came in gets blown up by the banking system into something much bigger – essentially $1,000 [assuming a 10 percent reserve],” said Menzie Chinn, an economist and public policy expert at the University of Wisconsin in Madison.” ANALYSIS continued -- Although Menzie Chinn describes the process of multiplying $100 up to $1,000 incorrectly -- she arrives at what would be maximum amount that could be achieved if the 10 % had any practical relevance. ANALYSIS continued -- M. Chinn is evidently asuming the $100 that was put in the bank account -- is now being considered a reserve that somehow protects the borrower. But, as we explain on page 1 -- how much the bank can lend does NOT depend on how much the bank has, or any concept of “reserve” -- it depends on how much the borrower(s) can pay back -- as evidenced by the borrowers’ collateral and the borrowers’ plans for the money being borrowed. See # 13 to #17 on page 1 of this report. ANALYSIS continued -- In ancient days, the borrower of paper money had to be sure the bank had a certain fixed amount of gold “reserves” to “back” the paper money he borrowed. At that time, paper money was often a stand-in for gold -- when you wanted to buy something, you often had to convert your money to gold -- because the seller of whatever you were buying did not know who issued the paper money and therefor did not know if the paper money was “good”. ANALYSIS continued -- That guarantee that the paper money is ‘good” is no longer necessary because in everyday use, we all now know whatever paper money we get from a bank is “good” -- barring fraud and counterfeiting. ANALYSIS continued -- Reserves of gold are also no longer needed beacause we all know our paper money can’t be automaticaly converted to a fixed amount of gold. You can, however, still convert your paper money to gold by buying gold with paper money at the current market price of gold. |
This is #9b of our Google Poll -- this and the previous 9a are from the same URL -- so we numbered them the same and removed #10 / http://www.livescience.com/culture/081023-making-money.html Out of Thin Air: How Money is Really Made | LiveScience Oct 23, 2008 ... Remaining banks have become scared of lending out money when there is no ... Creating money out of thin air may help in the short term, ... |
The article author's words are in black here. Our analysis is in blue Analysis -- this longish article covers more than creating money. In the part about creating money, it precisely repeats the error we tell about, in GP #1 above. That error was started by the Fed and is being continually spread, to our horror, by Wikipedia. < http://en.wikipedia.org/wiki/Fractional_reserve_banking > See #9a too. ANALYSIS continued -- In the section of the article #9b, titled “Virtual cash”, it presents “Banks then get down to the business of creating money by lending it out. Assume that you put $100 in your bank account. The government requires banks to hold a certain amount in reserve, say 10 percent, so the bank may just take $90 and lend it out to someone else. That person can then buy something with the $90. The store deposits the $90 in another bank, and the lending process continues to inflate the original $100.” ANALYSIS continued -- That scenario seems more ridiculous every time we read it. Try it with your friends -- lend one of them $100 with the proviso that they have to lend $90 to another friend -- continue this with a chain of 10 friends and see if your group winds up with more than the original $100. If this works the way wikipedia says it does -- you and your 10 friends should jointly wind up with considerably more than $100. Some very serious people believe the nonsense. ANALYSIS continued -- By the way -- Wikipedia will not take this information down from their website -- probably because they got (or think they got ...) the information from a Federal Reserve Publication. They refer to “Page 57 of ‘The FED today’, a publication on an educational site affiliated with the Federal Reserve Bank of Kansas City) designed to educate people on the history and purpose of the United States Federal Reserve system. It is a .pdf document. ANALYSIS continued -- Here is what it says: “Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.” The link to this page is: http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html (that link appears to be dead (mrc) |
| There is no GP#10 |
This is #11 of our Google Poll |
The artical's author's words are in black -- our analysis is in blue. Analysis -- this is by Richard Benson who certainly seems to know what he is talking about. He says Money is created in two ways: First, money creation comes from borrowing it and spending it. (Money is literally borrowed and spent into existence.) Second, it can simply be printed up “out of thin air” by a central bank. The U.S. economy and other modern economies have central banks and fiat currencies. Central banks have two major powers. They can 1) “peg” the nominal level of short-term interest rates, and 2) purchase assets such as government debt, with newly printed money. When the central bank pegs short-term interest rates at a low level, it greatly encourages corporate and individual borrowing and spending. ANALYSIS continued -- All of the above is true as far as I know (mrc) The next paragraph is opinion -- so I will not venture a guess. Note the date of his report August 1 , 2004 --- before the crash we are now living through (mrc) For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sector’s new borrowing will not create enough new money to keep servicing the already massive level of old debt. Central banks will need to step up their efforts to “print money out of thin air”. Central bank printing of new money is accomplished by purchasing government debt or other assets.” ... Money Created “Out of Thin Air” by Richard Benson / August 2004 ANALYSIS continued -- This is a copy of the entire article. Some of it is quite complicated -- I certainly do not understand all the complexities -- but we will do our best to unravel it. (mrc) The Broad Measure of Money: M3 (In Billions of Dollars) Clearly, there has been substantial money growth since 2000. Moreover, neither the crash of the NASDAQ stock market, or the last recession, has slowed down money growth. The fact that the Fed cut interest rates 13 times since 2000 - reducing them to a 46 year low - has a lot to do with the massive amount of borrowing that has taken place in the United States. Total Net Borrowing in the U.S. (In Billions of Dollars) The amount of net borrowing in the United States is quite impressive, particularly when you consider the old economic model when borrowing was limited to simply recycling savings. In 2003, the savings rate was 2 percent of GDP, while net credit market borrowing was well in excess of 20 percent of GDP. There has been a whole lot of borrowing and spending of new money going on! Certain asset classes, such as financial assets and housing, have benefited the most by this credit and money creation. For instance, because the mortgage market has been willing to finance any and all mortgages, the credit creation process has allowed both new mortgage debt and the ability to pay for higher housing prices. These higher housing prices have, in turn, allowed for the funding of larger mortgages. Money creation in the private sector tends to concentrate in certain asset classes that facilitate the creation of new credit. This new credit lends itself to new spending, leaving behind new money as the residual, and a growing mountain of debt. To say that this process has been left to run wild is an understatement. Indeed, it’s time to think “Bubble” in stocks, bonds and housing. A rational investor understanding the credit creation process would have played the resulting upward momentum in asset prices for all they were worth! However, the world is changing. The central banks are already printing vast quantities of new money, making 2004 a “watershed” year. In the general price level, due to the creation of new money borrowed into existence, inflation is starting to leak through. If one examines individual incomes and corporate cash flows, you will realize the U.S. economic system can not service the mountain of private debt that has already been created at higher nominal interest rates. This watershed year could turn into a cliff side waterfall unless money growth keeps increasing to encourage the growth in personal and corporate incomes. Inflation is needed to push up cash flows to service old debt. Without inflation, there remains a massive risk of deflation. If old debt is paid down, or forgiven in bankruptcy, money that has been previously created will vanish from whence it came. If the money and debt goes, asset prices will crumble. Many intellectual writers have logically concluded that rising interest rates will cause a “deflationary debt collapse” as interest rates rise. Certainly, a rise in interest rates to more normal levels will be painful and will cause some financial distress. Moreover, a rise in interest rates tends to slow the private money creation process. So, some questions remain unanswered. Where will enough money come from to keep the U.S. economy liquid and solvent? Where will the massive amounts of new money come from to service the debt mountain? ANALYSIS continued -- I don’t understand all of the reasoning in the last paragraph -- but if I had to make a bet -- I’d bet that Benson’s reasoning is sound (mrc) Let’s not forget that central banks can create new money with a few strokes at a computer keyboard to purchase whatever assets they wish. The Federal Reserve can create any volume of money it needs to keep the economy servicing both old and new debts. It seems virtually certain that the Fed, and other friendly central banks, will print as much new money as they need to because “inflation tomorrow is better than a collapse of the financial system today”. ANALYSIS continued -- That certainly seems like a prescient warning (mrc) Since the U.S. Treasury is running a $450 Billion deficit and a 5 percent trade deficit, central banks have actually begun the “Great Money Printing”. In the past 12 months, global central banks have created about $800 Billion worth of new money (as measured by the increase in world central bank reserves). This is what the Federal Reserve Governor, Ben S. Bernanke, lovingly calls “Helicopter Money”. US Fed Holdings of US Treasuries ($718 Billion ) / US Fed Holdings of US Treasuries for Foreign Central Banks ($1.24 Trillion) / Foreign Holdings of US Assets ($3.3 Trillion). Foreigners already hold almost 40 percent of marketable U.S. Treasury debt. The Asian central banks have increased their holdings of U.S. assets to about $1 Trillion. In the relay race of money creation, 2004 is the year when the baton of money creation has already been handed from the private sector to the world’s central banks! Wide open money spigots in the private economy have a habit of financing “asset price bubbles”. Since the prices of bubble assets (stocks, bonds and housing) are not included in the price indexes that measure inflation, the inflationary consequences of new money growth can be ignored. As central banks inject money growth directly into their respective economies by buying assets such as United States treasury bonds with Helicopter Money, it is impossible to totally conceal the fact that there is more money chasing the same number of goods. Inflation happens! The massive trade and budget deficits in our country have acted as an “excuse” for friendly foreign central banks to do much of the needed money printing that would normally be done by the Federal Reserve. Our trade deficit gives companies in foreign countries dollars in exchange for their exports. Our treasury deficit gives foreigners the opportunity to buy our U.S. treasury debt with the dollars. Any foreign central bank can then swap their local currency with companies holding dollars and buy U.S. treasury debt! It’s all so simple! New money has been created, just not in our country! ANALYSIS continued -- Frankly, I don’t understand all the logic -- but I think Benson knows what he is talking about (mrc) For instance, the Central Bank of China is creating new money by buying U.S. treasuries with our trade deficit. This has helped to drive up their domestic inflation rate to 5 percent a year! ANALYSIS continued -- I have been writing elsewhere that the U.S. government should not be borrowing money by selling bonds (and paying interest on the debt) when they have the ability to print all the money they need. However -- if the interest rate on that debt is low enough to be more than offset by what the money-managers are almost certain will be a high inflation rate -- it would make sense. It is a well known fact that it is wise to be a borrower in inflationary times -- so you can pay your debts in the future with money that has lost its value. China, on the other hand, might be losing on the bonds -- but they can probably make up the loss by their profit on the sale of their goods It seems to me that this is a win-win deal for both countries as long as the standard of living is, on the average, higher in the U.S. than China. (mrc) Until just recently, even the Japanese have been suffering from mild deflation and may not have the economic capacity to buy unlimited quantities of our treasuries. Japan is already flooding their economy with fresh Yen out of thin air, as they finance their own government deficit. Japan is currently running a 7-8 percent fiscal deficit and their savings rate has been dropping. Japan’s national debt is 140% of GDP and is rising rapidly. The Japanese bond market faces a serious risk of price collapse as their interest rates start to rise. Therefore, Japan can not be counted on to finance both their government deficit and our deficit for much longer. Very soon it will be incumbent on our Federal Reserve to crank up the domestic U.S. printing press. It is one thing when your neighbor’s central bank floods their country with newly printed money buying U.S. Treasury debt. It is quite another when the Federal Reserve flood’s America with Helicopter Money by buying massive amounts of U.S. Treasuries. As inflation comes, interest rates will be forced up. Rising interest rates certainly hurt the owners of old low-coupon bonds. Moreover, rising interest rates have never been the stock market’s friend. Rising interest rates are the declared enemy of housing prices. Indeed, rising inflation in the general price level is the enemy of all those wonderful bubble markets. Rising inflation and falling asset prices will turn the world of investing upside down! ANALYSIS continued -- I must admit I don’t understand all the subtleties of Benson’s arguments -- but it sounds right to me (mrc) He certainly understands that money is often created out of thin air. My guess is that creating money out of thin air is best looked at as being a tool -- and like most tools -- it can be used for good or for evil purposes (mrc) Richard Benson / Benson’s Economic & Market Trends / Specialty Finance Group, LLC Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980’s and started in the securitization business in 1983 at Bear Stearns, and helped build the early securitization businesses at Citibank and E.F. Hutton. Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math, and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach. The Specialty Finance Group, LLC is a Florida Limited Liability Company and is registered with the NASD/SIPC as a Broker/Dealer. / Copyright © 2004-2009 Richard Benson |
This is #12 of our Google Poll |
This is #12 of our Google Poll --- The original article is in "black type" -- my words are in "blue" (mrc) ANALYSIS continued -- This article is very interesting. A lot of what is written is (T) absolutely TRUE. and a lot of it is (F) just plain FALSE. Unfortunately it is hard to tell (T) and from (F). for the most part, we are putting the article in this booklet because it repeatedly brings up the subject of “creating money out of thin air” and it is the use of those words that our Google Poll was designed to examine. ANALYSIS continued -- We will try to restrict our comments to the subject of our Poll -- except we will put a “T’ for “true” and an “F” for “false” wherever we think our opinion might be of interest to readers. We will also use “ ? ” when we are undecided or confused.(mrc) The Creature from Jekyll Island / by G. Edward Griffin Chapter 10 It’s the most important financial lesson of your life! ANALYSIS continued -- (“ ? “) THE MANDRAKE MECHANISM . . . What is it? It is the method by which the Federal Reserve creates money out of nothing; the concept of usury as the payment of interest on pretended loans; the true cause of the hidden tax called inflation; the way in which the Fed creates boom-bust cycles. ANALYSIS continued -- (“ ? “) In the 1940s, there was a comic strip character called Mandrake the Magician. His specialty was creating things out of nothing and, when appropriate, to make them disappear back into that same void. It is fitting, therefore, that the process to be described in this section should be named in his honor. In the previous chapters, we examined the technique developed by the political and monetary scientists to create money out of nothing for the purpose of lending. This is not an entirely accurate description because it implies that money is created first and then waits for someone to borrow it. On the other hand, textbooks on banking often state that money is created out of debt. This also is misleading because it implies that debt exists first and then is converted into money ANALYSIS continued -- (“ ? “). In truth, money is not created until the instant it is borrowed (T). It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off the debt that causes it to vanish. (T) There is no short phrase that perfectly describes that process ANALYSIS continued -- (T). So, until one is invented along the way, we shall continue using the phrase “create money out of nothing” and occasionally add “for the purpose of lending” where necessary to further clarify the meaning. So, let us now . . . see just how far this money/debt-creation process has been carried -- and how it works. The first fact that needs to be considered is that our money today has no gold or silver behind it whatsoever. ANALYSIS continued -- (T) The fraction is not 54% nor 15%. It is 0%. It has traveled the path of all previous fractional money in history and already has degenerated into pure fiat money. ANALYSIS continued -- I have to add a comment here --- my dictionary has the following definition of “fiat money”: “inconvertible paper money made legal tender by a government decree”. I think that definition is accurate except that “incontrovertible” must be understood to mean “not controvertible to a fixed amount of gold or silver -- but convertible to gold and silver and all other assets at market prices -- by Law”. The word “fiat” really means “by law” -- so it is incorrect to think “fiat money” is “degenerate money”. (mrc) The fact that most of it is in the form of checkbook balances rather than paper currency is a mere technicality; and the fact that bankers speak about “reserve ratios” is eyewash. ANALYSIS continued -- “T”, “T”, “T” The so-called reserves to which they refer are, in fact, Treasury bonds and other certificates of debt. ANALYSIS continued -- (“ ? “) Our money is “pure fiat” through and through. The second fact that needs to be clearly understood is that, in spite of the technical jargon “T” and seemingly complicated procedures “T”, the actual mechanism by which the Federal Reserve creates money is quite simple. “T” They do it exactly (“ ? “) the same way the goldsmiths of old did except, of course, the goldsmiths were limited by the need to hold some precious metals in reserve, whereas the Fed has no such restriction. ANALYSIS continued -- “T” The Federal Reserve is candid. The Federal Reserve itself is amazingly frank about this process. A booklet published by the Federal Reserve Bank of New York tells us: “Currency cannot be redeemed, or exchanged, for Treasury gold or any other asset used as backing. The question of just what assets ‘back’ Federal Reserve notes has little but bookkeeping significance.” Elsewhere in the same publication we are told: “Banks are creating money based on a borrower’s promise to pay (the IOU) . . . Banks create money by ‘monetizing’ the private debts of businesses and individuals. ANALYSIS continued -- “T” In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago says: In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount. What, then, makes these instruments -- checks, paper money, and coins -- acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and real goods and services whenever they choose to do so. This partly is a matter of law; currency has been designated “legal tender” by the government -- that is, it must be accepted. In the fine print of a footnote in a bulletin of the Federal Reserve Bank of St. Louis, we find this surprisingly candid explanation: Modern monetary systems have a fiat base -- literally money by decree -- with depository institutions, acting as fiduciaries, creating obligations against themselves with the fiat base acting in part as reserves. ANALYSIS continued -- (“ ? “) The decree appears on the currency notes: “This note is legal tender for all debts, public and private.” While no individual could refuse to accept such money for debt repayment, exchange contracts could easily be composed to thwart its use in everyday commerce. However, a forceful explanation as to why money is accepted is that the federal government requires it as payment for tax liabilities. Anticipation of the need to clear this debt creates a demand for the pure fiat dollars. ANALYSIS continued -- (“ ? “) Money would vanish without debt. It is difficult for Americans to come to grips with the fact that their total money-supply is backed by nothing but debt, and it is even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence. (absolutely “F” -- lots of money is created and spent -- not created and lent) That’s right, there would not be one penny in circulation -- all coins and all paper currency would be returned to bank vaults -- and there would be not one dollar in any one’s checking account. In short, all money would disappear. ANALYSIS continued -- (absolutely “F” -- lots of money is created and spent -- not created and lent) Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s. Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933. This is the exchange that followed. Eccles: We created it. It must be realized that, while money may represent an asset to selected individuals, when it is considered as an aggregate of the total money supply, it is not an asset at all. A man who borrows $1,000 may think that he has increased his financial position by that amount but he has not. His $1,000 cash asset is offset by his $1,000 loan liability, and his net position is zero. ANALYSIS continued“T” Bank accounts are exactly the same on a larger scale. Add up all the bank accounts in the nation, and it would be easy to assume that all that money represents a gigantic pool of assets which support the economy. Yet, every bit of this money is owed by someone. Some will owe nothing. Others will owe many times what they possess. All added together, the national balance is zero. What we think is money is but a grand illusion. The reality is debt. ANALYSIS continued -- (Not true -- when real wealth is produced by manufacturing, farming or other labor, the money it is sold-for is real money for the most part. When the debts are paid back -- that does not destroy the real wealth that has been produced by the debt-money and the dollars for which the wealth was traded) Robert Hemphill was the Credit Manager of the Federal Reserve Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled 100% Money, Hemphill said this: If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is. ANALYSIS continued“F” ( I believe the statement was made -- but it is not true) With the knowledge that money in America is based on debt, it should not come as a surprise to learn that the Federal Reserve System is not the least interested in seeing a reduction in debt in this country, regardless of public utterances to the contrary. ANALYSIS continued(“ ? “) ANALYSIS continuedThere is no doubt that debt plays an important part in our money and banking system -- but that is only beacause nobody has ever figured a safer way to get newly created money into our economic system. If the lending banks do their jobs properly and lend money based on good collateral and a reasonable plan to turn that money into wealth, there will be no problems. Once the debt is paid back -- the wealth will remain for the benefit of us all. Here is the bottom line from the System’s own publications. The Federal Reserve Bank of Philadelphia says: “A large and growing number of analysts, on the other hand, now regard the national debt as something useful, if not an actual blessing . . . [They believe] the national debt need not be reduced at all.” The Federal Reserve Bank of Chicago adds: “Debt -- public and private -- is here to stay. It plays an essential role in economic processes . . . What is required is not the abolition of debt, but its prudent use and intelligent management.” ANALYSIS continued“T” What’s wrong with a little debt? There is a kind of fascinating appeal to this theory. It gives those who expound it an aura of intellectualism, the appearance of being able to grasp a complex economic principle that is beyond the comprehension of mere mortals. And, for the less academically minded, it offers the comfort of at least sounding moderate. After all, what’s wrong with a little debt, prudently used and intelligently managed? The answer is nothing, provided the debt is based on an honest transaction. There is plenty wrong with it if it is “based upon fraud”. ANALYSIS continued“T” & (“ ? “) An honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender’s asset. That asset could be anything of tangible value. If it were an automobile, for example, then the borrower would pay “rent.” If it is money, then the rent is called “interest.” Either way, the concept is the same. When we go to a lender -- either a bank or a private party -- and receive a loan of money, we are willing to pay interest on the loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair to pay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy to acquire money -- real money, that is. If the money we are borrowing was earned by someone’s labor and talent, they are fully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or the click of a computer key? Why should anyone collect a rental fee on that? ANALYSIS continued“T” & (“ ? “) This touches on a very important point. The banks do this because they can get away with it and that is because the banks are non-competitive. They obviously agree among themselves what interest rates to charge and that is a clear violation of anti-trust laws. Perhaps there are laws that you and I don’t know about that makes banks exempt from prosecution on these counts. That should certainly be stopped immediately. THIS IS THE MOST IMPORTANT THING PUT FORWARD IN THIS ARTICLE SO FAR. When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they have nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else’s loan. So what entitles the banks to collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here, not about what is legal, but what is moral. “T” As Thomas Jefferson observed at the time of his protracted battle against central banking in the United States, “No one has a natural right to the trade of money lender, but he who has money to lend.” Third reason to abolish the system. Centuries ago, usury was defined as any interest charged for a loan. Modern usage has redefined it as excessive interest. Certainly, any amount of interest charged for a pretended loan is excessive. The dictionary, therefore, needs a new definition. Usury: The charging of any interest on a loan of fiat money. ANALYSIS continued“T” & (“ ? “) Let us, therefore, look at debt and interest in this light. Thomas Edison summed up the immorality of the system when he said: People who will not turn a shovel of dirt on the project [Muscle Shoals] nor contribute a pound of materials will collect more money . . . than will the people who will supply all the materials and do all the work. ANALYSIS continued“T” Is that an exaggeration? Let us consider the purchase of a $100,000 home in which $30,000 represents the cost of the land, architect’s fee, sales commissions, building permits, and that sort of thing and $70,000 is the cost of labor and building materials. If the home buyer puts up $30,000 as a down payment, then $70,000 must be borrowed. If the loan is issued at 11% over a 30-year period, the amount of interest paid will be $167,806. That means the amount paid to those who loan the money is about 2 1/2 times greater than paid to those who provide all the labor and all the materials. It is true that this figure represents the time-value of that money over thirty years and easily could be justified on the basis that a lender deserves to be compensated for surrendering the use of his capital for half a lifetime. But that assumes the lender actually had something to surrender, that he had earned the capital, saved it, and then loaned it for construction of someone else’s house. What are we to think, however, about a lender who did nothing to earn the money, had not saved it, and, in fact, simply created it out of thin air? ANALYSIS continuedTHIS IS ALL ABSOUTELY TRUE . IT COULD BE STOPPED IMMEDIATELY IF WE THE PEOPLE WOULD INSIST (1) BANKS SHOULD NOT BE EXEMPT FROM ANTI-TRUST LAWS AND (2) ANY PERSON CAN OPEN A BANK. THE COMPETITION FROM NEW BANKERS WOULD SOLVE THE PROBLEM (mrc) What is the time-value of nothing? ANALYSIS continuedFrom here on, most of this article is either repetitive, misleading, wrong or worthless. It is not worth analyzing. The authors take a misleading system made up by the Fed and make it worse by weaving it into a fantasy that is much more complex. ANALYSIS continuedIf you want to waste your time on it, go to ANALYSIS continuedThis “Mandrake Mechanism” report presents this over-simplified “SUMMARY” SUMMARY The American dollar has no intrinsic value. ANALYSIS continued(This is absolutely not true -- mrc) It is a classic example of fiat money with no limit to the quantity that can be produced. Its primary value lies in the willingness of people to accept it and, to that end, legal tender laws require them to do so. (This may be true -- but as we explained previously, fiat money means lawful money and that is not bad in any imaginable way. -- mrc) It is true that our money is created out of nothing, but it is more accurate to say that it is based upon debt. In one sense, therefore, our money is created out of less than nothing. The entire money supply would vanish into the bank vaults and computer chips if all debts were repaid. ANALYSIS continued(This is absolutely not true, we have covered that previously -- mrc) Under the present System, therefore, our leaders cannot allow a serious reduction in either the national or consumer debt. ANALYSIS continued(We must reject this conclusion -- because we just rejected the previous three assumptions on which it is built -- mrc) Charging interest on pretended loans is usury, and that has become institutionalized under the Federal Reserve System. ANALYSIS continued(We can more-or-less buy this position and agree it should be stopped -- mrc) The Mandrake Mechanism by which the Fed converts debt into money may seem complicated at first, but it is simple if one remembers that the process is not intended to be logical but to confuse and deceive. The end product of the Mechanism is artificial expansion of the money supply, which is the root cause of the hidden tax called inflation. (We can more-or-less, but not completely agrees to this -- mrc) This expansion then leads to contraction and, together, they produce the destructive boom-bust cycle that has plagued mankind throughout history wherever fiat money has existed. ANALYSIS continued(We can’t agree to this -- the writer has never shown that it is the lawful fiat money that is to blame for any of our problems -- mrc) We wll now skip seven pages to our Analysis ANALYSIS continued -- This is 12 pages that is more or less of a well written -- but very a hard-to-follow rant that ends with a SUMMARY that includes this sentence “The Mandrake Mechanism by which the Fed converts debt into money may seem complicated at first, but it is simple if one remembers that the process is not intended to be logical but to confuse and deceive. ... “ ANALYSIS continued -- We can buy that. Almost every aspect of the system is way more complicated than it has to be. -- “The American Dollar has no intrinsic value. It is a classic example of fiat money with no limit to the quantity that can be produced. Its primarily value lies in the willingness of people to accept it and, to that end, legal tender laws require them to do so. It is true that our money is created out of nothing, but it is more accurate to say it is based upon debt. In one sense, therefore, our money is created out of less than nothing. The entire money supply would vanish into the bank vaults and computer chips if all debts were repaid” ANALYSIS continued -- That summary gives a very shallow and mostly incorrect picture of our money and banking system. There is far more than debt in this world. Much of the money that was ever created out of thin air left behind wealth of all sorts when it ws paid back (bridges, homes buildings, roads and everything we have, including tons of money not beholding to debt). If the debt-money were to vanish -- we might have a very good world left behind. maybe we’d figure out how to better use all that wealth we would have left. ANALYSIS continued -- Here is my anectdotal, real-life argument against what I think is the ridiculous basic idea in the summary of this article -- that all wealth would vanish if debts were paid back. ======================= ANALYSIS continues until the next line like this ============================= ANALYSIS continued -- Debt and interest do far more good than this summary gives them credit for. Purchased a second custom built house at Lake Mohawk, N.J. for about $15,000 / 1962 -- had a mortgage around $12,000. Sold it and moved to California. I remarried. Sold that house for about $90,000 in 1982. Moved and bought two houses on one lot in Santa Barbara for $135,000 with a loan of about $100,000 / 1982 Sold those houses in 1986 or so for $300,000 or so. My wife and I held the mortgage of about $300,000 and collected interest payments. Bought a 95-year old house in downtown Santa Barbara for $375,000 / 1986 -- had a mortgage of about $300,000. Retired in 1994 at 62 years of age. Sold the old house in downtown Santa Barbara for $1,000,000 / 2001? / and collected on the $300,000 mortgage we were holding. Wound up with about $700,000 cash. Moved to San Marcos, CA in 2001 -- bought two houses with the $700,000 -- rented one out to our Daughter. Sold both houses in 2005. Bought a small piece of property and a mobile home in San Marcos in 2004 for around $300,000. Spent some money and put the rest in Government bonds The point of all this? This story covered 10 homes -- all of which were covered by a debt (mortgages) in one way or another. All of those debts have been paid off and we have a significant amount of interest bearing money left in government insured accounts. All of those homes are still in existence and have a total market value of at least $5,000,000 -- perhaps $7,000,000 I offer this as EMPERICAL, REAL-LIFE ABSOLUTE PROOF (the best kind of proof) that debts (loans) can lead to wealth and the payment of those debts does not destroy the wealth that was generated by the related loans. There are undoubtedly mortgages on all those homes today -- but the total of those mortgages are not of material interest. whatever they are -- every mortgage was agreed to at market prices and probabaly covered with realistic collateral. Is this a great system -- or what? This is not to say that our money and banking system can’t be improved enormously and loans could not be way more fair to the borrower. But I am saying that most of the claims made in the Mandrake Mechanism are exaggerated falsehoods and are not worth serious consideration. I believe much time and effort are wasted on consideration of writing like the Mandrake Mechanism when we could be focused on our real problems of how to solve our real problems of poverty and the inefficient management of our country’s fabulous wealth. Remember, this is not an obscure article I found in a musty, dusty bookstore for $1.95. It is #12 on a Google search and read daily by at least dozens of neophytes who swallow it whole and repeat the nonsense on their websites blogs, facebook pages and tweets on twitter. Martin R. Carbone -- martycarbone@yahoo.com
============================================================================================ |
This is #13 of our Google Poll Money out of Thin Air Foreign central banks are shifting into overdrive on their holdings of U.S. debt .... the Fed creating money out of thin air to buy up government bonds, ... http://dailyreckoning.com/money-out-of-thin-air/ |
Money out of Thin Air 12/15/03 The exponential explosion of dollar-denominated credit...through the “miracle of fractional banking”... Foreign central banks are shifting into overdrive on their holdings of U.S. debt last week, as evidenced by their balances at the Fed increasing by $9 billion to a new record. Hahaha! Dorks! Just to show those jerk foreigners that they haven’t cornered the market in stupidity, U.S. banks also bought up a nice $4 billion themselves! But, and if you really want to see something scary, walk with me over to where the Treasury holds sway, and we will cling to each other in fear and whimper pitifully as we watch vile specters swirl around us, and we note that they issued another $17 billion of debt in the same short week! The whole scene reminds me of the end of the movie “Raiders of the Lost Ark,” where our intrepid hero, Indiana Jones and his perky girlfriend are bound to a post, and the Nazis are opening the Lost Ark of the Covenant and all those angels are swirling around. At first the specters are beautiful and friendly, like what happens when you first start printing money and creating excess credit. Everything is wonderful and lovely! Then, right before our very eyes, the angels metamorphose into shrieking, devouring demons, and everyone is killed and the earth is swept bare, except our hero and his lovely sidekick. Fractional Reserve Banking: $5.8 Billion in One Week But getting back into something more attuned to reality as it really exists, we note that the Fed increased raw, fungible credit by $5.8 billion, too! In one week! And, I might add, to a new record, another new all-time new high, never before seen since the inception of the entire Federal Reserve System! A veritable avalanche of raw, naked credit, the original high-powered money if ever there were such a thing, the fabled Money Out Of Thin Air of story and song, money that can be multiplied by almost a hundred-fold, a thousand-fold, a million-fold, a zillion-fold, all through the miracle of fractional banking! I say this even though people at the supermarket always look at me like I have lost my mind when I stand by the checkout counter and tell them about it, because taking a very, very rough estimate of the multiplier, I look at Required Reserves, $41.64 billion, and divide that by Savings/other Deposits of $4084.8 billion. And what happens when you do that? Well, if you are like me, and you have my powerful skills with calculators, then you get some weird series of answers because you did something wrong with all those confusing buttons and then, in desperation, you finally ask someone who is just walking by to please use come over here and figure this damn thing out for me, then we get the surprising answer of 0.01. This means that for every dollar of deposits, banks actually have only one cent of reserves in case people come looking for their money. Okay. Now, taking a look at Total Assets of the U.S. banking system, we find roughly $4,381 billion. And when we compare that to the reserves of $41 billion, it is, likewise, one puny cent of reserves against a dollar’s worth of some of those loans going bad. ANALYSIS continued -- So -- Mogambo thinks paper reserves currently protect paper money. Isn't that just slightly foolish thinking? Somewhere else in this report, we explain that reserves today protect nothing from nothing. Our "reserves" are antiquated artifacts that are nothing like those golden coins that existed in olden times times when we had potemkin gold that the banks showed to people who were benevolently scammed into thinking that there was a dollar's worth of gold somewhere in existence for every dollar of paper money being used to efficiently drive the economy. ANALYSIS continued -- That might have been true for three or four days when the first goldsmith opened his bank --- but those days are gone forever. Reserves were always a scam -- they still are. But it is such a reassuring word. The banks kept the word when we did away with gold as a unnecessary "backing" for money. Fractional Reserve Banking: A Dime Vs. A Penny That one cent in reserves, that one measly penny, is backing up both a growing contingency of souring loans going bad, AND people wanting their money! Whew! And now, as part of your homework for today, I want you to go and get a textbook, any textbook, on economics, and look up the authors’ example of fractional reserve banking. What is the standard amount of reserves that THEY use to illustrate the use of fractional reserves? Ten percent! They, meaning guys who write textbooks, would have an entire dime’s worth of reserves for every dollar of deposits! And we have, in real life, a lousy penny! A penny! And if you spend any time reading that section, you will note that nowhere in the text do the authors of those textbooks ever imply that reserves would get down to one lousy penny! Does that imply something to you? And why is this possible, anyway? Because we have a fiat currency, ANALYSIS continued -- (Another guy of a large group who doesn't like fiat currency -- which is currency that was declared lawful by an act of Congress. What the dickens is wrong with that? Should we go back to wampum, whale's teeth and tobacco receipts? and a guy named Greenspan who will stoop to anything, and another guy named Bernanke and his printing press, and if the banks ever need any money, for anything, they can just let those two know, and they and their Federal Reserve will just - presto! - print up some credit, and buy the holdings of the banks, which also went up last week, as I noted above somewhere. In short, they commit monetary fraud on a grand scale. They will even print up actual currency! Which I add with that hysterical arching of my eyebrows and high-decibel voice, arms flailing about like my arms were on fire, although without the leaping up and down because the old knees aren’t what they used to be, they did just that, last week! Again! They printed up $4.4 billion in cash! Dollar bills! And they have printed up, in the last year, $38 billion! Lovely stacks and stacks, pallet after pallet, of tens and twenties and fifties and hundreds! About $138 for every man, woman and child in the whole country. Fractional Reserve Banking: A Decade’s Worth of $4.5 Billion Weeks $4.5 billion in one week doesn’t sound like that much, I admit, but it is for one lousy week, and can’t you see where this is headed? Now imagine not just one week, but a month’s worth of $4.5 billion weeks, a year’s worth of $4.5 billion weeks, a decade’s worth of $4.5 billion weeks! It adds up! And you think, and pardon me while I try and stifle this laughter, that the dollars that you are putting away today - tee hee! - into your retirement plan - giggle! - are going to maintain their - snort snort! - purchasing power when you - hahahaha! - retire? Pardon me, but hahahahahahaha! I can’t help myself! Hahahaha! Wiping the tears away from my eyes, my ribs really hurting from all that laughing, I note that the Federal Reserve and the Treasury are debasing your money right in front of your eyes, and yet you think - hahahahaha! - that when you retire, every one of those dollars you are depositing today will be every bit as valuable years and years from now? Hahahaha! And you admit that you are watching the Fed and the Treasury debasing your money right in front of your own eyes, week after week after week, and yet you STILL believe that a dollar today is the same as a dollar tomorrow? Hahahahaha! Stop! Stop! You’re killing me! Hahahaha! Now far be it from me, taking a long breath and trying to calm down and be serious for a minute because I am such a classy guy deep down, to suggest that there is any connection at all between the Fed creating money out of thin air to buy up government bonds, and thus effectively extinguishing the debt through that particular fraud, and the fact that the banks suddenly decided to acquire more government bonds. Must be a mere, umm, coincidence. (Hahahaha! Now I’m killing myself!) So, in one stellar example, we have all had a good laugh, I have demonstrated the perils of a fiat currency, the danger of fractional banking, related it all to “Raiders” (which is a helluva good movie, a classic, really), and now I’ve predicted that we are all going to die, except for the PWOG, which is an acronym for People Who Own Gold, because you know what a sucker I am for acronyms, especially silly- sounding ones, because things are going to get really, really ugly one day real soon, and this may be the only bit of levity that we get out of it. Regards, The Mogambo Guru, December 15, 2003 |
Analysis -- this article is written by Mogambo Guru -- the pen name for Richard Daughty of the “Daily Reckoning”. He laughed himself silly while writing the 2003 article we are analyzing. He warned that the Central Banks were going berserk and printing more money that could ever be absorbed by all the world’s economies. His claim is that all of the Nation’s banks-- had, at that time, 1 cent in reserves for every dollar in circulation and we are in for a terrible shock when all that money (a) finds its real value and declares it doesn’t want to work anymore for such stupid people and such a poor return on itself. The article is fun to read -- enjoy yourself. ANALYSIS continued -- Our conclusion is that we have terrible problems with our banking system -- but the problems have nothing to do with the goofy concept of "reserves" which were and still are a benevolent scam that makes bankers and some depositors happy. We will never solve our problems by tackling the wrong sources of our troubles. ANALYSIS continued -- We believe the underlying and overriding problem is lying by the Fed and the government who do not want the public to know how our money and banking system really works. ANALYSIS continued -- Elsewhere in our writing in this booklet and on our website, you can find our somewhat serious efforts to debunk Mogambo’s rants about “Fractional Banking” and “Reserves” when we finish analyzing the first 50 Google articles on “creating money out of thin air, we will write up a summary debunking everything worth debunking and will put all that debunking in one easy to find place on our website. We will also try to tell how our Money and Banking system can be efficiently improved. (mrc) |
This is #14 of our Google Poll |
Mr. Buchanan's words in black -- ours in blue. Mr. Buchanan's article,s #14 and #16, have the best informatiom of all the articles in our Google poll Analysis -- The article is written by Neil H. Buchanan, evidently a smart guy who knows his way around an economics book and a law book. You can get a good idea of his prowess by his lead paragraph -- herewith reproduced “In a guest column on FindLaw appearing later today, I take on the questions of whether the Fed is printing money “out of thin air” and, if so, whether that is bad. (Answers: (1) Yes, because that is how money is always created. (2) No.) In that column, I pick up on an argument that I mentioned in passing in a Dorf on Law post back in April: Doesn’t the Fed cause inflation when it increases the money supply? In my FindLaw column, I set aside the intervening steps of the argument and simply point out that reality has been very unkind to the argument that inflation and money creation are directly related. In this post, I’ll discuss those intervening steps to show that the Fed’s current policy is both sensible and reversible.” ANALYSIS continued -- He is right on both answers. ANALYSIS continued -- Based on Mr. Buchanan’s background, this article is one of the most solidly based articles in our Google Poll, But we disagree with what we see as his main point that the Fed (paraphrased) "controls only the 'monetary base' or 'reserves' and can therefore stimulate the on-the-street banks only so much. The Fed can’t, for instance, make the banks create loans or transaction accounts and thereby stimulate the economy." ANALYSIS continued -- That may be true -- but I think it would be of little help if we gave the Fed more direct power to approve loans and expenditures of newly created money by local banks. What we need in this regard is banks that are free to loan whatever -- as long as they can't sell of their loans and avoid the responsibility for the soundness of those loans. It is ridiculous to allow the banks to sell off loans -- they do not need more money to make more loans -- they have, as I read the law, the right to create all the money they need to make sound loans. If I am wrong -- and I could easily be wrong -- the laws should be changed to make my 'wrong' a 'right'. ANALYSIS continued -- As far as we are concerned -- he misses a major point. We are convinced that as long as a bank is solvent and playing by the rules, it can, under existing laws, create and lend any amount of money as long as the loan is adequately covered by collateral and the use for the borrowed money is reasonable and likely to succeed. We see nothing in the law that (a) enables the Fed to choke off a potentially good loan by telling a bank it does not have enough reserves, or (b) force a bank to make a bad loan. ANALYSIS continued -- As we explain elsewhere, reserves are an antiquated artifact of ancient banking that have NO MODERN RELEVANCE. Reserves previously were a modest scam that enabled goldsmith bankers to meet day-to-day demands for gold to redeem the paper notes they had issued to a public who were led to believe that the goldsmiths had enough gold to redeem every note. In fact it appears the goldsmith bankers never had more than enough gold to redeem more than 10% of the paper notes, Paper money at that time was actually Potemkin (or sham) money -- arranged in such a way as to appear much larger in size than it was actually. Since, in our humble opinion, all knowledgeable people know now that there is no need for gold or silver backing for our paper money -- the need for reserves is obsolete. We believe the word “reserves” is still being used by the Fed and the government in a duplicitous effort to hide the true nature of our money and banking system. We claim the Fed -- and the government -- have no interest in letting the public know the system really works. By obfuscation -- they are keeping us in control -- as the power elite have done, apparently forever. The public is being treated like slaves who are, once again, being deprived of access to truth and being kept in chains of ignorance. ANALYSIS continued -- We, the public and all three branches of our government need an education program written by men like Mr. Buchanan who would clearly explain how money and banking works -- in detail. Thursday, June 18, 2009 Money Out of Thin Air / Posted by Neil H. Buchanan In a guest column on FindLaw appearing later today, I take on the questions of whether the Fed is printing money “out of thin air” and, if so, whether that is bad. (Answers: (1) “Yes”, because that is how money is always created. (2) “No”. In that column, I pick up on an argument that I mentioned in passing in a Dorf on Law post back in April: Doesn’t the Fed cause inflation when it increases the money supply? In my FindLaw column, I set aside the intervening steps of the argument and simply point out that reality has been very unkind to the argument that inflation and money creation are directly related. In this post, I’ll discuss those intervening steps to show that the Fed’s current policy is both sensible and reversible. Most people who took an undergraduate economics course will probably remember the equation MV=PQ. Like most of what we learn in college, however, the meaning of that equation has probably been lost in the mists of time. Known as the Quantity Equation, this is a mathematical identity that says that the number of dollars (M, or Money Supply) multiplied by the average number of times that each dollar is spent (V, or Velocity) equals the average price of a good produced in a given year (P, or price level) times the quantity of goods produced in a year (Q, real gross domestic product). There are a couple of variations on this equation, and some textbooks use a different letter for Q; but this is the most common form of the quantity equation. Two steps of college-level math turn the equation into a linear approximation: money growth + velocity growth = inflation (price growth) + GDP growth. Moving from the Quantity Equation to a version of the Quantity Theory requires assuming that velocity growth and GDP growth are either fixed or predictably changing, which then means that money growth and inflation are directly related. Given the strong intuition that rampant and uncontrolled money growth must certainly be inflationary (see Germany in the 20’s, many South American countries in the 70’s and 80’s, etc.), it is easy to convince students that the theory can be used as an actual predictive tool for U.S. monetary policy. It cannot. As it turns out, in this country velocity growth is anything but fixed or predictable, and the predictions that money growth is inevitably inflationary (or that increases in money growth must increase inflation) simply do not hold up to empirical testing. Sometimes the relationship holds up, but other times it doesn’t. In the current situation, we have the Fed creating large amounts of money (but see below), and real GDP has been falling (the definition of recession), which would result in inflation if velocity weren’t falling. But velocity growth is falling. Hence inflation has stayed in check. If the economy starts to grow, real GDP growth will soak up some of the upward pressure on prices, and the Fed can pull back on money growth. Actually, there is an additional empirical difficulty with the “more money causes inflation” story. As Paul Krugman pointed out in his column on Monday of this week, there is a difference between the type of money that the Fed can control and the type of money that shows up in the equation above. The Fed controls the “monetary base,” which is the sum of currency and the (mostly electronic) money that banks have on reserve. We usually imagine that there is a nice linear relationship between the monetary base and the quantity of money that is ultimately available for spending; but again, that relationship is much more tenuous than many people thought. (Krugman points out that, in the Great Depression, the monetary base doubled while prices fell 19%.) If the banks don’t lend out the money that they have in reserve (which they currently are not), the monetary base does not ever become the kind of money that shows up in the MV=PQ equation, and any inflationary pressure from increasing the money supply cannot even get started because there really is not a big increase in the money supply. Until President Obama took office, the quantity theory had faded in importance even among those who called themselves monetarists. Although Alan Greenspan completely missed the importance of financial regulation, he clearly understood that the mechanical inflation story is no guide for policy. Ben Bernanke, who we might recall was appointed Fed chair by George W. Bush, also understands this. Of course, it is possible that inflation could return. One way for that to happen is for the variables that I described above all to turn in the wrong direction at once. Given that much of the “money” the Fed has created sits in bank reserves, and given that the Fed has nearly direct control over those reserves, it is well situated to pull the plug on any incipient inflation in a very timely way simply by shrinking the monetary base as much as necessary. I am not predicting that the Fed will respond perfectly, but this is not a situation where you have to wait months or years for the effect to be felt. In short, the intuitive story driving the fears about the Fed creating “money out of thin air” and thus ensuring a future of ruinous hyperinflation breaks down completely in the face of both evidence and theory. I am usually not a “don’t worry, be happy” kind of guy, but this is really a case where the Fed is doing the right thing and can reverse course as the situation evolves. -- Posted by Neil H. Buchanan See Buchanan’s background elsewhere in our booklet and on ths website. |
This is #15 of our Google Poll on "Creating money out of thin air" 15. The World Socialist: Banks, money and thin air |
This is from The World Socialist Party |
Also see Fractional Reserve Banking (FRB) simplified where we try to explain how FRB really works. |
This is #16 of our Google Poll / Mr. Buchanan's words are in black / our words are in blue 16. How is Money Created? Debunking Some Myths About Recent Policies ... Jun 18, 2009 ... The Fed – indeed, every central bank in the world – is ... of those who complain about the Fed’s creating money “out of thin air” is really ... |
| http://writ.news.findlaw.com/commentary/20090618_buchanan.html |
ANALYSIS continued -- This article is written by Neil H. Buchanan who also wrote #14. Those two articles have the best information in the Google poll. This particular article is very good on the subject of how money is created. The two paragraphs in red -- just below -- are a good summary of what paper money is all about. (mrc) How is Money Created? Debunking Some Myths About Recent Policies to Stabilize the Financial The recent economic crisis in the United States has been so severe that we are now experiencing something that has happened only a few times in history: zero interest rates. In a phenomenon technically known as a “liquidity trap,” the monetary authorities have pushed the interest rate that they control essentially as low as it can go, yet the economy still needs more stimulus. Please consider that the low interest rates set by the Fed really only applies to interest rates between banks for short term loans. There may or may not be any relation between (a) the interest on those inter bank loans and (b) the interest rate on loans to their regular customers. There is no reason to believe that low rates on (a) are welcome by successful bankers who instinctively like high rates of interest on (b) . The usual kick that we would experience from low interest rates is not being felt, because people are simply unwilling to spend in these difficult economic times. That was part of the argument for the stimulus package that was enacted in April, in which Congress and the President agreed on a two-year program to directly increase spending in an effort at least to slow the downward slide of economic activity. ANALYSIS continued -- We wonder why they expect the interest rates between banks to be related to the general interest rates and to the general economy -- seems like a long, tenuous, unreliable, frail connection to us. (mrc) Whether the stimulus bill is or is not effective (and, although I think it was too small, it is likely to play at least an important role in turning around the economy), some people have turned their criticism toward the Federal Reserve – commonly called the Fed, this country’s central bank – saying that the Fed’s creation of money to fight the crisis is threatening the country with long-term inflation, even hyperinflation. These claims are not only overstated, but they often are based on a profound misunderstanding of how the financial system works. The danger is currently that the government is doing too little to fight the recession, not that the Fed is putting in motion an inflationary spiral. Understanding why this is so requires some basic knowledge about how money is created. ANALYSIS continued -- I agree with that analysis (mrc) Money Out of Thin Air? The Myth that the Fed is Currently Doing Something Unusual and Dangerous Modern financial systems are all based on money that is, in a very profound sense, created out of nothing other than group psychology. No one has any practical use for printed pieces of paper carrying portraits of dead presidents, yet everyone works to receive those pieces of paper. Why? Because everyone knows that everyone else will accept those pieces of paper in exchange for the things that we wish to own. ANALYSIS continued -- That is true. (mrc) The process of creating money is, however, more complicated than just printing pieces of paper that people will treat as money. Most of the financial system, after all, carries out transactions in money that exists only in electronic form. Direct deposits of paychecks into bank accounts allows people to pay their bills online, which in turn allows merchants to pay their employees with yet more direct deposits (and some checks and cash). Indeed, when we read about a company buying another company “with cash,” that does not mean that millions or billions of dollars worth of greenbacks change hands. Typically, such a transaction is carried out in government IOU’s known as Treasury Bills that, in fact, also never exist in printed form. Both sides to a transaction treat those securities as “cash” because they know that they can use them to buy things or trade them in for cash at some point. The essential point to remember is that all of this is done with money that has been created out of nothing more than the common belief that the electronic transactions involved are meaningful. ANALYSIS continued -- All true (mrc) The role of the Fed is to set up rules by which it can limit the amount of money (including both cash and non-cash forms of money) that is in existence. ANALYSIS continued -- Not quite true. I would say that the prime role of the Fed is to set up rules related to their semi-constitutionally mandated job of creating money that will be used efficiently to create more wealth in the nation. Less money, working efficiently is way better than more money being wasted. It is not the quantity of money that is important -- it is the nature and efficiency of the use of the money (the management of the system) that is of paramount importance. (mrc) The Fed’s methods of doing so are too technical to be of interest here, but the key point is that the Fed can create or destroy money by engaging in policy actions that are well-known (not by me or 98% of the general public -- or 97% of all government officials) and completely uncontroversial. The Fed – indeed, every central bank in the world – is constantly adjusting (any system that has to be constantly adjusted is, almost by definition, a poorly designed system. Good systems have built-in automatic controls -- or at least, warning lights and gauges) the amount of money that exists, generally as part of a strategy to set interest rates at a level that is projected to maximize growth with a low, stable rate of inflation. ANALYSIS continued -- It has never been proven, to my satisfaction, that any or all the of Fed’s efforts make sense -- or work as they are thought to. In my humble opinion, most of the Fed’s efforts are shots in the dark with pop-guns. (mrc) All of the money that exists today was, therefore, created by the Fed out of nothing at all. Even so, we are now hearing and reading urgent cries that the Fed is creating money “out of thin air,” as if this is something horrible and dangerous. Just within the last six months, for example, the New York Times has carried nine articles which raise this specter. Isn’t that a shame?. That is precisely why we are making this Google Poll, where we are trying to find out what the computing world thinks of the phrase -- “creating money out of thin air”. See this link to see what the Google Poll is all about. Even setting aside the two Times articles that were op-eds, regular Times news articles such as one from May 22 of this year have said quite bluntly: “The Federal Reserve is printing money from thin air.” This is anything but objective language, and it is misleading at best. It is true that creating too much money can be dangerous, but the issue is not that money is being created from nothing, but rather that too much money can end up chasing too few goods. That is clearly not the problem that we currently face. What About Gold? Why the Fed’s Actions Would Be No Different if We Returned to the Gold Standard Some readers might respond to the description above by saying that the problem is a different one: The Fed must be prevented from creating “fake money.” What is “real money,” then? Gold, of course! This point, however, misunderstands the psychological nature of money, and it also mischaracterizes the true difference it would make if we were to take the radical (and completely unwise) step of returning to some kind of gold standard. Most people do not have any practical need for bars of gold, any more than they have a practical need for pieces of paper covered with numbers and the faces of long-dead politicians. Thus, the sole reason to hold gold (other than to use it for certain industrial and decorative purposes) is that other people want it – just as is the case with paper money. ANALYSIS continued -- All absolutely correct. (mrc) Moreover, even if we were to shift to a gold standard, the electronic nature of the current financial system would still require that we allow transactions to occur without the actual physical trading of gold, with “gold certificates” being created in print or electronic form, or both. Once we did that, however, we would then need a Fed-like agency to regulate the non-gold representations of money -- which would put us right back where we are now, with money not tied to gold or any other commodity. If we wanted to limit the Fed’s ability to manipulate the amount of such money that exists, we could simply link the amount of non-gold money to gold by some fixed multiple. However, doing so would have many undesirable consequences -- the most obvious being that our money supply would respond only to changes in the amount of gold in the world. The two countries with the largest known stocks of gold in the ground are Russia and South Africa, which means that those two countries could then increase or decrease the amount of our money by flooding the gold market or hoarding their stocks. ANALYSIS continued -- I agree (mrc) In other words, even for those who yearn for a system in which the government has no ability to manipulate the amount of money that exists, the reality is that there is no such system. Moreover, the systems that purport to limit the Fed’s discretion either do not actually do so, or do so at too great a cost to the health of the economy (as well as national security). ANALYSIS continued -- I agree (mrc) The Real Issue: How Should the Fed Decide How Much Money to Create? ANALYSIS continued -- That may or may not be true. The fact that no efficient system of money and the control of money has been discovered as of this date -- does not mean that it is impossible to design such a system (mrc) ANALYSIS continued -- In my view, the basic problem is that too few people understand the basics of money and banking. If more of us understood what is going on. I am very confident that an efficient and therefore fair system can be developed by a small group of well meaning people. (mrc) Perhaps the core concern of those who complain about the Fed’s creating money “out of thin air” is really that the Fed is creating too much money too fast, not that it is creating money in an illegitimate way. The question, then, is how we would know when enough is enough. Attempts to find an answer to that question have filled economics journals for as long as there have been economics journals, but the key issue is that there is a tradeoff: Merchants want their customers to have enough cash to buy their goods, but no one wants there to be so much money that inflation ensues. One formulation of the issue is based on the assertion that there is a reliable, direct mathematical relationship between the amount of money that the Fed creates and the inflation rate that we experience in subsequent months and years. That assertion has, however, not held up at all well to empirical testing, with inflation not reliably tracking the amount of money being created. The reason for this is that people do not always spend all of the money that they could spend, meaning that money can be created but not result in inflation. That is not to say that there is no limit to how much money the Fed could or should create. Everyone agrees that if the Fed were to order the Government Printing Office to print up $100 trillion in new currency and distribute it to the public tomorrow, there would be massive hyperinflation. Raising that specter as a reason to criticize the Fed today, however, is like saying that the possibility of drowning means that one should never drink water, or swim, or bathe. That it is possible to create too much money does not mean that we should create none. If there is no reliable relationship between the amount of money that the Fed creates, within broad boundaries, and inflation, then what should the Fed do? Essentially, it should do exactly what it is doing right now. ANALYSIS continued -- Is it trying to develop a system that is self-regulating? Some (I, for instance,might argue that they would never do that -- because it would devalue their guru-status. (mrc) As noted above, the Fed has pushed its (wimpy) policy-sensitive interest rate as low as possible, in an effort to stimulate economic activity. This was completely sensible, given the extreme nature of the current crisis. We knew that it was rare that rates could go to zero, but that has happened before. If those rates cuts had been enough, that would be fine. Unfortunately, the economy needed more stimulus. That is where the Fed’s further actions came in, supplementing and enabling the actions by Congress and the President to try to create more economic activity directly. When the federal government needed money to finance various bailouts and the stimulus spending, the money had to come from somewhere. The alternative to continued borrowing from abroad was to have the Fed buy the federal debt that is being created, directly injecting new money into the system in an effort to stimulate spending. ANALYSIS continued -- What about the alternative of creating the money and giving it directly to the Federal Government -- bypasssing the interest bearing bonds? Or prodding local banks to make more loans with the analytical help of the Fed.? Or making sure that local banks understand the reserves are not the least bit important -- see our writing on this subject elsewhere in this report where we argue that reserves are an antiquated artifact from the days of goldsmith banking that has no practical relevance today. (mrc) This strategy has its limits, of which the Fed is well aware. The current concern, however, has not been inflation but deflation, a decline in prices that can itself be a disastrous part of a decline into economic depression. The Fed wisely concluded, in short, that we should not worry about drowning when our most pressing problem is a severe drought. ANALYSIS continued -- ... Or something else entirely ... It might not be amount of money at all. Why is it assumed that is our current problem? (mrc) When the situation turns around, policy can and will change: We can create less money than we have been creating lately. That does not mean that the Fed will stop creating money out of thin air, but only that it is responding appropriately to changed circumstances. Neil H. Buchanan, J.D. Ph. D. (economics), is an Associate Professor at The George Washington University Law School, where he teaches tax law and policy. ANALYSIS continued -- I agree with most everything Mr. Buchanan writes -- except I believe an efficient system of banking and money can be established with relative ease. I will continue to work toward that end. First by putting together a small group of knowledgeable people who will explain in a small booklet how the money and banking system works now. (mrc) ANALYSIS continued -- To repeat myself. I offer the following few sentences. The fact that no efficient system of money and the control of money has been discovered as of this date -- does not mean that it is impossible to design such a system (mrc) ANALYSIS continued -- In my view, the basic problem is that too few people understand the basics of money and banking. If more of us understood what is going on. I am very confident that an efficient and therefore fair system can be developed by a small group of well meaning people. (mrc) ANALYSIS continued -- We intend to invite Mr. Buchanan to give us some advice on our program to educate the American public about how banking works. (mrc) |
This is #17 of our Google Poll -- we will not review this article. It is somewhat beside the point of our main effort |
This is #18 of our Google Poll Money from Nothing: Supplying Money Should be a Public Service / Written by James Robertson / Friday, 19 June 2009 |
Supplying money should be a public service, not a cash cow for banks. The way money is created and issued, who creates it and in what form—as debt or debt-free, in one currency or another—largely determines whether a financial system works fairly and efficiently or not. In our global village, money shapes our lives at personal, household, local, national, and international levels. The system now in place encourages or compels us all to get and spend money in ways that work against the planet, against other people, and against ourselves. ANALYSIS continued -- I agree (mrc) The great majority of the money supply in national economies is created by profit-making banks writing it into their customers’ accounts out of thin air as bank loans in electronic bank-account money—not coins or banknotes. ANALYSIS continued -- I agree (mrc) They call it “credit,” to disguise the fact that it is actually money. I doubt that -- I think they call it credit, because it is credit (mrc) When money starts as debt, paying the interest in addition to the principal requires more money to be earned as income than has been created. That makes it necessary for the supply of money and the accompanying indebtedness in society to keep growing, which has damaging systemic effects for both the environment and society. For example, the economic growth that supports an increasing money supply requires more of the Earth’s resources to be turned into commodities. Growing indebtedness works in favor of those who lend money into existence and against those who borrow and pay interest. ANALYSIS continued -- This is more or less true. However it is being put in rather sinister terms. I feel that I will shortly be led astray by an irrational rant based on the idea that the Fed creates money as debt -- but does not create the interest to pay that debt. That kind of goofy argument can be found all over the interent. (mrc) ANALYSIS continued -- Money can not only be lent into existence -- it can be spent into existence for very good reasons. And when money is lent into the system whereby the money will be used to create wealth in excess of the value of the money -- it can’t very well be looked at as a drag on the society(mrc) Giving profit-making banks the privilege of deciding the first use of money when it enters circulation distorts the economy. For example, it favors investing in existing assets like land and housing with ready collateral and long-term prospects of appreciation, instead of investing in needed goods and services. ANALYSIS continued -- That may or may not be true -- but in any event using money for land and housing does not mean additional money can’t be used for other goods and services. The two are not mutually exclusive. In our opinion, there is enough money avaiabe for all of our needs. Money really can, and can only be, created out of thin air. (mrc) A Sure Recipe for Booms and Busts Allowing commercial banks to create our money inevitably causes frequent booms and busts. There have been more than 90 in various parts of the world in recent years, according to a U.N. study. During the booms, when the economy is growing, the banks greatly profit by making many loans, thus creating too much money. In the busts, they stop lending, which shrinks the money supply. Then they demand massive bailouts so they can reactivate their privilege of supplying money. ANALYSIS continued -- That is a reasonable theory -- but you are under an obligation to do more than just state the theory. I hope you will give proof and suggest a solution to this problem. (mrc) From the bankers’ point of view boom/bust cycles are inevitable. Chuck Prince, the outgoing chief executive officer of Citigroup observed in 2007, shortly before he received his multi-million-dollar “golden parachute” for being chucked out of his crisis-stricken bank, “As long as the music is playing, you’ve got to get up and dance.” Monetary Reform But there is an alternative—based on the wisdom of U.S. founding fathers like Thomas Jefferson and James Madison, and later Abraham Lincoln, who all opposed giving “the money power” to the banks and said it should be reserved to the government. A nationalized central bank would create the right amount of money for the economic conditions, and give it to the government to spend into circulation debt-free. This would place the national currency under the control of a public agency responsible for carrying out money supply objectives laid down by the elected government, accountable to the legislature, and subject to democratic control. It would break the boom/bust cycle created by the expansion and contraction of debt. Safeguards would ensure that the agency did not allow politicians to create additions to the money supply for their own electoral or other narrow political purposes. Commercial banks would, without doubt, resist this change. If they lose the privilege of creating money out of thin air, they’ll be competing on the same playing field as businesses that don’t get their stock-in-trade as a free gift. ANALYSIS continued -- This is all a reasonable argument -- but it does not explain how the Government would do a better job than the Fed. (mrc) ANALYSIS continued -- Also -- debt is a great motivator. I would rather lend money to someone who is under presure to pay it back -- than give it someone for some reason conjured up by a bystander or bureaucrat. (mrc) A Step Toward More Radical Reform? Central bank governors—like Ben Bernanke of the U.S. Federal Reserve and Mervyn King of the Bank of England—are now issuing large sums of new money out of thin air in an effort to get banks lending again. Reducing interest rates virtually to zero has failed to persuade banks to lend money into existence. There is no alternative but to create the necessary money through the central banks. ANALYSIS continued -- What about creating money through local banks -- or in accordance with the Constitution, directly by Congress? ANALYSIS continued -- Do you know which interest rates the central banks reduced to near-zero? If you don’t -- it might be wise to look into that. Why would you think that low interest rates would encourage local banks to lend, when they logically like to lend when interest rates are high? (mrc) Conventional wisdom throws up its hands in horror at the idea of a public agency supplying money as a public service. ANALYSIS continued -- I agree that “horror” is a terrible response to what the goverment should be doing all the time. (mrc) So this practice is called “quantitative easing” and sold as a one-off dose of a very special, costly laxative, designed to clear the constipation of the commercial banks after their gargantuan profit-making “credit” binge. Governments could, however, use quantitative easing, not to shore up the power of the banks, but as a stepping stone toward returning the power of issuing money to democratic control. ANALYSIS continued -- As is demanded by the Constitution. (mrc) Local Currencies and Local Banks Local currency development is also an important aspect of reform and can make a significant contribution to economic decentralization. It will involve the spread of community currencies like Time Dollars, Ithaca Hours, LETSystems, Chiemgauers, and others already existing in many countries. These currencies can help to support new institutions like local banks, credit unions, and investment funds, as a basis for greater local economic self-reliance. Local currencies can provide people with a partial response to immediate crises like the present one. They could be encouraged to expand greatly after mainstream monetary reform, when the national money supply will be created as a public service under democratic supervision. But, in the absence of monetary reform, just as they did after the 1930s Great Depression, private banks will do everything possible to prevent the expansion of locally controlled currencies and finance, in order to maintain their profits. As a result, most people will probably remain too dependent on earnings, pensions, benefits, etc., all denominated in a national currency, to commit themselves to decentralized alternative currencies instead. ANALYSIS continued -- Wouldn’t that be unconstitutional? (mrc) ANALYSIS continued -- How about having local government start State Chartered Banks and create real U.S. currency. There are no laws outlawing such action. Banks in California have to be owned by corporations -- but there is no law that says local government can't own corporations. I assume all statesare about the same as California in that regard. (mrc) A Nightmare for the New President As President Obama struggles with the biggest economic crisis in decades, he may be aware of history. Not only Jefferson, Madison, and Lincoln opposed giving “the money power” to the banks. Woodrow Wilson regretted having “unwittingly ruined my country” by signing the 1913 Federal Reserve Act. As the cost of reviving the banks’ ownership of our money supply becomes clearer in the coming months, the president may wonder if he should avoid Woodrow Wilson’s regret and take the historic opportunity offered by this crisis to restore the money power to the people. ANALYSIS continued -- I accept all of that as being true. But you have missed the best argument for putting the money supply back into the hands of Congress. That reason is simply -- that is what the Constitution says. (mrc) ANALYSIS continued -- Combine that adherence to the Constitution with a logical, efficient, transparent system of Money and Banking and I believe that will solve our problems. (mrc) James Robertson wrote this article as part of The New Economy, the Summer 2009 issue of YES! Magazine. James works for sustainability and monetary reform. He is author of a dozen books, and co-founded The Other Economic Summit and the New Economics Foundation. www.jamesrobertson.com. Interested? Read how the public Bank of North Dakota keeps the state in the black. |
There is no GP-19 |
This is #20 of our Google Poll |
Best Defense of the Federal Reserve: Not “Out of Thin Air” Intellectual honesty requires that one address the strongest, not weakest, arguments of one’s opponent. It is called “Devil’s Advocacy” or “Giving the Devil his Due” but it is not really advocacy, nor really even viewing one’s opponent as “the Devil”. It is simple intellectual honesty. Now, admittedly, we live in a very intellectually dishonest world—a world in which we are routinely demonized by a theocratic supremacy utterly uninterested in the truth or freedom -- so there is very little reciprocation earned from us. That is the strongest position of those who would not give the Devil his Due: Why bother with intellectual honesty? The answer is simply, that we seek the truth. With that preliminary out of the way, let me address something that has been bothering me for some time about those who continually go on about the Federal Reserve “creating money out of thin air” as though they are counterfeiting. First, the money they create is backed by the threat of punishment—if you don’t obtain their money for payment of taxes, the government will throw you in prisons to experience “sexual awakening”—hence not “out of thin air”. ANALYSIS continued -- That is a goofy argument and not intellectually honest. You don’t get thrown in jail for not “obtaining” the money for your taxes -- you get thrown in prison for avoiding taxes in some way -- for cheating. (mrc) Now, everyone who uses the phrase “out of thin air” will more or less agree that this “backing” by a promise not to punish you if you present the Federal Reserve tokens is real but, they will object, there is no point in discussing such fine distinctions. Yes there is. There is a relatively strong argument from the supporters of fiat money and fractional reserve banking that gets trotted out for the favored few journalists, economics majors and politicians who are trained to ignore the rest of us. We, the “Paranoid”—We, the “Kooks”—We, the “Extremists”—We, the People, are not exposed to it—until now. Imagine a world in which people have taken a step up from barter to issuing IOUs for their goods or services -- IOUs which can circulate. Farmer John issues IOUs that say: “I, Farmer John, owe the bearer of this note 1 dozen eggs.” Tailor James issues IOUs that say: “I, Tailor James, owe the bearer of this note 1 fitted suit.” These IOUs are traded around the community and a monetary system is established where the currencies have backing that is as real as the credibility of their issuers. They are “debt money” in the sense that the issuer has made a promise to the bearer but they do not bear interest to anyone in particular. Now comes the Banker: The typical argument you hear from the opponents of Fractional Reserve Banking is that the Banker will have a store of gold that he represents with gold certificates that circulate in the community, and that he issues more certificates than he has gold in a blatant act of fraud. But let’s go back to Farmer John and his eggs for a moment: Farmer John doesn’t have the eggs. He has chickens who lay eggs on a regular basis. If Farmer John has a “run on the henhouse” by the holders of his IOUs, he’ll be accused of having “created IOUs out of thin air” because he won’t be able to service all the demands for his eggs in a timely manner. ANALYSIS continued -- That is a clever argument -- I agree with it. (mrc) Now is it true that the Banker’s main monetary service is the storage of gold for people, hence issuing tokens for more gold than he has in storage is fraud? No. That is not the Banker’s main monetary service. The Banker’s main monetary service is to simplify the monetary system by accepting the IOUs from others and performing 3 services: 1) Evaluate the credibility of the barter tokens issued by Farmer John and Tailor James, etc. ANALYSIS continued -- Hm? When did Banker’s operate like that? Sounds pretty complicated to me. Who did all the checking and measuring to make sure all the goods were of some aceceptable quality? And how was delivery enforced and lack of delivery punished? (mrc) It’s that simple. ANALYSIS continued -- Simple? Now, one may ask, where does the banker legitimately charge interest here? Simply: Sometimes Farmer John fails to provide eggs. Sometimes Tailor James fails to fit suits. The banker needs to charge what amounts to an insurance premium based on the credibility of Farmer John’s promises and another premium based on the credibility of Tailor James’s promises, etc. Hence, the Banker is merely attempting to do what any honest insurance man does: Cover his, and your, risks in participating in the monetary system under his responsibility. No Gold need be involved at all. Now that we better understand the legitimacy of a “central bank”, let us focus on the real problem: ANALYSIS continued -- That argument did not convince me of any such legitimacy. I can't see how the banker provides insurance (mrc) When the bank links up with the tax collecting agencies, as happened in 1913 with the simultaneous passage of the Federal Reserve Act and the 16th Amendment to the US Constitution, it has acquired the government as collection thugs—thugs who will “break your kneecaps” if you don’t pay up. At some point—and it isn’t well defined exactly when this occurs—the promises for delivery of goods and services cease to be the primary backing for the banker’s notes and the threat of punishment becomes the primary backing. ANALYSIS continued -- Who is being threatened? The Farmer -- if his hens don't lay? (mrc) That’s the real problem with the Federal Reserve. ANALYSIS continued -- ?????? ANALYSIS continued -- We do not need any further reasons to dislike the Federal Reserve. We need solutions to the many problems of our money and banking system. Case dismissed on the grounds of triviality and lack of just cause. (mrc) Posted by James Bowery on Monday, July 13, 2009 at 12:42 PM in Economics & Finance |
This is #21 of our Google Poll Why should central banks cut interest rates? - Credit Writedowns In regards to “out of thin air,” that usually applies to the central bank creating money out of thin air i.e. buying treasuries with ... http://www.creditwritedowns.com/2008/11/why-should-central-banks-cut-interest.html |
| Why should central banks cut interest rates? Posted by Edward Harrison on 6 November 2008 at 10:51 am |
Central banks around the world are whacking interest rates at a breakneck clip. The Fed, the Reserve Bank of Australia, the Bank of Japan and now the ECB ( European Central bank) and the BoE. The BoE made the most dramatic move with an outsized 150 basis point cut. However, I am not convinced this is what the market needs. Why are central banks cutting interest rates? The conventional wisdom is that cutting interest rates provides monetary stimulus. Cutting interest rates will help prop up the economy at a time when commodity prices are plummeting, making inflation less of a concern. I do believe this is true and some easing might be just what we need at this delicate point. However, I also believe cutting rates has unintended consequences — and one of them is increasing the appetite for risk. Before I go into why this is so, let me explain how I see interest rates with a blurb from a previous post. The purpose of interest rates Consider money to be just like any other good. Therefore, a loan is essentially an exchange of a ‘present good’ (money that can be used today) for a ‘future good’ (an IOU -money that can be used later). Because people will always prefer having a good straight away than receiving that good later, the present good commands a premium in the marketplace. That premium is the rate of interest. Interest rates, therefore, represent the time value of money. It is the mechanism through which individuals express ‘time-preferences’ i.e., how much more they value receiving money right now as opposed to a later date. The premium of present money over future money fluctuates according to people’s time preferences; if people want money today very badly, the premium for money today (interest rate) will be high. So, the purpose of credit and interest rates is clear. It is the mechanism by which one is compensated for deferring consumption today for later consumption. The business cycle Loans on credit also create the boom-bust business cycle. In our fractional reserve deposit banking system, banks must keep on hand only a portion of the money we deposit. The rest is lent out as credit. Therefore, if all depositors were to rush to the bank to redeem their deposits, the bank would not have enough cash on hand and would be declared insolvent. That is not true. The bank would simply pay by check and the Federal Reserve would make the check good -- or they would say “ come back in 3 days and we will have your paper money when it comes back from the laundry.” (mrc) ANALYSIS continued -- This is what happens in a bank run. To avoid a run, banks must maintain the confidence of depositors by acting prudently and cautiously in extending credit. If not, they risk insolvency. The problem is that human nature steps in; as the business cycle progresses, the banks lend more and more money. Naturally, some of those loans are ‘bad’ loans i.e., the debtor cannot pay back the full principal at the required time. The banks must account for these bad loans in their loan loss reserves. However, at some point, when the credit cycle has progressed too far, one of two things occurs: 1 The economy ‘overheats’ and inflation starts to rise. Whispers start circulating that the central bank will raise interest rates and that inflation is spiraling out of control. The central bank does increase interest rates and many loans that looked good in a lower interest rate environment start to go sour. As rumors circulate that this bank or that bank has been lending imprudently, the banks dig in their heels and pull back. Interest rates go up, credit contracts, and the economy goes into recession. This is the business cycle. It is a natural part of our capitalist system and it is entirely created by the extension of credit. ANALYSIS continued -- But paper money eliminated any possibility of bank runs. Whatever money is needed to redeem the notes outstanding is simply printed by the treasury and disbursed by the Fed. (mrc) In my view, cutting interest rates below their natural level distorts time preferences and investment decisions, causing individuals and companies to take on more risk — risk that they will later regret having taken. In effect, the central bank is goading people into misconstruing the riskiness of the decisions they are making by keeping interest rates artificially low. ANALYSIS continued -- I contend that interest rates can’t be kept artificially low except by collusion between banks -- and that should be a felony if it is not now. (mrc) A perfect example is the previous housing bubble. If interest rates should be 5% but they are 1%, then home builders are going to increase their indebtedness to take on more projects with longer and longer completion time frames. A project that comes online 5 years out looks much less risky when you can borrow money for 4 or 5% less. ANALYSIS continued -- Are you saying the banks caused the collapse of house prices because they simply did not charge enough interest? That is something like saying the banks cause bank robberies because they keep too much money on hand. (mrc) Another example of this right now comes in the form of levered ETFs. These are exchange traded funds that allow investors (and) speculators the opportunity to double or triple the gains from investing in the stock market. See Paul Kedrosky’s take on this here. While gains are levered, so are losses and it seems amazing to me that investors are taking on that much risk after the drubbing we all took in October. But, when interest rates are cut to 1%, that is what happens. Why don’t central banks leave interest rates alone but lend freely against good collateral? ANALYSIS continued -- That certainly sounds like a good idea -- in any case. But they do not really control all interest rates. They only control -- in an advisory way -- what banks charge each other for short term loans. That rate must be only tangentially related to all other interest rates (mrc) Intervene in the commercial paper market if you must, but stop distorting investment decisions. The only reason that rates are being cut so low is political pressure, plain and simple. ANALYSIS continued -- You might be on to something -- but I think you presented a poor case. Case dismissed because of incoherence and strawmanship. (mrc) And when politics drives economic and monetary policy, bad things happen. ANALYSIS continued -- Related link -- see << http://www.primeronmoney.com/20%20Q./page6of20.html >> for a short essay on Interest rates |
This is Google Poll #22 Sound Money | Ron Paul .com |
Sound Money Henry Ford once said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Are you confused by all the talk about monetary policy, fiat money and inflation? You’re not alone. Bankers and politicians have worked hand in hand for many decades to obscure their activities from the public. They hide behind elaborate structures designed to inflate the money supply while creating the false impression that they are looking out for our best interests. ANALYSIS continued -- I will buy that analysis. I think that is our biggest problem. If we all understood how Money and Banking works -- we would not have half the problems we have now. Other than that, this article makes a lot of what I consider unsubstantiated claims outside the subject we are tying to understand. Consider this our first effort to analyze this article in detail. I will be back before we wrao this up and add sme more analysis. (mrc) Inflation is a very simple concept to understand: More money = less value. It may seem contradictory but it’s very straightforward. For illustration purposes, join me on a brief journey of the imagination. One beautiful morning, you wake up and realize that you own twice as much cash as you had just last night. Magic money elves entered your home and bank account and simply doubled your entire cash assets. You’re now twice as wealthy (or half as poor as the case may be). ANALYSIS continued -- It is somewhat amazing that the writers at Ron Paul.com would resort to this story about Magic money elves to make their point that too much paper money made out of thin air will cause inflation. See GP#18 for a convincing argument by Mr. Buchanan that all the money that has ever existed is made of thin air and switching back to a Gold standard would not make it any easier to control inflation. Ron Paul ran for President of the United States in 2008 and was enthusiasticlly supported by a large goup of admirers. Hilary Clinton claimed that Ron Paul's supporters were the most enthusiastic of all voters. Is their nothing that can be done to convince Paul's group that they simply do not understand how money and banking works? The enthusiasm for Ron Paul is probably the best proof that we should embark on a full scale public education program on this subject. But you soon realize that the same thing happened to everyone else in the country. The money supply (total amount of money) has doubled! It’s just a one-time event and your regular income remains the same... you just got lucky this one time. It’s okay to dream, so stay with me. ANALYSIS continued -- This is not dream -- it is a nightmare -- Magic elves? Violating the Constitution by speading Counterfeit money? Any argument that depends on Magic elves can probably be safely discarded out-of-hand. What happens next? If you’re like most people, you probably start spending. You buy things you always wanted to buy but couldn’t afford. You pay back some debts. You buy stocks. In other words, you put the new money into circulation. So do most other people in the country. Demand for many products increases because a lot more people can afford them now. Consumers are buying so much stuff that some shortages occur. To protect themselves against these shortages, shops and businesses decide to increase their prices. They know that once prices go up, fewer people will be competing to buy the same products, and the situation will be back to normal. As a side effect of these higher prices, shop owners start earning higher profits than usual. They have more money in their bank accounts, which allows them to increase their spending. They will invest in new stock or expand their business. They might pay out dividends to their investors and bonuses to their employees, allowing these people to buy more products as well. This additional demand puts even more pressure on other shops to increase their prices. A few months later, prices of almost everything have gone up. Suppliers and manufacturers are faced with the same threat of too much sudden demand from their clients so they too decide to start charging more. You went on a one-time buying spree and look what happened! Your income stayed the same, but after a few weeks you can suddenly no longer afford the products you used to buy all the time because all prices in the economy have gone up. Naturally, you demand a higher salary from your employer. If you’re self-employed or in business, you have to charge your customers more money just so that you can maintain your standard of living. Everyone else is in the same situation. Higher prices keep spreading throughout the entire economy, and it’s getting more and more difficult to make a living. Can you see how this lucky one-time incident which at first seemed so exciting was extremely harmful not just for you but for the entire country? You briefly had a good time but now you’re worse off than before. In our story there are now twice as many dollars in circulation, but your income remains the same and each dollar you earn is worth only about half as much as it used to be. You’re really hoping for those money elves to come back. As a matter of fact, some people, companies and banks have managed to develop an inside connection to the “money elves”, allowing them to receive new money into their bank accounts whenever they want to. The money is officially a loan (credit), but they know they never have to pay it back... they just “roll it over”, i.e. take up even more debt. With all that easy money in their accounts, and after hearing on TV that stocks only go up and that real estate prices will continue to rise forever, they tend to get a bit lightheaded and start making bad investment decisions. They know that if anything happens to their investments they will be bailed out by the government, so they do not hesitate to take huge risks with their new found “wealth”. Let’s stop dreaming and look at the reality of things. What if I told you that these “money elves” do exist and that they spring into action not just once in a lifetime, but every couple of weeks? And that they repeatedly give money to their closest friends, but not to you? That prices are going up because the total amount of money in circulation increases, but that you’re missing out on all the fun? Well, that’s inflation at work. Who benefits from inflation? Only those who are at the top of the pyramid and receive all that new money directly from the source. As you might have guessed by now, the source is the Federal Reserve, and its recipients include the government which “borrows” a lot of new money each year, without any intention of ever paying it back. Another beneficiary these days are failed banks that are being “bailed out” for the good of the “economy”, or defense contractors that receive money to build up our military so we can have a constant presence all over the world and fight never-ending and unnecessary wars. There was even a huge number of small-time beneficiaries who received consumer loans and sub-prime mortgages they would never be able to pay back. What, then, is fiat money? It’s exactly what we just talked about: money that can be inflated or increased at the push of a button at the say-so of a powerful person or organization. Nowadays most dollars are just blimps (blimps?) on a computer screen and it’s extremely easy for the Federal Reserve to create money out of thin air whenever they want to. ANALYSIS continued -- Fiat money is simply money that has been declared legal by an act of Congress. (mrc) ANALYSIS continued -- Case dismissed because of a senseless argument. (mrc) ANALYSIS continued -- You can learn a lot from fools. (mrc) If our money were backed by gold and silver, people couldn’t just sit in some fancy building and push a button to create new money. They would have to engage in honest trade with another party that already has some gold in their possession. Alternatively, they would have to risk their lives and assets to find a suitable spot to build a gold mine, then get dirty and sweaty and actually dig up the gold. Not something I can imagine our “money elves” at the Fed getting down to whenever they feel like playing God with the economy. ANALYSIS continued -- How about using moon-dust? That is even harder to find than gold? (mrc) ANALYSIS continued -- And -- for every elf-prank under the sun, there is a solution or there is none. If there be one, search 'til you find it. If there be none -- never mind it. by Mother Goose. (mrc) ANALYSIS continued -- We know that all new money is issued by the banking system as interest-bearing debt. -- that has to be paid back -- leaving behind the wealth that was generated with that debt-money. That practially guarantees debt-money will not cause inflation if only the banks make sensible loans that will create more wealth than the debt-money. (mrc) As you can see, inflation and fiat money are very seductive and beneficial to those at the top, and very dangerous to everyone else and the nation as a whole. That’s exactly what Henry Ford was talking about. He knew that every country that relies too much on fiat money is ruined sooner rather than later. There is only one possible solution to the inflation problem: Stop creating money out of thin air. But we’re already in such a mess that the only way to have a real impact on the money supply is to increase interest rates so that people pay back their loans and borrow less money from the banks, which decreases the amount of money in circulation. However, higher interest rates might very well crash the economy. So the Fed’s current “solution” to overcoming inflation is... creating even more of it. Fiat money is a dangerous addiction. Even if the Fed found a way to stop inflation, as long as the current system persists the temptation will always be there to resume pushing the easy money button. That’s why we need to get back on the gold standard and eliminate the Federal Reserve altogether. But that won’t happen “before tomorrow morning”, as Henry Ford said, or even this year. Ron Paul believes that the first step towards monetary freedom is to allow open competition in currencies. Once gold and silver are allowed as legal tender and can be sold without sales tax, everyone can use them to store their wealth and to pay for the things they want to buy. The Federal Reserve will finally have a very compelling motivation to stay honest and maintain the value of the dollar because if they don’t, they will simply lose all their customers. Ron Paul has been an advocate of the gold standard and open competition in currencies for many years. He is the Federal Reserve’s most outspoken opponent in Congress and has frequently questioned Alan Greenspan and Ben Bernanke about the Fed’s actions. ANALYSIS continued -- But it appears that he never learned anything from them that he could use to unmask them. (mrc) |
This is no Google Poll #23 |
This is Google Poll #24 Where Does the Money Come From in the First Place? ... Once their loans are repaid (by the local banks), this new money is ... They were creating money out of thin air and “selling” it to the innocents at ... http://www.truthaboutax.com/site/1515517/page/907179 |
Where Does the Money Come From? The article's words are in black -- ours is in blue. The one question nobody asks. And the one driving force that more than anything else defines the sad state of the world today. Most people think our governments simply print more money as the economy grows. For every question, there is a lie. For every lie, there is a truth. For every truth, there is a way. And for every way, there is a time. ANALYSIS continued -- And -- for every problem under the sun, there is a solution or there is none. If there be one, search 'til you find it. If there be none -- never mind it. by Mother Goose The sad fact is, nobody (apart from a very few) knows where the money actually comes from. But there are a few things that we do know. We know that the money supply has been increasing world-wide at around 7.5% per year. We know that local governments do not create any of this new money. ANALYSIS continued -- They could -- there are no laws that prohibit local governments from starting State Chartered banks and creating real U.S money through loans. (mrc) We know that all new money is issued by the banking system as interest-bearing debt. -- ANALYSIS continued -- that has to be paid back -- leaving behind the wealth that was generated with that debt-money. That practially guarantees debt-money will not cause inflation if the banks make sensible loans that will create more wealth than the debt-money. (mrc) This truly is a curious state of affairs. Someone somewhere is creating all this new money out of thin air and selling it to us through the banks at high interest. We don’t know who they are. We don’t know if they are interested in our well-being. We don’t know if they give a hoot for our children. They might even be aliens bent on taking over the earth, for all we know. And whether they are aliens or not, that is exactly what they are doing. ANALYSIS continued -- Trust me -- it is not aliens. It is the Federal Reserve system that was hired by Congress to take over the job of creating money that was given to Congress by our Constitution. (mrc) Trillions of dollars worth of new debt is created each year around the world. All this debt is sold ANALYSIS continued -- (lent?) through the banks at high interest, in exchange for negotiable securities like mortgages, debentures, personal guarantees and the like. All this new money originates from outside our governments’ sovereignty and control. It may all originate in cyberspace. And no one has any means of tracing it to its source. And yet year after year, governments everywhere continue to play this rigged game; a game in which someone high up in the world banking system always wins and the borrowers always lose. And it is government itself (ignorantly perhaps) that continues to deal these winning hands to the bankers. All new money enters the system as interest-bearing debt.ANALYSIS continued -- (except that money that is spent (not lent) by the government on worthwhile infra structure projects designed to create more wealth than the amount of the debt-money involved -- mrc). So the first prerequisite of new money issue is demand. There must be a willing borrower. Now ever since “money” was invented, there’s never been enough of the stuff. Very early on, a few wily goldsmiths/bankers cottoned on to the Fractional Reserve System, whereby paper notes purportedly representing real gold were seen to require only a fraction of their value in gold deposits. This allowed them to begin multiplying their own “paper” money many times greater than their actual resource backing. ANALYSIS continued -- (Correct. But nobody has ever discovered a better system -- and many have been tried. (mrc)
When Kings and Princes began borrowing this dubious new money, the stage was set for the present highly questionable tax system to take root. As governments were forced to repay debt on money that was actually created out of thin air by the bankers, they begin to rely more and more on tax payments from their subjects as a way to repay debt. Thus taxes were not designed to fund services. Rather, they were designed to service debt. ANALYSIS continued -- That is a very good argument. Obviously those Kings and Princes were not very smart -- they could have created their own money. Every sovereign nation has that right. You would think that our Congress would have figured that out by now. Didn't they learn that in the handbook -- "Governing for Idiots? I think that is the title of Chapter 2. -- "Don't borrow money you have a right to create out-of-thin-air". How pathetically dumb can they be? And if they are dumb, we are dumber for allowing this to continue. (mrc) Which brings us to our present state of affairs, whereby taxes have little or nothing to do with “funding” government services; except by an illusionary connection. The only thing that can fund government in a sustainable sense is an actual surplus created in private sector commerce. And even on the face of it, punitive income taxes destroy private incentive to produce, create, save and invest. Thus the only connection is a reverse one. In other words taxation destroys the sustainable government funding base rather than supplying it. ANALYSIS continued -- You are certainly right that if taxes are irrationally and unfairly high they work to reduce incentive. But nobody has ever figured out a way to eliminate taxes. Most of us think fair taxes are a just way for us to pay for this wonderful country -- in spite of its faults. (mrc) So there you have it. Taxes create a shortage of wealth and money in the private sector, forcing individuals and businesses to borrow from the banks to replace that “stolen” by government taxes and government incompetence. ANALYSIS continued -- That, we believe is a narrow-minded, unjustified view. (mrc) Local banks use our security documents to create mortgage bonds and other financial instruments through which they can borrow amounts far in excess of their actual deposit holdings from “offshore” sources. It is these offshore entities who actually create our “new” money (the new money we have been forced to borrow through taxation) out of thin air. ANALYSIS continued -- So the fault is those damn foreigners? (mrc)Once our loans have been repaid, the local banks are able to profit on the interest differences -- ANALYSIS continued -- what do you mean by interest differences? Remember -- we do not have to borrrow at all and pay interst to others-- we can create all the money we need out of thin air. Wher do you think the foreigners get their money? The create it out of thin air. (mrc) -- times ten or more, giving them plenty of incentive to keep quiet and keep the present system going. But the real power rests with those anonymous individuals in cyberspace who create all this new money out of thin air. Once their loans are repaid (by the local banks), this new money is beautifully “laundered” allowing them to then purchase controlling interests in all the most profitable multinational businesses including strategic infrastructure, pharmaceuticals, petro-chemicals, telecommunications, transportation, armaments, and of course the media. And that’s precisely why you have never heard this before. You might be right about that. I assumed that once the loans were paid back by borrowers, the debt money was extiguished by the same sort of entries that created it. But we will never know -- because as i understand it -- the Fed's books are not really audited in any meaningful way. Elsewhere we tell how Wright Patman tried to have the Fed's Books audited in 1964 -- but never succeeded. We should find that information and put a link here ( see #14 at http://www.primeronmoney.com/Patmansspeechof8-3-64.html ) There’s more. We know that the world economy has been expanding at around 3.5%-4% per year, and thatANALYSIS continued -- average inflation rates are roughly similar. So, not only are these offshore bankers creating new money (7.5% per year) (I do not think you can justisfy adding these numbers together -- if that is what you are doing -- mrc) against a growing wealth base (3.5% per year, they are also creating money for pure consumption ANALYSIS continued -- (I do not understand that last phrase -- are you taking about consuming money or spending money and consuming the products you buy? -- mrc), enslaving consumers with debt, and forcing our hard earned money to lose its value at a rate of around 4% per year. This is like pouring salt into a wound. Petty pick-pocket theft after the bankers have already ransacked our homes. ANALYSIS continued -- (Aren't all debts the other side of loans that are freely agreed-to by both parties and covered by an excellent system of contract law? -- mrc) There’s still more. We know by reading the history books that early Kings and Princes borrowed from the money lenders to conduct exploration, colonization, and war. ANALYSIS continued -- (whatever you read in a history book should always be subject to doubt -- it is unreasoable to say you know something because you read it in a history book. I ignore that presumptin of knowledge -- mrc) Today, governments are still trying to colonize and take over others’ territories, or are trying to take back what has been lost. And of course there is the ongoing competition for what appears to be scarce world oil reserves. ANALYSIS continued -- Shame on them. -- mrc So, whenever there is a new challenge or a new opportunity for government to colonize, or to overcome some challenge, taxes inevitably go up. And this plays right into the hands of the money lenders, as it always has. Throughout history this has lead to an ongoing temptation for the moneylenders to create havoc and mayhem at every opportunity. Taxes and/or government borrowing inevitably follow; gifting the money lenders yet more opportunity to create cash out of thin air, and steal more precious ownership rights from we mere mortals through debt slavery and inflation. ANALYSIS continued -- You might be right. What is your solution -- or set of solutions? How about simply following the Constitution and put the creating of money in the hands of Congress? I don't think that wil work, because we don't know what rules we need for a fair Money and Banking system -- mrc Anyone who has seriously studied history will see the bankers’ threads woven ‘round and through; including the Russian Revolution, World War 1, Hitler’s rise to power, the Second World War, the establishment of Israel, the Korean War, the Vietnam War, “Desert Storm”, and the coming war with Iran. ANALYSIS continued -- You might be right. What is your solution -- or set of solutions? How about simply following the Constitution and put the creating of money in the hands of Congress? I don't think that wil work, because we don't know what rules we need for a fair Money and Banking system -- mrc Throughout history assassinations and “False flag” operations undertaken by “anonymous” individuals have signaled more warfare, more death, more destruction, and more taxes; and more profit for the bankers. Even 9-11 bears all the trademarks of conspiracy. Could all this be by the hidden hand of the bankers? If it is, it’s all because of taxes. ANALYSIS continued -- You might be right. What is your solution -- or set of solutions? How about simply following the Constitution and put the creating of money in the hands of Congress? I don't think that wil work, because we don't know what rules we need for a fair Money and Banking system -- mrc We really have only two choices. First, turn a blind eye until the bankers own everything and control a one world dictatorship in which we will be mere wage slaves. Or end all taxation and empower our own governments with the right to create new interest-free money proportional with the growing economy. ANALYSIS continued -- This might work -- has it ever been tried? If I were King -- I'd give it a try -- it sounds reasonable and does not seem hard to implement. Thanks for the idea. Of course money would still be created out-of-thin-air. But I am convinced that is not a problem (mrc) Your choice. It’s really not that difficult to choose, is it? Make the right choice, and start asking everyone you know that one all-important question: “Where does the money come from in the first place?” ANALYSIS continued -- That is precisely the question I asked my economics professor in 1955. He never gave me a good answer. Somewhere at this link, you will find that story. << http://www.primeronmoney.com/otherlinks.html >> ANALYSIS continued -- The best answer is in Wright Patman's writing. Check the writing by Patman. You can find it at the links in the bottom table at |
This is google Poll #25 |
| A Glossary of Political Economy Terms / by Dr. Paul M. Johnson |
Mr. Johnson's words in black -- our analysis in blue Banking In the broadest sense of the term, “banking” is the business of accepting temporary responsibility for safeguarding other people’s money (“deposits”) and then lending out these funds (along with the bankers’ own funds) in order to earn interest for the bank’s own account. Banking firms thus earn their profits primarily by serving as “financial intermediaries” who mobilize the scattered savings of many households and firms (by offering safekeeping services and paying interest on at least some kinds of accounts) and then make these pooled funds available to suitable borrowers (to business firms that want to finance proposed investment projects or perhaps to consumers who want to finance big ticket durable consumers’ goods like automobiles or perhaps to governmental entities whose policy-makers have decided to spend more money than they have received in revenue collections). The bank pledges its own capital (and also buys outside deposit insurance) to guarantee that any depositor can get all his/her money back in cash no later than some contractually specified length of time after giving notice of withdrawal. Note that most depositors have signed a contract that says they have to wait a few days before they can actually withdraw cash from the bank. That means the banks have a few days to get the cash together, by borrowing from another bank or the Federal Reserve. It should be extremely rare that the bank will not be able to raise the cash in this way if their books are balanced and they are solvent. The bank makes this somewhat risky guarantee even though it is quite predictable that some (hopefully small) percentage of the loans the bankers make using depositors’ funds will “turn sour” and not be repaid by the borrower. The bank’s profits arise mainly from the (positive) spread between its costs of securing and servicing deposits and its revenues from fees and interest on the loans extended. (Of course banks frequently seek to make additional profits selling other financial services to their clients and customers as well, but the business of accepting deposits and making loans is the defining core of the banking business.) It is worth noting that the banks are working with enormous leverage -- at least ten to one 1. By that, we mean that the bank is allowed to lend out 10 times as much money as it has in deposits. The bank is allowed to create the money it needs out of thin air simply by making various entries in its books. For instance, when it makes a new loan after investigating the credit worthiness of a potential borrower and coming to a contractual agreement with that borrower, the bank simply opens a "transaction account" on its books showing the borrower has the amount of the loan deposited in the bank. At some times, the bank can lend an unlimited amount to one. That is when it is working with a zero to one reserve ratio. Should it become necessary for the bank to produce cash for the borrower, that cash will be provided by the Federal Reserve who will order the cash from the U.S. treasury, who will simply print the needed amount and bill the Fed for the paper and ink -- about 4 cents for each physical bill. If any loan goes bad, we do not know what the rules and mechanisms are within the banking system for accounting for that loss. We assume the money that is withdrawn from the lender's transaction account and not paid back naturally shows up as a loss on the lending bank's books. At some point, based on the percentage of losses related to total transaction accounts for the lending bank, we assume some punitive action is taken by the Fed. and the Federal Deposit Insurance Corporation (FDIC). See the paragraph below which is preceded by "Losses". Not all firms engaging in “banking” in this broad sense are officially called “banks.” Savings and loan associations, credit unions and other miscellaneous thrift institutions provide similar services under other names. The laws of the United States and most other developed industrial countries provide for multiple types of financial intermediary institutions whose official “labels” normally depend upon the selected purposes for which they will loan money (business loans, consumer loans, real estate mortgages, etc.), the maximum time period for which they will contract a loan (2 years? 5 years? 30 years?), and the kinds of supplementary services (checking privileges, foreign exchange, management of trusts and estates, etc.) that they may provide for their customers beyond basic taking of deposits and extension of loans. From the perspective of this course, banks are mainly of interest because of their key role in determining the size of the money stock. Considerably less than half of the US money stock (M1) consists of physical cash or currency (coins and bills). Most of the money stock in the US (or any other present-day advanced industrial economy) is in the form of “mere” ledger entries representing bank depositors’ credit balances in their individual or corporate checking accounts. And, amazingly enough to the uninitiated, this means that banks are constantly creating money “out of thin air” simply by making bookkeeping entries that assign new checking account credits to customers as they take out loans from the bank. ANALYSIS continued -- Please note that last sentence. Creating money out of thin air is a common occurrence and not the lease bit sinister. Losses -- Of course, private banks cannot simply create money out of thin air without limit and still expect to stay in business. When the bank credits a borrower’s account with the amount of his new loan, it is to be expected that the borrower will very soon want to spend part or all of the money he has borrowed. After the check the borrower writes is deposited in somebody else’s account in another bank, the check will soon be presented for collection at the lending bank, and they will have to have the cash on hand to pay the other bank off at that time. The more dollars’ worth of loans a bank has extended, the more cash it will have to have on hand in reserves to meet the daily flow of redemptions. Most or all of the check redemption demands coming in every day can normally be offset by the cash and checks drawn on other banks that the depositors and borrowers have brought in and deposited or paid that day, but an “unsound” bank that extends loans with reckless abandon sooner or later will find that the flow of checks presented to it for collection greatly exceeds the flow of outside checks and cash being brought in. Once the bank’s vaults are empty and the cash reserves are gone, the management must quickly (overnight!) either borrow the necessary additional cash elsewhere (probably at high interest rates) or else sell off some of the bank’s assets (because of the haste, probably at fire-sale prices). When the troubled bank can no longer borrow and has no assets left that can be sold on short notice, it can no longer fulfill its contractual guarantees to pay its obligations on demand and is therefore out of business with the banks owners and managers now subject to civil (and perhaps criminal) legal penalties (bankruptcy, suits for breach of contract, negligence, and fraud, indictments for fraud, embezzlement, etc.). “Sound” banks limit the volume of the loans they extend so that they remain in a prudent proportional relationship to the amount of instantly liquid funds they have available in “reserves” (either as currency in the vault or as demand deposits in some other bank, such as the Federal Reserve). But bankers face a difficult trade-off. The flow of checks that will be presented for payment and the volume of new deposits and loan repayments coming in every day cannot be predicted with 100% accuracy, so the higher the fraction of its total deposit obligations the bank holds ready in reserves, the safer or “sounder” the bank can be considered (and the more attractive the bank will seem to depositors and other potential business associates). However, reserves do not yield any interest income to the bank; only the funds that are tied up in loans to (solvent) borrowers can contribute directly and immediately to the bank’s profitability. To maximize their profits, bank management must find the best way to strike a balance between the need to maintain their “reserve ratio” at a level high enough to limit their risks of becoming insolvent and the conflicting need to keep the highest feasible proportion of the bank’s available funds loaned out at interest. ANALYSIS continued -- The preceding paragraph is very important. It answers many questions we have posed in this report about the current nature of reserves and should silence many of the assertions we have made about the nature of modern reserves. We will go back and make appropriate changes to our questions and assertions. We certainly appreciate the clarity of Mr. Johnson's explanation. (mrc) ANALYSIS continued -- It should be noted that Banks have a primary, fiduciary responsibility to their stockholders to make as much money as they legally can. They have no such responsibility to their customers or the banking system as far as we can tell. |
#26 of Google Poll / THE WIZARDS OF MONEY Script for Part 1: “How Money Is Created” Much of the unfairness to the non-bank public of this magical money creating process – creating money out of thin air – really comes about because the ... http://www.altruists.org/static/files/wizom01%20-%20How%20Money%20Is%20Created.htm |
THE WIZARDS OF MONEY Part 1: “How Money is Created” TABLE OF CONTENTS The black type is used for the article's author's words. Our words are in blue. |
This is your Money and Financial Management Series...but with a twist. My name is Smithy, I’m from the land of Oz. In response to the growth in business and personal finance shows at most media outlets, including so-called public media, such as NPR and PBS, we bring you this new series on money but “with a twist”. In this series we will look beyond the latest DOW and NASDAQ ups and downs, and past the hot stock tips, and see just how peculiar and undemocratic our monetary system really is. The Wizards of Money will take a critical look at the mechanics of the capital and debt markets, who makes the critical decisions that drive them, and how these markets then effect everybody’s lives. Humans have inherited a monetary system that fueled the industrial revolution, lost its commodity backing during the Vietnam War and now travels by the trillions, over millions of miles in a matter of nano-seconds. Physical currency notes are almost irrelevant having been replaced by a system of bits and bytes accounting in complex networks. While money is just a highly abstract measure and a medium of exchange our lives revolve around it and its disappearance can bring trade to a grinding halt, collapsing whole communities. This ridiculous situation is akin to a carpenter stopping work because he has run out of inches! Or a musician calling it quits because she’s run out of decibels! ANALYSIS continued -- That is clever way of looking at money. Dollars in some ways are very much like inches. They are useful when you want to measure things, you can make as many as you need, they are made out of thin air, they are very useful to our language when used as witten and spoken symbols, they have much use in record keeping and they are basically abstract. Today, in part one, we’ll examine that most peculiar activity known as “making money”; how money is made and who makes it. We’ll explore the mysterious money making process by first exploring the origin, and role of, one of the most secretive bodies in the world, the Federal Reserve System. We will also look at the role of the commercial banking system, and why it is that the money origination process is quite unfair and undemocratic. We agree that the Federal Reserve is very secretive. In future editions of Wizards we will look further into the workings of the Federal Reserve, and its sole shareholders, the private banking industry. We will also investigate similarly secretive bodies such as the Bank for International Settlements in Switzerland, the World Bank, the International Monetary Fund, Central Banks in other countries, and most importantly how these institutions interact with the stock markets. Recent decades have brought with them a growing public awareness of the long-term costs of the short-term profiteering legacy of the industrial revolution. Global Warming, Ozone Depletion, and Acid Rain are now all household names. The current monetary system - the one inherited from this same industrial revolution and the one in which we always “discount the future” - has played a large role in such destruction of the environment. Many are asking the question - Can we design monetary and economic systems that encourage preservation of the environment and sustainable economies? Along these lines, in later editions of Wizards we’ll examine some of the fundamental flaws of contemporary mainstream economic theory, that led to such environmental destruction. Then we’ll explore how emerging fields of economics, such as Ecological Economics, are addressing some of these flaws and challenging the underpinnings of traditional theory. 2) (# 1 ?) WHERE DOES THE TITLE “THE WIZARDS OF MONEY” COME FROM? The explanation of this will provide a good historical framework for this series, and remind us of a time a hundred years ago when the American citizenry had a much better understanding of their national monetary system and demanded active participation in it. Today, however, for reasons that can only be speculated on, the majority of world citizens have very little understanding of how the international monetary system works. Yet in this day and age our lives are largely determined by our relationship to, and we are highly dependent on, the international monetary system. ANALYSIS continued -- We agree to that. When you live and work amongst something day in, day out, you take it for granted. Just like fish surrounded by water, many people seem to have stopped questioning the foundations of the monetary system and go through life unaware that these foundations may be on very shaky ground. Additionally those of us who work in finance have been “trained” to understand economics and finance in a certain way, often blinding us to new ways of looking at money.ANALYSIS continued -- (That is a very important thought. We have found it extremely difficult to carry on a conversation about economics with almost everyone who has formal training in the subjects of money, banking or economics. Thay often see to take what they learned as gospel, and seem to us to have a religiously dogmatic attitude about what they know on the subject.) Many activists request reform and more economic fairness within the existing monetary system. However there is evidence to support the position that problems of economic inequity are rooted within the monetary system itself. The name of this series, the “Wizards of Money” is derived from the title of a book written just over 100 years ago, called “The Wonderful Wizard of Oz”, by a journalist named L. Frank Baum. Many believe this book to be a social commentary of the times. One of the most contested issues of the era was the monetary system and whether America should stay on the gold standard or move to a bi-metallic standard (meaning gold and silver). Gold would benefit the already rich and powerful financiers of the northeast, who owned most of the gold, such as JP Morgan and others. The bimetallic standard would make money more available to farmers and regular workers and was backed by the Populist movement of the time. The monetary system was such a popular public discussion item that talks on this issue drew crowds of ten of thousands from across the country. Interpreters of the “Wizard of Oz” have suggested the following meanings of characters and places in Oz: * Oz, short for Gold Ounces, is probably short for the Gold Standard. * Emerald City is likely another word for WALL STREET, where the wealthy financiers who owned most of the gold were based, and where green glasses (green for money) were worn. “Wizards” of Money, as in Oz, is a most appropriate name for those who are responsible for the mysterious money making process today. In this process, as we shall see, money is essentially created “out of thin air”. It is only the Wizards who get to practice this art, and they do so in the absence public scrutiny which might ruin the magic. The other main characters of Oz also have counterparts in US society at that time, that is, at the start of the 20th century. Books such as “The History of Money” by Jack Weatherford (which incidentally received rave reviews from Charles Schwab) cover this interpretation of Oz in more detail. As it turned out, the Populist movement lost, McKinley was elected president and the Gold standard defined the monetary system. But the US still did not have an effective central bank system. At the instigation of financiers like JP Morgan and his right hand men, but most of all from the sheer energy and genius of one Mr. Paul M. Warburg, that was all about to change. 3) THE BIRTH OF THE FEDERAL RESERVE The birthplace of the Federal Reserve System was not Wall Street or Washington as people might think. The founders wouldn’t dare hold a monetary design meeting in a place where public scrutiny might threaten the handiwork of the first Wizards. Rather the monetary system designers chose to go to a state with a proven track record of loyalty to wealth accumulation as a priority over the rights of the people. This was evident from the state’s long history of slavery, coupled with such a remarkable devotion to gold that it uprooted its indigenous inhabitants and marched them off to Oklahoma at the first smell of gold. What better place to design an undemocratic monetary system based on the gold standard? This state was Georgia, and in 1910, a special Wizard convention took place there on Jekyll Island. Duck-hunting was the excuse given for having to go there. But numerous historical accounts of this event reveal that the duck population remained fully intact and, instead, the Federal Reserve System was designed. (Examples of this account are in Frank Vanderlip’s Autobiography. Mr Vanderlip attended the secret meeting and was President of National City Bank, which is now known as Citigroup today. Another account was written by Bertie Forbes, in a publication called Current Opinion in 1916. He went on to found Forbes Magazine. Interestingly today the Federal Reserve Bank of Minneapolis also has this same account on its web site, so it is “Official History”). ANALYSIS continued -- Note the above account. Much has been written about the importance of Jekyll Island. Three years later, during the week before Christmas 1913 when several representatives were already on vacation, the US Congress slid through the Federal Reserve Act, thereby giving birth to the Federal Reserve System. Today, though the gold standard is “no more”, we still live with the legacy of that Jekyll Island meeting and some of history’s real monetary wizards, particularly Mr. Warburg. Needless to say, the system they designed had little (well, effectively no) room for public input. It has survived fairly well, with the exception of the 1929 crash and subsequent depression, because the general public trusts it. However, they do so mostly without understanding it. This is a very interesting situation to have in a so-called democracy. ANALYSIS continued -- Amen! In later editions of the Wizards of Money we will look more closely at the founding of the Federal Reserve System, its governance, and its relationship to congress, to the markets and to the public in general. We will just note here a fact about Federal Reserve ownership that is largely misunderstood by the general public. That is that the Federal Reserve is not a government body. It is 100% owned by the private banking system. While its governors are appointed by the President, their terms are for 14 years and the structure of appointments guarantees they represent the very best interests of the wealthy. ANALYSIS continued -- We agree. Wright Patman made much of all those facts. 4) MISCONCEPTIONS How is money created, and what role does the Federal Reserve and its member banks play? Lets start with some common misconceptions about money, and why they are not true: Misconception 1: You make money by going to work, or by selling something. FALSE: Nobody can make money except commercial banks (also called depository institutions) and the Federal Reserve, which is owned by the commercial banking industry. When you get paid for work it is merely a transfer of money that already exists. It was, at some time in the past, created by the banking industry for a purpose for which they saw fit to create (or really lend) money. The main reason people get a job is to get a transfer of money from people who already have some. ANALYSIS continued -- That is true -- but it is a little overstated. Long before there became abstract money, men traveled the world and local villages trading objects of wealth -- furs, spices, metals, tools, animals, food, clothing, drink and such. When formal abstract money was invented -- much of that existing wealth was traded for the convenient, newly invented money. In that sense wealth is way more important than money and the possesssion of wealth is the aim of all work. We contend the main reason people get job is that they can ultimately get wealth. Money is simply a handy intermediary device. When we talk about money here we mean money that can be used in all transactions and in the repayment of all debts. This is what we are calling bank-money. However many non-bank types of so-called “money” raising instruments are increasingly being used by non-bank corporations to avoid direct contact with the bank money creating process. This includes things like corporate bonds and shareholder equity, which expand on the bank money supply, but all are completely dependant on, and rely on the confidence that they can be liquidated for, “bank money”. We might call this other stuff “near money”. Since, in our society, it is really bank money people seem to need for the basics of life, and these other near monies are luxuries for people that have excess, we will focus just on bank money in this edition of Wizards. Misconception 2: Money has something to do with gold and Fort Knox. FALSE: The monetary system USED to be backed by the gold standard until President Nixon abolished the Gold Standard in 1971 during the Vietnam War. He did this because there was not enough gold at Fort Knox, KY to back all the money that needed to be created to fund the massive wartime expenditures. The axing of the gold standard backing the US dollar led to the “floating” of most national currencies, which were no longer pegged to a gold conversion standard. ANALYSIS continued -- I was a 39-year-old successful businessman / engineer / inventor / consultant at the time and had no idea that we went off the gold standard because of the Vietnam war. I will bet that 90% of all American citizens at the time were as ignorant as I was on the subject. Maybe I should not say we were ignorant -- maybe we were naturally intelligent enough to know that going off the gold standard was not the least bit important to rational people. This lead to phenomenal growth in speculation against international currencies, which later led to massive economic and social crises in various countries that were speculated against. Examples include the Mexican Peso crisis of 1994-95, the Asian financial crisis of the late 1990s, followed by the Russian ruble crisis. Since the death of the gold standard and the floating of most major currencies we have seen currency speculation increase to an astonishing 98% of all international transactions. This means that “real economic” transactions account for a mere 2% of international transactions, and we truly live in the midst of a global casino. This data on currency speculation is derived from data from by the Bank for International Settlements and summarized in the book “The Future of Money” by Bernard Lietaer, Century Press. ANALYSIS continued -- Wow -- that amazing statistic suggests to me that money speculators are not rational people. Wouldn't a rational person avoid these transactions -- knowing that they were primarily gambling and the chance of profits were small for any but the smartest speculators who had an insider's edge? Money supply and debt have exploded in the absence of gold convertibility and it is hard to make sense of what money really means anymore. Money is no longer a store of value. It is only a measure, an electronic accounting system of credits and debits, that has come to be accepted world over as the only way of conducting trade. Each day several trillion dollars travels the globe trying to attract more electronic credits for its owners. ANALYSIS continued -- We can't agree that money is no longer a store of value. Although, in the absolute sense, American money could easily fail to maintain its value. I just changed my mind -- money is no longer a reliable store of value. I would personally trade all my dollars for one nice home, my health, a good brain and a strong back. Today’s money is not backed by gold. It is now backed by nothing at all, except our trust in the monetary system. This is ultimately a trust in those that create and control money – the commercial banking system, and its major shareholders. The statement on all Federal Reserve Notes “In God we Trust”, is perhaps the most telling statement of this trust. For, who would not trust something that appears to be so close to God? Misconception 3: Money is Created by the Government Printing it. FALSE: Today almost NO money is created by the government. Most of the total money supply is created by banks making loans to the non-bank public. Almost all money (more than 95% at any time) is created by the creation of a corresponding amount of debt. Currency in circulation is just a very small proportion of the total money supply and it is created by the Federal Reserve System, not the government. In truth, money is actually created “out of thin air” by the commercial banks and their Federal Reserve System. ANALYSIS continued -- Those are astounding numbers. I believe they are approximately correct -- and that does not bother me in the least. I assume almost all that debt is covered by legal, enforceable contracts and those debts -- for the most part, will be paid back. 5) Exactly How Does Money Get Created? Having gotten some of these misconceptions out of the way lets talk briefly about the actual mechanics of money creation. Money creation happens in two main ways; First the creation of base money, which is mostly physical currency notes, created by the Federal Reserve. The second money creation process involves checking account or deposit money created by the commercial banks, and which makes up most of the money supply. Base money, also called high powered money, is created when the Federal Reserve performs what are known as Open Market Operations. In this process the Federal Reserve injects money by buying Government Securities, which then become debt owed by the government (that is the American Taxpayer) to the Federal Reserve. And where does the Federal Reserve get this money to buy the government securities? Well, it just makes it up “out of thin air”. The Federal Reserve has no budget, quite simply because it doesn’t need one – it invents money whenever it needs it. In fact, almost all money we come by has its basis in high powered money that the Federal Reserve invented at some time in the past. Most of this base money is currency in the form of Federal Reserve Notes. The Federal Reserve then creates a spurious “liability” on its balance sheet called Federal Reserve Notes outstanding, and in return gets an asset in the form of government securities, which the public must repay through the efforts of real work. Every time the Federal Reserve creates or extinguishes base money the financial press and other mainstream media reports it as a Greenspan interest rate announcement. This is not technically correct but it does sound more palatable than saying that the Federal Reserve just made some money up or just made some money disappear. ANALYSIS continued -- Very interesting presentation. I believe it -- but I think it could be made more easily understandable by eliminating some insider terminology. I will try to do that before we abandon this project. Once this base money is created, banks can create around 10 times this amount in checking accounts and other deposits. They do this by making loans to the non-bank public. A corresponding amount of checking account money is created for each new loan. So most money is created just by bankers writing some new numbers on a piece of paper, or these days, entering some new bits and bytes in computers, since money is really now just a bunch of computer records. This means that when you go to borrow money to buy a house or car, the money is really being created “out of thin air” by the bank, and being credited to the checking account of the seller (or the transaction account set up for you as the buyer of the car ?) ANALYSIS continued -- That is a very good explanation. But I have a few questions -- see the numbers below. #1 and #2 are related to the reserve requierement ratio. #3 and #4 are because I do not understand the structure of the chart of accounts used by the bank ANALYSIS continued -- 2) ..... How does that 10 X square with the existing U.S. law that specifies a zero reserve for banks that have up to about $10 Million in Transaction Accounts and a graduated schedules that runs through 3% and 10% for bigger banks. ANALYSIS continued -- 3) ..... Why should a small bank be limited in loan size by the amount of transaction accounts it has? Assuming the bank has (a) checked out the lender properly and has decided that (b) there is essentially zero risk of the loan not being paid back, and (c) has well written contracts covering the loan and is (d) following the Fed's rules with regard to how much the bank can lend to (e) any specific borrower, or (f) all borrowers (taking the bank's assets and capital into account). Isn't the bank's net worth a better measure of its strength? ANALYSIS continued -- 4) ..... Why are the transaction accounts used a measure of the banks' ability to lend? The "transaction accounts" are only a rough estimate of the strength or stability of the bank -- because those transaction accounts can be closed at a moments notice by the borrower. Shouldn't "accounts receivable" be used instead of "transaction acounts". Doing so would at least remove the question most of non-bankers have as to how transaction accounts are related to accounts receivable. It seems to me that a transaction account that is set up by a depositors cash deposit should not have the same value as a transaction acount set up by the amount lent to a borrower and is thereby yieding interest income to the bank. The bank has a distinct advantage in all this just by being a bank. For if you can’t pay the loan through your hard work, they automatically get the house, and all they did was write some numbers into the computer! From the bank’s perspective however, if you don’t pay off the loan, they would have to write down their asset (i.e. your loan) and this would effect the earnings they report. If lots of people did this the bank could go “belly up”. So you can see why they want to keep the house if you don’t pay your loan – they are taking a financial risk too, albeit one created completely out of “thin air”. 6) Let’s continue the discussion of unfairness in the banking system by exploring the undemocratic nature of it. Much of the unfairness to the non-bank public of this magical money creating process – creating money out of thin air – really comes about because the general public has no input into decisions about money creation. It is only bank managers and the Open Markets Committee of the Federal Reserve Board that decide how much money gets created, and importantly, FOR WHAT PURPOSES MONEY SHOULD BE CREATED. These decisions are all entirely closed to public input. Decisions on making new money will be based on whether a lender can repay and how much interest the lender can bring in, which is what creates bank profits. This means most money will be created to lend to people that already have lots of previously created money, and lots of advantages in life. Disadvantaged people will often be denied access to the money creating process, except under exploitative circumstances which are likely to see high interest rates and/or ultimate possession of their assets and resources by the bank. Alternatively the more disadvantaged will have to seek money from non-bank entities that have already accumulated lots of money, and this often also leads to exploitation. ANALYSIS continued -- We will accept this as being true. What this also means is that money is NOT created for things most desired by society as a whole. In fact it is often created for exactly the things that society does not want at all. This includes projects that involve excessive destruction of natural resources like logging, building power plants, mining, and so forth, because the bank realizes that such projects are likely to bring back the money that will pay off the loans. It is also interesting to note that money is almost NEVER created for the purpose of providing public goods, such as education and healthcare, for such services will not pay the bank back. Rather these services depend on recycled money through the tax system. Hence it is not surprising that we have reached a situation where monetary value and social value are inversely correlated. By this I mean that a good or service with a high monetary value in the private property markets generally has a low social value. Conversely high social value goods and services generally return a low monetary value. This is illustrated in the example where public goods providers such as teachers are some of the lowest paid workers, yet currency trading is perhaps the most lucrative profession there is, and has also become one of the most socially destructive. It is reasonable to expect that this situation would be largely reversed by taking social factors and public input into consideration at the point of money origination. ANALYSIS continued -- There is a lot of subjective judgement built into that last paragraph -- we can't accpet that all at face value. It is clear that origination of money at commercial banks is undemocratic and so encourages the creation of money (or loans) for many undesirable activities. But often overlooked is the unchecked power of the Fed, the creator of Base Money. One of the best reminders of this power is then Federal Reserve Governor Paul Volcker’s hike in interest rates in 1979 that triggered the Latin America debt crisis. This came at tremendous cost to the people of Latin American countries. While the activities of OPEC, the commercial banks and various dictators, played a major role in laying the foundations of this crisis, the final push was decided at one committee meeting conducted behind closed doors. The Federal Open Market Committee (FOMC) meetings have never been open to public input or scrutiny. While summaries of meetings are posted almost immediately, the full transcripts of FOMC are not even available until 5 YEARS after the event! It’s important to be concerned that the money origination process is not subject to democratic accountability. Many of these problems could be remedied if the public had more input into the decisions surrounding the origination of money. This requires an entirely different paradigm for thinking about money than we have today. It is a very complex problem and there are no simple answers. But at the very least it should be high on the list of topics for public debate. In addition, once you understand the process for creating money out of thin air, you begin to see that what banks and the Federal Reserve do is not so difficult after all. ANALYSIS continued -- We agree completely -- truth and transparency are very important to democratic institutions. Some hope for better money is starting to materialize from the local and alternative monetary systems such as LETS and Ithaca Hours. These will be discussed in later editions of “Wizards”. 7) THE ZERO SUM GAME What is often overlooked about the monetary system, particularly by advocates of the “trickle down” hypothesis, is that it is a ZERO SUM GAME, because our money is entirely debt based. The more of a positive net money balance I have, the more of a negative balance someone else has. I can put my positive balance to work earning more money, while I either sit around and do nothing, or go and work for more money. So the most likely situation for a positive balance person is that their positive balance will keep growing. Also, in the zero sum game, this means that someone else’s balance gets more negative. The negative sum person would be unlikely to get a loan to start their own business, and so would have to go work for someone that already has money. Under current wage structures and interest rates for “high risk” customers it would be difficult for many negative balance people to ever get to a positive balance position no matter how hard they work. They have the added disadvantage that they can’t put a positive balance to work earning more money. Most likely their balances will get more negative, while the people that already have money will get more money to balance out the zero sum game. ANALYSIS continued -- We will agree to this in general, but it has too many suppositions for us to accept it fully. With positive money balances always earning a positive return on capital, combined with no requirement for redistribution of wealth, which is implicitly prohibited by neo-liberal policy because it eases such governmental intervention, the results are clear. The rich will keep getting richer and the poor will keep getting poorer, and the more interest bearing debt-money you “invest” in developing nations the worse (not better) the situation gets. Those that believe that the “trickle down” effect will result from investment in poorer (more negative balance) countries and neighborhoods demonstrate a very poor understanding of the monetary system. In fact they believe in something that cannot possibly materialize, and is evidenced by the consequences of investment in developing nations. ANALYSIS continued -- We beleve that to be more or less correct. Putting the wolves in charge of feeding the sheep is probably better for the woves than it is for the sheep -- even if the sheep get fat. This situation is compounded by the fact that the banking system must not fail. What this really means is that the major section of the world banking sector - namely the Western financial institutions - must not fail. This would actually be disastrous for rich and poor alike, as in the great depression. To reduce risk of banking system failure (which ultimately comes from sudden loss of confidence or trust in the system) institutions such as the IMF and World Bank have evolved into mechanisms for preventing banking system collapse. Unfortunately, however, what these mechanisms amount to is transferring the cost that could collapse the banking system outside of the banking system. And these costs end up being borne by those who have the least say in the financial system. This actually distorts free markets where, ideally, investors take personal responsibility for the risks they assume. Those that support so-called free market ideology and think that today’s markets are actually consistent with this ideology are seriously misguided. They overlook the biases and distortions built into today’s markets, making them very inefficient and highly volatile. ANALYSIS continued -- We are convinced. Along these lines, it could be argued that much of the hardships forced upon the people of Indonesia and other Asian countries after the Asian financial crisis were the result of excessive risks taken by Western financial institutions in search of large returns or profits. It turned out that if these institutions were to bear the full costs of the risks they took leading up to the crisis then the whole financial system may have faced collapse. Through the IMF bailouts they effectively passed these otherwise bankrupting costs to parts of society that would not threaten the financial system, because they are not costed in its accounts. This, as usual, meant the poor, workers and Mother Nature, who form the balancing item of the biases built into today’s unfree and inefficient markets. 8) ANCIENT MONETARY WISDOM What is surprising is that this knowledge is ancient wisdom and has been recorded in the primary texts of the world’s major religions. The Old Testament of the Bible speaks of the sin of usury and the concept of Jubilee, the period eradication of all debts. Most likely this is from very similar realizations thousands of years ago. It is ironic that the Federal Reserve Note bearing the statement “In God we Trust” is the symbol of the system that so blatantly violates the key principles of this ancient wisdom claiming to be God’s word itself. If money is so abstract and does not store value, nor correlate with social value, couldn’t we change it to better satisfy our needs? This is what democratizing money really means - and like all movements to further democracy it will no doubt meet with serious resistance. ANALYSIS continued -- We think we should start with public education. That is the point of this Google Poll of "creating money out of thin air". See <<http://www.primeronmoney.com/internetcreatingmoneyoutofthinair.html >> and << http://www.primeronmoney.com/googlepollintroduction.html >> That’s all for Wizards of Money #1. |
#27 Google poll -- Fractional Reserve Banking / by Murray N. Rothbard. ANALYSIS continued -- Mr. Rothbard is a prolific and very popular writer. He is, as far as I can tell, the voice of the Austrian School of Economics. He certainly is a clever wordsmith -- but we think he seems to miss many basic economic concepts and we find him to be somewhat of a dogmatic, rabble rouser (from my dictionary) that is, "a person who speaks with the intention of inflaming the emotions of a crowd of people, typically for political reasons." Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting ... Mr. Rothbard's words are in black -- our words are in blue We have already described one part of the contemporary flight from sound, free market money to statized and inflated money: the abolition of the gold standard by Franklin Roosevelt in 1933, and the substitution of fiat paper tickets by the Federal Reserve as our “monetary standard.” Another crucial part of this process was the federal cartelization of the nation’s banks through the creation of the Federal Reserve System in 1913. Banking is a particularly arcane part of the economic system; one of the problems is that the word “bank” covers many different activities, with very different implications. During the Renaissance era, the Medicis in Italy and the Fuggers in Germany, were “bankers”; their banking, however, was not only private but also began at least as a legitimate, non-inflationary, and highly productive activity. Essentially, these were “merchant-bankers,” who started as prominent merchants. In the course of their trade, the merchants began to extend credit to their customers, and in the case of these great banking families, the credit or “banking” part of their operations eventually overshadowed their mercantile activities. These firms lent money out of their own profits and savings, and earned interest from the loans. Hence, they were channels for the productive investment of their own savings. ANALYSIS continued -- Do you think they lent only the money and gold they had in their vaults? Or did they invent some variation of Fractional Reserve Banking? To the extent that banks lend their own savings, or mobilize the savings of others, their activities are productive and unexceptionable. Even in our current commercial banking system, if I buy a $10,000 CD (“certificate of deposit”) redeemable in six months, earning a certain fixed interest return, I am taking my savings and lending it to a bank, which in turn lends it out at a higher interest rate, the differential being the bank’s earnings for the function of channeling savings into the hands of credit-worthy or productive borrowers. There is no problem with this process. ANALYSIS continued -- Are you purposely ignoring the fact that the bank is probably using fractional reserve banking whenever it makes a loan? The same is even true of the great “investment banking” houses, which developed as industrial capitalism flowered in the nineteenth century. Investment bankers would take their own capital, or capital invested or loaned by others, to underwrite corporations gathering capital by selling securities to stockholders and creditors. The problem with the investment bankers is that one of their major fields of investment was the underwriting of government bonds, which plunged them hip-deep into politics, giving them a powerful incentive for pressuring and manipulating governments, so that taxes would be levied to pay off their and their clients’ government bonds. Hence, the powerful and baleful political influence of investment bankers in the nineteenth and twentieth centuries: in particular, the Rothschilds in Western Europe, and Jay Cooke and the House of Morgan in the United States. By the late nineteenth century, the Morgans took the lead in trying to pressure the U.S. government to cartelize industries they were interested in – first railroads and then manufacturing: to protect these industries from the winds of free competition, and to use the power of government to enable these industries to restrict production and raise prices. In particular, the investment bankers acted as a ginger group to work for the cartelization of commercial banks. To some extent, commercial bankers lend out their own capital and money acquired by CDs. But most commercial banking is “deposit banking” based on a gigantic scam: the idea, which most depositors believe, that their money is down at the bank, ready to be redeemed in cash at any time. If Jim has a checking account of $1,000 at a local bank, Jim knows that this is a “demand deposit,” that is, that the bank pledges to pay him $1,000 in cash, on demand, anytime he wishes to “get his money out.” Naturally, the Jims of this world are convinced that their money is safely there, in the bank, for them to take out at any time. Hence, they think of their checking account as equivalent to a warehouse receipt. If they put a chair in a warehouse before going on a trip, they expect to get the chair back whenever they present the receipt. Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money ain’t there. An honest warehouse makes sure that the goods entrusted to its care are there, in its storeroom or vault. But banks operate very differently, at least since the days of such deposit banks as the Banks of Amsterdam and Hamburg in the seventeenth century, which indeed acted as warehouses and backed all of their receipts fully by the assets deposited, e.g., gold and silver. This honest deposit or “giro” banking is called “100 percent reserve” banking. Ever since, banks have habitually created warehouse receipts (originally bank notes and now deposits) out of thin air. Essentially, they are counterfeiters of fake warehouse-receipts to cash or standard money, which circulate as if they were genuine, fullybacked notes or checking accounts. Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term “fractional-reserve banking,” which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. (Right now, in the United States, this minimum fraction is fixed by the Federal Reserve System at 10 percent.) Fractional Reserve Banking Let’s see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I “lend out” $10,000 to someone, either for consumer spending or to invest in his business. How can I “lend out” far more than I have? Ahh, that’s the magic of the “fraction” in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don’t have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation’s money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way. ANALYSIS continued -- No it isn't. You started by saying their was no central bank. In general only a sovereign nation's bank or its agent can create money in accordance with ancient principles of sovereignty. If you are a private bank, you do not have the rirght to engage in fractional reserve banking. The nineteenth-century English economist Thomas Tooke correctly stated that “free trade in banking is tantamount to free trade in swindling.” But under freedom, and without government support, there are some severe hitches in this counterfeiting process, or in what has been termed “free banking.” First: why should anyone trust me? Why should anyone accept the checking deposits of the Rothbard Bank? But second, even if I were trusted, and I were able to con my way into the trust of the gullible, there is another severe problem, caused by the fact that the banking system is competitive, with free entry into the field. After all, the Rothbard Bank is limited in its clientele. After Jones borrows checking deposits from me, he is going to spend it. Why else pay money for a loan? Sooner or later, the money he spends, whether for a vacation, or for expanding his business, will be spent on the goods or services of clients of some other bank, say the Rockwell Bank. The Rockwell Bank is not particularly interested in holding checking accounts on my bank; it wants reserves so that it can pyramid its own counterfeiting on top of cash reserves. And so if, to make the case simple, the Rockwell Bank gets a $10,000 check on the Rothbard Bank, it is going to demand cash so that it can do some inflationary counterfeit-pyramiding of its own. But, I, of course, can’t pay the $10,000, so I’m finished. Bankrupt. Found out. By rights, I should be in jail as an embezzler, but at least my phoney checking deposits and I are out of the game, and out of the money supply. Hence, under free competition, and without government support and enforcement, there will only be limited scope for fractional-reserve counterfeiting. Banks could form cartels to prop each other up, but generally cartels on the market don’t work well without government enforcement, without the government cracking down on competitors who insist on busting the cartel, in this case, forcing competing banks to pay up. Central Banking Hence the drive by the bankers themselves to get the government to cartelize their industry by means of a central bank. Central Banking began with the Bank of England in the 1690s, spread to the rest of the Western world in the eighteenth and nineteenth centuries, and finally was imposed upon the United States by banking cartelists via the Federal Reserve System of 1913. Particularly enthusiastic about the Central Bank were the investment bankers, such as the Morgans, who pioneered the cartel idea, and who by this time had expanded into commercial banking. In modern central banking, the Central Bank is granted the monopoly of the issue of bank notes (originally written or printed warehouse receipts as opposed to the intangible receipts of bank deposits), which are now identical to the government’s paper money and therefore the monetary “standard” in the country. People want to use physical cash as well as bank deposits. If, therefore, I wish to redeem $1,000 in cash from my checking bank, the bank has to go to the Federal Reserve, and draw down its own checking account with the Fed, “buying” $1,000 of Federal Reserve Notes (the cash in the United States today) from the Fed. The Fed, in other words, acts as a bankers’ bank. Banks keep checking deposits at the Fed and these deposits constitute their reserves, on which they can and do pyramid ten times the amount in checkbook money. Here’s how the counterfeiting process works in today’s world. Let’s say that the Federal Reserve, as usual, decides that it wants to expand (i.e., inflate) the money supply. The Federal Reserve decides to go into the market (called the “open market”) and purchase an asset. It doesn’t really matter what asset it buys; the important point is that it writes out a check. The Fed could, if it wanted to, buy any asset it wished, including corporate stocks, buildings, or foreign currency. In practice, it almost always buys U.S. government securities. Let’s assume that the Fed buys $10,000,000 of U.S. Treasury bills from some “approved” government bond dealer (a small group), say Shearson, Lehman on Wall Street. The Fed writes out a check for $10,000,000, which it gives to Shearson, Lehman in exchange for $10,000,000 in U.S. securities. Where does the Fed get the $10,000,000 to pay Shearson, Lehman? It creates the money out of thin air. Shearson, Lehman can do only one thing with the check: deposit it in its checking account at a commercial bank, say Chase Manhattan. The “money supply” of the country has already increased by $10,000,000; no one else’s checking account has decreased at all. There has been a net increase of $10,000,000. But this is only the beginning of the inflationary, counterfeiting process. For Chase Manhattan is delighted to get a check on the Fed, and rushes down to deposit it in its own checking account at the Fed, which now increases by $10,000,000. But this checking account constitutes the “reserves” of the banks, which have now increased across the nation by $10,000,000. But this means that Chase Manhattan can create deposits based on these reserves, and that, as checks and reserves seep out to other banks (much as the Rothbard Bank deposits did), each one can add its inflationary mite, until the banking system as a whole has increased its demand deposits by $100,000,000, ten times the original purchase of assets by the Fed. The banking system is allowed to keep reserves amounting to 10 percent of its deposits, which means that the “money multiplier” – the amount of deposits the banks can expand on top of reserves – is 10. A purchase of assets of $10 million by the Fed has generated very quickly a tenfold, $100,000,000 increase in the money supply of the banking system as a whole. Interestingly, all economists agree on the mechanics of this process even though they of course disagree sharply on the moral or economic evaluation of that process. But unfortunately, the general public, not inducted into the mysteries of banking, still persists in thinking that their money remains “in the bank.” Thus, the Federal Reserve and other central banking systems act as giant government creators and enforcers of a banking cartel; the Fed bails out banks in trouble, and it centralizes and coordinates the banking system so that all the banks, whether the Chase Manhattan, or the Rothbard or Rockwell banks, can inflate together. Under free banking, one bank expanding beyond its fellows was in danger of imminent bankruptcy. Now, under the Fed, all banks can expand together and proportionately. “Deposit Insurance” But even with the backing of the Fed, fractional reserve banking proved shaky, and so the New Deal, in 1933, added the lie of “bank deposit insurance,” using the benign word “insurance” to mask an arrant hoax. When the savings and loan system went down the tubes in the late 1980s, the “deposit insurance” of the federal FSLIC [Federal Savings and Loan Insurance Corporation] was unmasked as sheer fraud. The “insurance” was simply the smoke-and-mirrors term for the unbacked name of the federal government. The poor taxpayers finally bailed out the S&Ls, but now we are left with the formerly sainted FDIC [Federal Deposit Insurance Corporation], for commercial banks, which is now increasingly seen to be shaky, since the FDIC itself has less than one percent of the huge number of deposits it “insures.” The very idea of “deposit insurance” is a swindle; how does one insure an institution (fractional reserve banking) that is inherently insolvent, and which will fall apart whenever the public finally understands the swindle? Suppose that, tomorrow, the American public suddenly became aware of the banking swindle, and went to the banks tomorrow morning, and, in unison, demanded cash. What would happen? The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do, and this would be in their power, would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation. Let us suppose that total insured bank deposits are $1,600 billion. Technically, in the case of a run on the banks, the Fed could exercise emergency powers and print $1,600 billion in cash to give to the FDIC to pay off the bank depositors. The problem is that, emboldened at this massive bailout, the depositors would promptly redeposit the new $1,600 billion into the banks, increasing the total bank reserves by $1,600 billion, thus permitting an immediate expansion of the money supply by the banks by tenfold, increasing the total stock of bank money by $16 trillion. Runaway inflation and total destruction of the currency would quickly follow. This article originally appeared in the October 1995 issue of The Freeman and is reprinted with permission. Murray N. Rothbard (1926-1995), the founder of modern libertarianism and the dean of the Austrian School of economics, was the author of The Ethics of Liberty and For a New Liberty and many other books and articles. He was also academic vice president of the Ludwig von Mises Institute and the Center for Libertarian Studies, and the editor – with Lew Rockwell – of The Rothbard-Rockwell Report. Murray Rothbard Archives |