Agreed.

I am also disgusted with the banksters. In free market no one decides what money is and therefore money can be created by anyone. In the US there were thousands of different types of money before the civil war.

We agree on some of the solution. The current cartel of frb money token creation must end and a free market established. Unfortunately, history indicates that no human can be trusted with creation of money tokens for profit. Today it may be possible to track a multitude of currencies and rate them based on timely public disclosure of token creation, but the system would still be dependent on honest timely reporting. It is guaranteed that,if allowed legally, many will game the system to get 'free' money instead of doing productive work, e.g., scientists employed by Wall St in a zero sum game who could be employed in productive research instead.

Agreed, money is not capital. The original discussion was about money creation, not capital creation.
As you said, before the federal reserve act, "But the value of money itself was fairly stable." It was based on gold and silver most of the time, and production of gold and silver itself kept up with the need for money tokens in the economy on average. But the economy day to day wasn't "on average", so there were booms and busts frequently partially because of the token supply not matching the goods supply.
That said, if there are not enough money tokens created then the economy suffers from the lack of tokens to facilitate trade (unless the market creates tokens itself, which is legally impossible in the current US economy that gives the power of creation to the sociopathic baking cartel.) For trade to prosper the tokens must increase with the volume of goods produced. The solution to this does not have to enrich banksters by giving their cartel the monopoly power to create tokens to manipulate the economy for their own benefit (and to the detriment of millions of innocent hard working individuals.)

Not sure who you are referring to, but I didn't downvote you. And if you can see something I'm missing in my explanation, please let me know.

I don't think so. What I am saying is lets get rid of the legal tender laws and the Fed. But lets not outlaw free market banking.

Yes, but the balance of accounts doesn't change - each person is STILL using the funds of the original depositor, it's just that at each step along the way there is one more step of interest as another party gets involved and their labor gets added to the pool.

I'm not denying the multiplier effect is real. But the balance of accounts doesn't change (it just gets really spread out and complicated) UNTIL the Fed gets involved. The only real wealth being created is as the result of new labor being injected into the economy and represented as interest (or capital).

"The production/labor of people does not create any money for repayment of principle or interest."

Labor is capital. See Adam Smith. In fact, Labor is the base of ALL capital. Money is just a representation of capital - not capital itself. For an example of this, see our economy UNTIL the early 1900's when the Fed was created. Was the US economy growing from the 1700's on? Yes. Why? Population growth created labor which is capital, which got injected into the economy and grew the economy. But the value of money itself was fairly stable. Then along came the Federal Reserve. Once it started injecting fake money into the system, the value of money was devalued through inflation - a natural result. And the Fed has been "managing" inflation ever since by continuing to inject more valueless currency into the economy to defray the true costs of debt. The thing to realize is that currency is not the same thing as value.

Are you saying that your explanation and example of bond creation being like bank loan creation is only appropriate when fractional reserve banking is not part of the banking system ?

I think you stopped one step short in your explanation. After the debtor spends the 90k it then appears in the bank accounts of other people. That reserve is then used to create more loans which when spent or deposited creates additional reserve to create more loans (up to 9 times the original deposit), just as Robbie's quote explains. The production/labor of people does not create any money for repayment of principle or interest. It may transfer money from other participants in the economy, but none is created. Unless more loans are made there is not enough money in the system to pay the original loan balance and the interest on that loan. Money is only created by creation of more debt in the current system.

The original $100,000 never changed, however. It never became two sources of assets on the books - it remains a credit for one and a liability on the other. It remains a credit on the original depositor's books of $100,000. On the bank's books, it becomes a liability of $100,000 upon deposit. When the bank loans out that money, they retain the liability of the $90,000 they loan out, but now gain an asset in the term of a loan or note to the tune of $90,000. The other 10% remains as a liability. The loan recipient or debtor then takes on the liability of the loan amount of $90,000. It's all there in the T accounts. (I'm of course simplifying because at each step you're going to have charges and interest being assessed, but the accounting is all right there.) Even the fact that the debtor uses the money doesn't decrease his liability on the books. All you are doing is transferring money from someone who doesn't need immediate use of it to someone else who is willing to pay a fee to use that money now. That fee is paid in interest payments.

What should be noted, however, is that in a real environment, the loan of the money DOES actually affect the real amount of money available for the original depositor to withdraw. That is what I was trying to point out earlier. Bank runs happen when too many people attempt to reclaim the totality of their accounts and the sum is greater than the reserves on hand which represent the leftover deposits not loaned out. That is the game played by the banks: how close to the line can they operate? Can they maintain enough operating cash to satisfy the withdrawal requirements of depositors while charging enough in interest and fees to maintain business operations?

No, the real "creation" of money happens in the interest payment. And that can be explained by the additional labor that must be supplied by the debtor in order to meet the terms of the loan. His (or her) labor is being exacted in payment of the interest, but in aggregate, there now becomes more "money" (actually labor value represented as money) in supply in the market. What should be recognized, however, is that the money didn't originate out of thin air, but is actually the value of labor of the debtor being transferred back to the creditor. So the money really isn't being created out of thin air, but by the actual output of people.

What the fractional reserve system actually does is directly affect the interest rates of both depositors and debtors. Then the Federal Reserve comes in and charges fees to supply the banks with a kind of backup mechanism for obtaining the short-term funds needed to stay above the mandated reserve rate, which of course they control and charge interest rates for as well. That's the real source of inflation and money supply problems, because the money THEY loan to the banks is ABSOLUTELY fictional. They print it, but it doesn't really represent actual labor. What's also fictional is the FDIC, because the FDIC doesn't actually store money either - they get it from the Feds who just print it!

What we need to recognize is that if the banks were left to themselves to manage their own reserve rates and set their own inter-bank loan rates, I think we'd see the reserve rate climb significantly, and I think that depositors and banks alike would - all via standard market machinations - agree on some terms for deposits and withdrawals that would reflect this reality via interest rates. This in turn would power the downstream interest rates on loans (driving them upward). That would also in turn contract the real money in motion in the market and put a halt to inflation.

The money is created because you count your IOU as an asset. I send the money so someone else has $100 and I have $100 of assets balanced by $100 of debt. That means the world now has $200 of money. Bonds are money.

The bond exists because you created something out of nothing.

Do not confuse fractional reserve banking, with a central bank or legal tender laws. Legal tender laws are the only way government can enforce the use of a certain money and this is always done so the government can counterfeit money. The 1st legal tender laws in the US were declared unconstitutional, but Grant then packed the court and got the decision overturned. Central Banks (the Fed in the US) are government planning agencies that direct credit and interest and also takes over the printing of money (Counterfeiting). I am dead set against Central Banks and Legal Tender Laws. However, fractional reserve banking is not a part of either of these and they do nothing different than is done in the Bond market.

Hello freedomforall,
Thank you for presenting this most excellent presentation.

I am a Jeffersonian! If I had lived alongside Hamilton, I might have saved Burr a lot of time and trouble.

Jefferson on central banking:

https://www.youtube.com/watch?v=UrxKOO0n...

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. ”

― Thomas Jefferson

http://mises.org/library/central-banking...

Respectfully,
O.A.

I was trying to discuss with db the process of creation of money. He said that a bond created by a company is creation of money just the same as a frb bank creating money in a loan. My point is that a company issuing a bond is not the same as a bank creating money from nothing, The company has something to start with, a productive asset that they have created with genius and have impressed the free market enough to want to buy the company bonds of their free will. The resulting bond is not "legal tender" by government decree. The banks "assets" are politicians that they have purchased to create laws to eliminate competition for the banks and to give banks legally the power to create money from nothing without having produced anything tangible (except misery.) Bond issuance (in absence of fraud) is not creating money from nothing. It is not legal tender and can't be used as such.
If Hamilton's banking system only allowed banks to make profits as rent on their own capital created honestly without monopolistic powers and only loaning the capital itself not a multiple thereof in a market of free will I would not take issue with it. (This discussion started with db's support of Hamilton's banking system.) Imagine, if you will, what would have happened in America if the constitution had not been amended with the bill of rights. I understand Hamilton to have been the architect of that constitution that lacked any protection for individual rights. That is how I view the honesty of Hamilton's banking proposals.

but you are changing the point. we completely agree that printing money-putting it in the system at close to 0% interest is immoral

The loan portfolio exists only because they created money from nothing. You can't justify banks having something when they used the system you are defending to steal it.

And the company in the bond example holds no money. Just the assets of the company. The bank is doing the same thing except it is an intermediary. The bank has a legal claim (collateral) that is backing the money.

That is exactly what a bank is doing it is issuing notes (bonds) that are backed by its loan portfolio. It is exactly the same thing.

all money is an IOU - a generalized IOU i.e., a bearer IOU, even gold and silver. Unless you are manufacturing something with gold or silver, the reason you accept it is to buy other goods. In other words you have a general IOU that you sold something (say wheat) and now you use that IOU to buy from someone else.

If you are stranded on a deserted island, your gold and silver have no value.

I have friends in NZ who moved there having grown up in eastern europe under the soviet system. They are torn between longing for the soviet system that delivered secure jobs, a lower standard of living, but more peace of mind, versus the more free market with job insecurity, higher monetary standard of living, but less economic peace of mind. They long for simpler life of socialism even though they recognize that it collapsed.
TANSTAAFL.

That 90$ isn't coming out of nowhere - it just can't be in two places at the same time. This is where the interest rates and terms come in. The depositor can insist on being able to pull out all his deposits at the drop of a hat and the bank compensates for this provision with a lower interest rate to offset this risk. But it isn't the individual transactions that make banking feasible, but the massive flow. It's a little like insurance. The insurance providers are betting that only a small portion of the client population are going to be making "withdrawals" at the same time, allowing the other deposits to cover those transactions. I would also point out a minor flaw in your supposition: there is only one depositor. The other is a debtor.

Now one can argue about the most effective reserve currency rate. That's a great question that I have yet to see a definitive answer on. Obviously, it is - again - a risk vs reward scenario: the lower the reserve rate, the more money banks can loan out, but the higher the risk of default in the case of a run. The inverse is also true: the higher the reserve rate, the more secure a depositor's funds are, but less money is available to lend out of those deposits.

I think the other thing that is hinted at but not specifically identified is that the bank is taking on risk on behalf of the original depositor without his or her tacit approval. That is a legitimate concern and topic of interest. What you are essentially arguing is that the terms of depositing and withdrawal need to be more transparent to the investor/depositor so that one does not have an unrealistic expectation of having access to 100% of one's funds at all time with no penalty. That I believe is a legitimate question.

In your example the buyer of the bonds is the lender. He creates no money. He owns assets that he lends to the bond issuer and he gets a promise to repay (the bond) secured by assets of the bond issuer (frequently the assets to be purchased by the bond issuer using the assets of the lender.) The bond issuer is the borrower, not the lender. The lender in the bond example actually owns assets that are used to make the loan. In the frb example the bank has no such assets. The bank creates the "legal tender" "asset" to loan from nothing. The borrower in that case then gives the bank a promise to pay (that is like the bond given by the bond issuer.)