Home / Contact

REPORT DEAD LINKS --- we can't keep this site up-to-date without your help

This is part of our Course On Money and Banking . It is BOOKLET # 27

This page can be found on the internet at <<http://www.primeronmoney.com/how-banks-make-money.html>>

1 ) This article is part of our Google Poll which is fully expained at << http://www.primeronmoney.com/googlepollintroduction.html >>

2) The information at #4 below is from Google Poll #1: http://www.yesmagazine.org/issues/the-new-economy/how-banks-make-money . It explains how that magazine thinks banks create money out of thin air. In our opinion the expanation is completely wrong. Banks do create money out of thin air -- but not the way this magazine explains. See our explanation at Google Poll #10 and Mr. Buchanan's explaination at Google Poll #16 which is, in our opinion, absolutely correct. Bear in mind to be rated #1 by Google -- means Google thinks this Yes! magazine website is the most referred-to website on queries like the one we posed on the creation of money. Just think of how many peoplr are being mislaid everyday when they go to this site

Analysis -- This is a professional magazine article. It presents a completely erroneous description of “How Banks Make Money” suggesting that banks can onl lend out 90% of the deposits they have on hand. In fact, as we explain in this book, each bank can lend out 10 times the total amount of money they have in deposits and the stockholder’s capital investment. This magazine is presenting a common error, first generated by the Fed., and still being spread as of this writing in July 2009 by wikipedia. It is a wrongheaded view of (a) the law and (b) what banking is all about. See our analysis of #10 below which goes into the error being made by #1. The analysis there goes through Wikipedia.org to a publication by The Federal Reserve System. How sad. How dumb. (mrc)

Here is how we contend lending works -- <<http://www.primeronmoney.com/how-banks-make-money.html>> (mrc)

3) The article #4 BELOW is completely MISTAKEN -- scroll down to A, B, C, D and E below to see the true story.

4) How Banks Make Money
Creating Money Out of Thin Air

Yes, the government prints our paper money. But that’s only a small fraction of the money in use. Most of the money in national economies is created when banks write it into their customers’ accounts out of thin air as bank loans.

YES! Magazine graphic: How Banks Create Money Out of Thin Air

You earn $100 and put it in the bank. And then…

The bank keeps $10 in its Federal Reserve account …

This is the “reserve,” which the bank uses when customers withdraw funds. As a rule, depositors don’t take out more than 10% of the money they have on deposit on any given day.
YES! Magazine graphic: How Banks Create Money Out of Thin Air

Then loans Susie $90, at interest.
YES! Magazine graphic: How Banks Create Money Out of Thin Air

Susie deposits the $90 in her bank.

That bank keeps 10% ($9) in reserve and loans Joe $81, at interest.
YES! Magazine graphic: How Banks Create Money Out of Thin Air

See how it all adds up—for the banks.

You now have $100 in your account. Susie has $90 in hers. Joe has $81. 

There’s now $271 total in accounts that you and Susie and Joe can spend, and it all came from your $100 deposit. The banks have created an additional $171 by loaning it into existence.


Imagine this money trick over and over.

If you do this operation 50 times, that $100 turns into $995.25—$885.25 in loans, and your original $100.
 

Mad math: If those loans are for one year at 10% interest, the banks will make $88.53. If they’d only been able to loan your $100, they’d make $10.

This is from our website -- see it there at: http://www.primeronmoney.com/how-banks-make-money.html

Dear Reader -- I hope you did not believe any of the above from Yes! Magazine -- it is, in my opinion, completely wrong - (mrc)

SCROLL DOWN TO "A-TO-E" TO SEE OUR COMMENTS

The following note is written to the writer of that article.

Dear Misguided Soul,

I hate to rain on your nice little parade of money -- but I think you have forgotten a few things and made things much more complicated than they are. The banks certainly create money -- that is their job. Our Constitution gave that job to (#1) our Congress and (#2) "the people" -- but we will ignore that (#2) for the time being.

Congress transferred that money-creating job to the Federal Reserve in 1913 and the Federal Reserve gave the job to their chain of private banks -- banking is a boring, thankless and difficult job in our opinion -- people are always blaming the banks for this or that -- but someone has to do it.

Please consider te following information.

A -- 1) The balding protagonist in your story, "You", put his $100 with his bank -- so they owe him $100. No money was created in this transaction -- he just transferred his money to the bank on what I think is called a bailment -- or perhaps it is a loan. Call it what you will.

2) When the bank lent $90 to Susie -- she signed a promissory note for the money. So she has the $90 -- but she also owes the bank $90 -- and she has to pay interest. There was no money created here. The fact that she deposited the money in the bank did not pay off the note.

3) Same thing with Joe and his $81 -- he has the money -- but he has a new $81 debt. No money was created there.

4) Similarly, no money was created at any of the steps you wrote about and you could do the same type of steps thousands of times without creating a dollar of new money

B -- Why would a bank lend only 90% of its "money" -- when it has the right to lend 10 times its "transaction accounts" according to the lawful Reserve Requirements? See http://www.primeronmoney.com/frbsimplified.html and<< http://www.fdic.gov/regulations/laws/rules/7500-500.html#fdic7500204.9 >> Scroll down to sec. 204.9

At that link, you will read about Zero Reserves. A zero reserve means the bank needs no reserve -- It can lend money based solely on the collateral of the borrower and an enforceable contract. Banks do not guarantee the loans will be repaid -- the borrower and our contract laws do that. A 10% reserve means the bank can lend out 10 times the total of all of its transaction accounts. ("transaction accounts" are typically deposits by their customers.)

C -- You forgot to tell everyone that the money is created when the Fed makes the check by the bank to the borrower good. I am not surprised that you did not know this -- the Fed does not like to tell the truth -- even when they are doing what is perfectly legal. My guess is that they are too ashamed to admit they make it possible for each bank to lend out ten times as much money (deposits) as that bank has on hand.They have the right, according to the law referenced in (B) above to lend out $1,000 based on that $100 deposit. Remember -- a loan is not a gift -- it has to be paid back -- to lend someone $1000 or any amount is no big deal if (a) they have the collateral the bank will demand and (b) the force of the county, state and nation will be used to collect the money due on the loan contract.

D -- Isn't it just a trifle ridiculous that a bank with $100 would lend only 90% of that money -- when, even if was not a bank, it could lend 100%. Why would anyone want to be a banker if those are the rules?

E -- And what is the purpose of the 10% reserve that we are told the bank must hold-back? What is that all about? We are sure this cuckoo notion is an antiquated holdover from the days of gold-backed money when the goldsmith bankers told everyone that all their privately issued, non-government paper money was redeemable dollar for dollar for gold they had in their vaults.

That, of course, was never true --- the goldsmith banker held back just enough "Potemkin" gold ( 10% ?) so it looked like they had enough reserves to pay all depositors in gold if the customers wanted to withdraw their money in gold.

That paying in gold is no longer a problem --- because the depositors deposited paper money, or checks and the bank can simply give the redeeming cusomers cashiers check's for the return of their deposits. In this way, we can see that since the widespread use of legal tender paper money -- banks need no longer to fear bank-runs.

2009 YES! MAGAZINE GRAPHICS used throughout -- they own the copyright.

Dear Reader --
1) Remember, I did not search very hard for this story put forth by Yes! Magazine. It simply came back as #1 when I searched Google for "Creating money out of thin air". Being number one in a Google search means that is an extremely popular site. Just imagine how many people are being exposed continuously to the weird explanation of "How Banks Make Money". I take this as proof that hardly anyone understands how our Money and Banking system works.

2) All sorts of unrealistic claims are woven into -- or, at least, implied in the story (see the list below) presented above by YES Magazine. We trust that this story and the implausability of it all should make you suspicious of any claims that:

a)..... Banks can only lend out 90% of the money they have.
b)..... Banks have to keep a 10% reserve
c)..... Banks are fearful of Bank-Runs
d)..... Depositing your money in a bank creates money
e)..... Borrowing money from a bank creates money
f)..... Depositing borrowed money in a bank creates money
g)..... Banks have no right to create money
h)..... Paper Money Reserves make sense for Paper Money Deposits
i)...... Paper Money Reserves make sense (period)
j)...... Banks have an obligation to "back" loans they make

All of the above (a to j) is untrue in our opinion.

I believe that this story and others like it are based on information put out in official publications by the Fed. in an efffort to (1) confuse Congress and the American Public and (2) to make Money and Banking seem way more complicated than it really is. Many money reformers, think they are fighting the Fed. by presenting these unbalanced, goofy arguments while, in fact they are helping the Fed. by spreading confusion on how the Money and Banking System really works

See: http://en.wikipedia.org/wiki/Money_creation#Money_creation_through_the_fractional_reserve_system
which is based on a Federal Reserve publication and contains no truth -- it is a complete fabrication.

The truth is that Banks can create money by spending or lending -- because they have the legal right to do so as a member of the Federal Reserve System under laws that are in accordance with the U.S. Constitution -- it is their job. But it is not done as explained in this magazine and thousands of other places

/ Signed: Martin Rudolph Carbone (mrc)