Returning to a Gold Standard Is a Bad Idea [View article]
"Asleeper covered this but I think I see your problem. Yes, an individual bank lends out less than deposits"
Excellent! That's what I've been saying.
"but you fail to realize that the > deposits are themselves subject to withdrawal at any time. That is > why they are called "demand deposits"."
I understand they can be withdrawn tomorrow. I understand banks borrow from each other overnite (Fed Funds) all the time when reserves drop below required levels or excess reserves are held.
"If the deposits were instead > 6-month CDs then they could be lent out for 6 months at most. The > depositors would have RELINQUISHED the use of their money for 6-months"
Technically, you can still get your CD money early, if you forfeit some interest. Reserve requirements are lower on CDs, by the way.
Returning to a Gold Standard Is a Bad Idea [View article]
" If you choose not to borrow from me and manage to convince the restaurant to accept an IOU from you, that is credit. You can call it a loan if you want, but most people call it credit. It is not bank credit though, because it cannot be circulated or spent like legal tender"
Retailers can sell their accounts receivable. Just as credit card companies can.
Returning to a Gold Standard Is a Bad Idea [View article]
"Fast forward to modern banking and consider that each of the original $1,000 deposited at the bank is analogous to gold. Say, you sign each bill with a metallic gold flake pen to emphasize the idea. By the time the bank finishes issuing credit, there is 10,000 dollars circulating in the economy"
You math is wrong. With a 10% reserve requirement, a $1000 deposit does not allow a bank to issue $10,000 in credit
"If the restaurant had the same legal rights as the bank, it could print out little dollar bills and "lend" them to you"
Returning to a Gold Standard Is a Bad Idea [View article]
"Otherwise, modern banks make “money from thin air” the same way that medieval goldsmiths did, when they issued more warehouse receipts for gold than they had gold"
False.
"Really?"
Since banks don't print FRNs, they are not like goldsmiths.
Returning to a Gold Standard Is a Bad Idea [View article]
"To my way of thinking this is an unsupportable contradiction. If the money supply is increased, then the 'extra' money was created out of nothing"
Your borrowing increased the money supply. Your IOU is now money.
"Saying it's backed by an IOU (ie. a promise) is akin to trying to buy a car and telling the salesman "It's OK. My buddy told me he'd give me the money later.", then show him your buddy's IOU on a cocktail napkin, and expecting the car sales manager to approve the deal"
If you can get that to work, good for you. When you sign the IOU or loan papers at the dealership, you increased the money supply.
"Yet insert a bank as middle man in the transaction and suddenly your buddy's "promise" becomes actual money because it's written on the banks version of a cocktail napkin instead of an actual cocktail napkin ..."
Yes. The bank can now sell your loan for real money. Because it is.
"as I see it that's money from nothing"
Why did Hamilton agree to back all the Revolutionary War debts at 100 cents on the dollar? He knew it would increase the money supply. An increase that was badly needed, because deflation is bad. Seems like a high price to pay to stop deflation. He must have thought it was a price we needed to pay.
I think he was right. You can disagree if you'd like.
"If you disagree on that issue, then we have reached a point where we will have to agree to disagree"
Maybe we have.
"Your definitions and conclusions do not support those I have reached and probably never will"
As long as you don't claim that banks can loan out 10 times (or more) their deposits, I really hate that claim. It's the worst of the misunderstandings about the Federal Reserve, banking and money supply that I hear repeated all the time.
I'm on vacation, have a nice weekend.
On Jan 02 05:10 PM Smarty_Pants wrote:
> "When you borrow money, the money supply increases. ... Then why > are you still claiming banks create money out of thin air?" - Jim > > > To my way of thinking this is an unsupportable contradiction. If > the money supply is increased, then the 'extra' money was created > out of nothing. > > > > > No different that > using an actual cocktail napkin without the bank, except on one case > it becomes money and in the other it the salesman calls the cops > to drag you out of the showroom after having a good laugh. > >
Returning to a Gold Standard Is a Bad Idea [View article]
"Have you compared the metrics of 1873 with the metrics of the Depression"
They were both serious Depressions that occurred while we were on the (however imperfect) Gold Standard. If you think we've had more serious drops in GDP since then, I'm all ears.
"As a result, learned enough about the monetary system to earn a lot of money back that was lost and to know that the Fed and private fractional reserve banking is a very bad system for most of society"
Excellent job earning back that money. If you ever come across a system that can prevent fractional reserve lending without causing a new Dark Ages, be sure to spread the word. It's sure to be interesting.
Returning to a Gold Standard Is a Bad Idea [View article]
"First off more often than not the "money" that gets spent isn't even notes"
Doesn't change anything.
"So how is it you can claim that the money supply hasn't increased? When a loan is issued and backed by only an IOU, the 'number' representing the loan balance in the bank becomes money and can be spent electronically, even if there aren't any banknotes in the bank at all"
Not sure what comment of mine you think you're referring to. When you borrow money, the money supply increases. If you think I denied that, please show me where.
" In the above example both moonbat and I could 'spend' that money without ever touching the notes. What does the bank do when two other banks (one for each retailer) each demand the $1000 we both spent with two checks?"
You absolutely could both spend $1000. In that case the bank has to borrow Fed Funds to cover the withdrawals until it could raise other deposits or sell the IOU.
"Yes I do."
Great. Then why are you still claiming banks create money out of thin air?
" Although it is becoming clear that you have your own set of facts and interpretations and choose not to consider any evidence to the contrary"
My facts are clearly shown by my mathematical examples. That you sound like you agreed with. Until you didn't. Don't confuse yourself by using "credit" or "debit cards". Use hard cash in all your examples and you'll see that banks lend out less than their deposits. If they do that, they aren't creating anything.
Returning to a Gold Standard Is a Bad Idea [View article]
"The difference between Rothbard’s warehouse receipts for gold and modern fractional reserve banking is that modern banks use deposits of paper assets such as Federal Reserve Notes, T-bonds, and T-bills as reserves instead of gold"
True.
"Otherwise, modern banks make “money from thin air” the same way that medieval goldsmiths did, when they issued more warehouse receipts for gold than they had gold"
False.
"Going back to the $1,000 deposit idea. Suppose a person deposits one thousand dollars in the bank. The bank then does not “loan” any of the $1,000. Assuming a 10% reserve, it creates credit of $900 and calls it a “loan”."
Why wouldn't you call a loan a loan?
" The “borrower” withdraws the $900 and spends it. The recipient of the $900 deposits it back into the bank, where it serves as a reserve for $810 of new bank credit"
Excellent! You have 2 deposits, one for $1000 and one for $900. Total $1900. This supports 2 loans, one for $900 and one for $810. And no one counterfeited or created anything out of thin air. You'll notice that each loan is smaller than the deposit it comes from.
"There are several problems inherent in this scheme. First, the bank put up no money of its own, but now collects interest on $10,000"
If the bank is collecting interest on $9,000 in loans and holds $1000 in reserves,it must be paying interest on $10,000 on deposits.
Returning to a Gold Standard Is a Bad Idea [View article]
"There is no consensus among economists supporting the assertion that bubble and panics were more severe on the gold standard"
GDP didn't fall further during those panics? How much did GDP shrink after the Panic of 1873? How long did that Depression last?
"And no matter if there was a consensus, it would have to be qualified by noting that there has never been a pure gold standard or bimetallic standard in the U.S. "
Returning to a Gold Standard Is a Bad Idea [View article]
"You are incorrect. This is exactly what happens with the exception of having both the gold and the warehouse receipts replaced by Federal Reserve Notes (or their digital equivalents)"
When a bank prints a warehouse recipt, that's new money. Banks don't get to print new Federal Reserve Notes, they can only loan the ones they receive as deposits.
"Except this is presicely what happens in every bank in the entire country. So when ALL the banks have only $100 in cash in the vault and need to cover $400 of demands, who is left to lend them money or buy that IOU? All the other banks are short too"
Because when you spend the money, the recipient puts in under his pillow? It doesn't get deposited into his bank? LOL! You're funny!
"The current system is built so that it can issue money backed by nothing more than IOUs while claiming that it actually has the physical cash to back it"
More money isn't issued, backed by IOUs, your IOU is considered as good as money. If you default, the money supply shrinks.
"When events transpire to expose the fraud the banks engage in a shell game to hide the fact that they are attempting to earn interest on money that doesn't really exist"
The money they loan you exists. They hold a percentage in reserve and loan out the rest. If they really could "create money out of thin air", there would be no need for reserves. Think about it.
"The original $1000 of notes moonbat deposited has become $1900 of money supply. $900 of which is created from nothing but Smarty_Pants' promise to repay"
Returning to a Gold Standard Is a Bad Idea [View article]
"Now the bank loans $900 to you. It does that by creating another liability for $900 in your name in exchange for a $900 IOU"
Almost. The bank doesn't create a liability, it gets a new asset, my IOU and it reduces an old asset, vault cash.
I have the liability.
"Now you and I go on a spending spree. I spend $600 and you spend $800. oops! Bank is short $400!"
It doesn't matter what I spend, I already have the cash. Now if you spend $600, your account is reduced to $400 and the bank needs to reserve $40. They had $100 so can give $60 of the old reserve to you and need to borrow the other $540 in the Fed Funds market.
Another alternative is for the bank to sell the IOU from me to another bank for $900.
Returning to a Gold Standard Is a Bad Idea [View article]
"As far as "money from nothing", Rothbard used the phrase 'money from thin air' in describing the functioning of FRB. See his book Mystery of Banking.
mises.org/mysteryofban...
See the section on FRB that starts on page 116 of the pdf document (page 97 of the book)."
Thanks for the link. The only thing is, modern banks don't issue warehouse receipts for gold. I agree, that would be "money from thin air", but since that no longer occurs, I don't think it's relevent to our discussion.
Returning to a Gold Standard Is a Bad Idea [View article]
Excellent! That's what I've been saying.
"but you fail to realize that the
> deposits are themselves subject to withdrawal at any time. That is
> why they are called "demand deposits"."
I understand they can be withdrawn tomorrow. I understand banks borrow from each other overnite (Fed Funds) all the time when reserves drop below required levels or excess reserves are held.
"If the deposits were instead
> 6-month CDs then they could be lent out for 6 months at most. The
> depositors would have RELINQUISHED the use of their money for 6-months"
Technically, you can still get your CD money early, if you forfeit some interest. Reserve requirements are lower on CDs, by the way.
On Jan 02 10:53 PM moonbat1775 wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
Retailers can sell their accounts receivable.
Just as credit card companies can.
Returning to a Gold Standard Is a Bad Idea [View article]
You math is wrong. With a 10% reserve requirement, a $1000 deposit does not allow a bank to issue $10,000 in credit
"If the restaurant had the same legal rights as the bank, it could print out little dollar bills and "lend" them to you"
Banks don't print dollar bills to lend to you.
On Jan 02 10:07 PM asleeper wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
issued more warehouse receipts for gold than they had gold"
False.
"Really?"
Since banks don't print FRNs, they are not like goldsmiths.
On Jan 02 10:07 PM asleeper wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
I have an idea. If you have money you don't want lent out, don't deposit it in the bank.
"Part of the reason we have bubbles today is because it's easy for banks to create money for any situation"
Those darn banks, lending out less than their deposits.
On Jan 02 08:38 PM Smarty_Pants wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
Here's an excellent Milton Friedman video that explains a few interesting points much clearer than I could. Enjoy!
Returning to a Gold Standard Is a Bad Idea [View article]
Your borrowing increased the money supply. Your IOU is now money.
"Saying it's backed by an IOU (ie. a promise) is akin to trying to
buy a car and telling the salesman "It's OK. My buddy told me he'd
give me the money later.", then show him your buddy's IOU on a cocktail
napkin, and expecting the car sales manager to approve the deal"
If you can get that to work, good for you.
When you sign the IOU or loan papers at the dealership, you increased the money supply.
"Yet insert a bank as middle man in the transaction and suddenly your
buddy's "promise" becomes actual money because it's written on the
banks version of a cocktail napkin instead of an actual cocktail
napkin ..."
Yes. The bank can now sell your loan for real money. Because it is.
"as I see it that's money from nothing"
Why did Hamilton agree to back all the Revolutionary War debts at 100 cents on the dollar? He knew it would increase the money supply. An increase that was badly needed, because deflation is bad. Seems like a high price to pay to stop deflation. He must have thought it was a price we needed to pay.
I think he was right. You can disagree if you'd like.
"If you disagree on that issue, then we have reached a point where
we will have to agree to disagree"
Maybe we have.
"Your definitions and conclusions
do not support those I have reached and probably never will"
As long as you don't claim that banks can loan out 10 times (or more) their deposits, I really hate that claim. It's the worst of the misunderstandings about the Federal Reserve, banking and money supply that I hear repeated all the time.
I'm on vacation, have a nice weekend.
On Jan 02 05:10 PM Smarty_Pants wrote:
> "When you borrow money, the money supply increases. ... Then why
> are you still claiming banks create money out of thin air?" - Jim
>
>
> To my way of thinking this is an unsupportable contradiction. If
> the money supply is increased, then the 'extra' money was created
> out of nothing.
>
> >
>
> No different that
> using an actual cocktail napkin without the bank, except on one case
> it becomes money and in the other it the salesman calls the cops
> to drag you out of the showroom after having a good laugh.
>
>
Returning to a Gold Standard Is a Bad Idea [View article]
They were both serious Depressions that occurred while we were on the (however imperfect) Gold Standard. If you think we've had more serious drops in GDP since then, I'm all ears.
"As a result, learned
enough about the monetary system to earn a lot of money back that
was lost and to know that the Fed and private fractional reserve
banking is a very bad system for most of society"
Excellent job earning back that money. If you ever come across a system that can prevent fractional reserve lending without causing a new Dark Ages, be sure to spread the word. It's sure to be interesting.
On Jan 02 04:29 PM asleeper wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
Doesn't change anything.
"So how is it you can claim that the money supply hasn't increased?
When a loan is issued and backed by only an IOU, the 'number' representing the loan balance in the bank becomes money and can be spent electronically, even if there aren't any banknotes in the bank at all"
Not sure what comment of mine you think you're referring to. When you borrow money, the money supply increases. If you think I denied that, please show me where.
" In the above example both moonbat and I could 'spend' that money
without ever touching the notes. What does the bank do when two other
banks (one for each retailer) each demand the $1000 we both spent with two checks?"
You absolutely could both spend $1000. In that case the bank has to borrow Fed Funds to cover the withdrawals until it could raise other deposits or sell the IOU.
"Yes I do."
Great. Then why are you still claiming banks create money out of thin air?
" Although it is becoming clear that you have your own set of facts and interpretations and choose not to consider any evidence to the contrary"
My facts are clearly shown by my mathematical examples. That you sound like you agreed with. Until you didn't. Don't confuse yourself by using "credit" or "debit cards". Use hard cash in all your examples and you'll see that banks lend out less than their deposits. If they do that, they aren't creating anything.
On Jan 02 04:21 PM Smarty_Pants wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
True.
"Otherwise, modern banks make “money
from thin air” the same way that medieval goldsmiths did, when they issued more warehouse receipts for gold than they had gold"
False.
"Going back to the $1,000 deposit idea. Suppose a person deposits one thousand dollars in the bank. The bank then does not “loan” any
of the $1,000. Assuming a 10% reserve, it creates credit of $900
and calls it a “loan”."
Why wouldn't you call a loan a loan?
" The “borrower” withdraws the $900 and spends
it. The recipient of the $900 deposits it back into the bank, where
it serves as a reserve for $810 of new bank credit"
Excellent! You have 2 deposits, one for $1000 and one for $900. Total $1900. This supports 2 loans, one for $900 and one for $810. And no one counterfeited or created anything out of thin air. You'll notice that each loan is smaller than the deposit it comes from.
"There are several problems inherent in this scheme. First, the bank
put up no money of its own, but now collects interest on $10,000"
If the bank is collecting interest on $9,000 in loans and holds $1000 in reserves,it must be paying interest on $10,000 on deposits.
On Jan 02 04:15 PM asleeper wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
GDP didn't fall further during those panics? How much did GDP shrink after the Panic of 1873? How long did that Depression last?
"And no matter if there was a consensus, it would have to be qualified by noting that there has never been a pure gold standard or bimetallic standard in the U.S. "
Don't tell the goldbugs. LOL!
On Jan 02 03:20 PM asleeper wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
When a bank prints a warehouse recipt, that's new money. Banks don't get to print new Federal Reserve Notes, they can only loan the ones they receive as deposits.
"Except this is presicely what happens in every bank in the entire country. So when ALL the banks have only $100 in cash in the vault and need to cover $400 of demands, who is left to lend them money or buy that IOU? All the other banks are short too"
Because when you spend the money, the recipient puts in under his pillow? It doesn't get deposited into his bank? LOL! You're funny!
"The current system is built so that it can issue money backed by
nothing more than IOUs while claiming that it actually has the physical
cash to back it"
More money isn't issued, backed by IOUs, your IOU is considered as good as money. If you default, the money supply shrinks.
"When events transpire to expose the fraud the banks
engage in a shell game to hide the fact that they are attempting
to earn interest on money that doesn't really exist"
The money they loan you exists. They hold a percentage in reserve and loan out the rest. If they really could "create money out of thin air", there would be no need for reserves. Think about it.
"The original $1000 of notes moonbat deposited has become $1900 of
money supply. $900 of which is created from nothing but Smarty_Pants' promise to repay"
Excellent! You do understand.
On Jan 02 01:46 PM Smarty_Pants wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
It does that by creating another liability for $900 in your name in exchange for a $900 IOU"
Almost. The bank doesn't create a liability, it gets a new asset, my IOU and it reduces an old asset, vault cash.
I have the liability.
"Now you and I go on a spending spree. I spend $600 and you spend $800. oops! Bank is short $400!"
It doesn't matter what I spend, I already have the cash. Now if you spend $600, your account is reduced to $400 and the bank needs to reserve $40. They had $100 so can give $60 of the old reserve to you and need to borrow the other $540 in the Fed Funds market.
Another alternative is for the bank to sell the IOU from me to another bank for $900.
Returning to a Gold Standard Is a Bad Idea [View article]
mises.org/mysteryofban...
See the section on FRB that starts on page 116 of the pdf document (page 97 of the book)."
Thanks for the link. The only thing is, modern banks don't issue warehouse receipts for gold. I agree, that would be "money from thin air", but since that no longer occurs, I don't think it's relevent to our discussion.
On Jan 01 12:28 AM Smarty_Pants wrote:
Returning to a Gold Standard Is a Bad Idea [View article]
that cannot be withdrawn from for a certain period of time?"
Doesn't matter. At the time of the loan, the deposit is not available for the depositor to spend.
"Money cannot be in two places at once"
It's not. See my example above with the deposit of ten $100 bills.
" To attempt to do so creates new money from nothing"
Wrong.
"So who has possession of it?
Just think of money as a material object if you have to"
Great idea. One $100 bill is in the vault, the other nine are in the hands of the borrower.
On Jan 01 05:20 PM moonbat1775 wrote: