Sunday, May 13, 2012

How Banks "Create" Money

This post is a rehash of an older post, which was a rehash of an even older post I made at The Spearhead. But in my opinion, the main point here needs to be restated, reiterated and repeated until it becomes a commonly understood meme.

I've been a long time reader of Vox Day's least since 2002 (maybe earlier, I can't remember). His was the first place I truly encountered Austrian economic theory and anti-Statist, libertarian philosophy. Most of the long time commentariat (known collectively as the dread ilk) are well informed about economics and understand the system of the US Federal Reserve.

But even some of the long-time regulars of the dread ilk still miss one of the most relevant points regarding our present day money "creation" system, which is a very big part of driving inflation. Dread ilk old-timer, Difster, wrote the following:

"The banks themselves don't create money but the Federal Reserve does.

I'd suggest you read The Creature from Jekyll Island about the creation of the Federal Reserve. Also of course, read End The Fed by Ron Paul.

This will give you a great education and probably piss you off. If it doesn't, there's something seriously wrong with you."

Now, it's true that banks don't print paper currency money, but they most certainly do "create" money...aka - digital numbers entered into their account record-keeping computing system. In other words, you go to the bank, and you sign the paperwork to take out a loan, the bank doesn't physically count out stacks of bills in the amount you're borrowing and then hand it over to you in one lump sum.

No, they simply type the number in to their system, and voila, you now have whatever amount of money you agreed to borrow in a new account (or "deposited" into an already existing account). The only constraint they have on their money "creating" powers, is the fractional reserve requirement of their regional Federal Reserve Bank - which is generally 10%. This reserve amount on deposit, than allows the bank to "leverage" it to create money in the form of loans made out to other borrowers from the bank.

In other words, your local bank need only have $100 in their regional Fed Reserve account to turn around and "create" a $1,000 loan account to you. At the signing off of a new loan document, the bank just "created" $900 of fiat currency at the push of a few keyboard buttons. This new "$1,000 account balance" is than considered a "new deposit" for which only the required reserve amount is deposited at the Federal Reserve Regional Bank to than turn around and make a new loan to someone else.

Now this is a very simplified example I've used to explain the money creation process. It used be stated plainly on the Dallas Federal Reserve Bank's own website. The following quote was taken straight from an old html page that no longer exists on the Dallas Reserve's website:

How Banks Create Money

Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.

However, this exact same quote is still available on a new .pdf file you can download from the Dallas Federal Reserve Website:

Page 11 of that pdf file contains the exact same quote that used to exist as an html webpage as of less than a year ago, the html page still existed and easily hyperlinked and googled. Now it's only found as a pdf download.

A Federal Reserve Branch essentially admits a core feature of our modern monetary system: Federal Reserve member banks (aka Cartel members) are allowed to "create" money by making loans.

In other words, anytime you see the tell-a-vision footage of the Fed's printing presses making all those brand new sheets of dollar bills to be put into circulation, the actual, physically existing paper money  is only a fraction of the total money in our economy. MOST of the "money" in today's economy exists solely as digital numbers entered into bank's accounting/record-keeping computer systems, with only the required 10% actual cash being deposited at the regional Fed bank.

In other words...most of the money in today's "economy" is not actual paper currency...but DEBT agreed to by borrowers from the Federal Reserve's fiat currency/fractional reserve Cartel members. The more debt that's created, the more the money supply exponentially expands, driving inflation,


Kuraje said...

An excellent 1st time introductory swallowing of this red pill is the 30 minute animated (hilarious) short "The American Dream":

Humor helps.

The financial section of Zeitgeist: Moving Forward (aka Zeitgeist 3) is lengthy but solid: (1 hr 9mins 13 secs)

Related and of high quality (information + production value) is the College Conspiracy:
The entire film covers many red pill aspects of society (as do the previous first 2 movies)

Anonymous said...

It seems carbon trading is a rothschild initiative.what better way to further enslave people than taxing the air they breathe.

Anonymous said...

How does E.O 11110 specifically relate to getting rid of fed reserve? It was about silver.

Anonymous said...

Following on from the last comment, I looked up wikipedia for an understanding of eo11110 then publshed the above comment. I since found an archived wikipedia editing discussion and it seems the wiki entry is tainted with falsehood. Most people rely on wikipedia and it is the result, so it seems many would start.on a red pill journey and be stopped by that.

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FHL said...

I'm the one to whom Difster was replying, and in his defense, he did say he oversimplified it for me so I would understand (although in this case the oversimplification didn't help all that much and probably added to my confusion).

But I must say that your first post at the Spearhead was one of the clearest and most informative essays on this topic. At least the best I've read so far, mostly because you walked your readers through the process, step-by-step.

As to why it has to be expressed so slowly and carefully, I can only quote another poster by the name of Vidad who replied to Difster, saying: "Yeah. When you actually explain fully how the system works, it sounds so radically retarded that the average rational human will write you off as a nut."

From 100 cash dollars in the bank we now have 235,000 dollars out being spent? And there is no limit; I thought the 10 percent multiplier was a limit, in the sense that they couldn't have 1000 dollars out in loans at any moment if they only had 100 in the bank. But it is nothing but a limit on how fast they can multiply: they can still potentially expand and contribute to inflation infinitely.

Even if your example was a gross over-simplification: what the hell?

Rothbard was right to call this nonsense counterfeiting.

Keoni Galt said...

Yes, it most certainly is counterfeiting...why should any Bank be allowed to create debt money like that?

It's serfdom to the Banking Cartel as our modern day Feudal lords, hidden in plain sight.

money muscle and math said...

Fractional reserve banking predates fiat currency. It was actually the forerunner.

If you put gold in the bank, the bank could do the same fractional reserve process with the certificates they would issue.

The commenter above is wrong. There is a limit to the amount of money a bank can produce. There are reserve requirements.

I'm as skeptical as anyone of the current system, but let's keep our facts straight. It will help in your debates with the statists.

**** ***** said...

it truly is a mind blowing concept.
quite the house of cards, no matter how you look at it.

Anonymous said...

I am horrified to hear about all the rapes and murders of young blond girls there, including one blond blue-eyed German woman, by the local natives, and the police protect them, or even participate in the crimes.

Filthy subhumans

Martin said...

have you seen the Mises Institute documentary Money, Banking and the Federal Reserve?

Gerard said...

"The more debt that's created, the more the money supply exponentially expands, driving inflation"

No, the money supply actually expands geometrically (ie at a constant rather than increasing multiplicative rate) with respect to physical money production. Also, inflation is only the result of increased money supply when money demand does not commensurately increase. Since there is no reason to expect the FED to be able to divine true increases in the demand of money and because of political influence what you do generally see however is excessive money supply creation relative to demand and secular inflation. Much love.