G Edward Griffin, wtf? Listened to a speech and he was wrong about fractional reserv

[Deborah K]

This nonsense about individual banks loaning out 10x their deposits really annoys me. It's not correct.

1) It's called the Federal Reserve System for a reason. Banks need to hold a portion of their deposits as RESERVES, not loan them out times ten!

There have been numerous discussions on this very forum about the Fed paying interest on bank reserve deposits. How can they do this if the banks hold nothing in RESERVE!

2) Common sense would illustrate the retardedness of this idea. Knowing the multiplier effect of FRB would show you that if a bank were allowed to loan out 10X its deposits that would mean--
a) You deposit 100$ in an account. The bank loans 1000$ out to Guy B.
b) Guy B deposits it in his bank. That bank loans out 10,000$ to guy C.
c) Guy C deposits it in his bank. That bank loans out 100,000$ to guy D.
d) Guy D deposits it in his bank. That bank loans out 1,000,000$ to guy D.

Your original one hundred became ONE MILLION in three steps!!!!

Talk about hyperinflation.

Obviously that is not the case. Educate yourself and stop repeating falsehoods. Makes the movement look like a bunch of kooks.

This Federal Reserve Document is an awesome primer on how credit is created. READ IT. Page 11 is applicable to this thread.

Calm down. We're trying to hammer this out through debate. Everyone, if you'll notice, is being very respectful of each other. We don't need your condescensions i.e. we're "kooks". If we can learn something from you, then patiently teach us.

 

[wizardwatson]

This nonsense about individual banks loaning out 10x their deposits really annoys me. It's not correct.

1) It's called the Federal Reserve System for a reason. Banks need to hold a portion of their deposits as RESERVES, not loan them out times ten!

There have been numerous discussions on this very forum about the Fed paying interest on bank reserve deposits. How can they do this if the banks hold nothing in RESERVE!

2) Common sense would illustrate the retardedness of this idea. Knowing the multiplier effect of FRB would show you that if a bank were allowed to loan out 10X its deposits that would mean--
a) You deposit 100$ in an account. The bank loans 1000$ out to Guy B.
b) Guy B deposits it in his bank. That bank loans out 10,000$ to guy C.
c) Guy C deposits it in his bank. That bank loans out 100,000$ to guy D.
d) Guy D deposits it in his bank. That bank loans out 1,000,000$ to guy D.

Your original one hundred became ONE MILLION in three steps!!!!

Talk about hyperinflation.

Obviously that is not the case. Educate yourself and stop repeating falsehoods. Makes the movement look like a bunch of kooks.

This Federal Reserve Document is an awesome primer on how credit is created. READ IT. Page 11 is applicable to this thread.

I tried to illustrate this fallacy in my post. It isn't that the banks loan out 10x their deposits. It is that, in the banking system, one real dollar is counted 10x in the system via the loan process.

But the balance sheets of everyone involved all still balance.

 

[Deborah K]

I tried to illustrate this fallacy in my post. It isn't that the banks loan out 10x their deposits. It is that, in the banking system, one real dollar is counted 10x in the system via the loan process.

But the balance sheets of everyone involved all still balance.

Are we all saying the same thing only in different ways? I'd like your opinion as well as Teachone's opinion of that excerpt from the mises video. It's less than 2 minutes starting at 22:50 to 24:10 http://www.youtube.com/watch?v=iYZM58dulPE

 

[wizardwatson]

Are we all saying the same thing only in different ways? I'd like your opinion as well as Teachone's opinion of that excerpt from the mises video. It's less than 2 minutes starting at 22:50 to 24:10 http://www.youtube.com/watch?v=iYZM58dulPE

I already watched and commented on the video (post # 36) which I've actually seen before (never knew Hoppe had such an accent, you'd never know from reading his work ).

We seem to be arguing over the process by which the loans are created. While I think we all agree that x amount of money is multiplied in the system based on the reserve ratio, some here think that the process the bank uses is just a "flick of the pen" and boom a loan exists. But this isn't the way it works, you have to look at the check clearing process. There are not more loans on the books than deposits.

Now another poster called BS and said, well banks can borrow reserves so that doesn't hold. Well, the more technical you get the more you have to start talking about accounting.

A deposit is just a liability. A bank could certainly borrow its reserves from another bank, this has the added benefit of knowing exactly when the 'depositor' (in this case a loan repayment) is going to withdraw.

So the more correct way to say it is:

There are not more liabilities on the books than assets AND banks do not conjure up assets and liability pairs 'with a flick of the pen'. So in our case of the $100 depositor. The bank has $100 cash reserve asset, and a $100 liability to the depositor. If the banker were to 'loan' $900 to some entity, he would then have an asset (receivable) of $900 but where is the liability?

 

[tremendoustie]

I tried to illustrate this fallacy in my post. It isn't that the banks loan out 10x their deposits. It is that, in the banking system, one real dollar is counted 10x in the system via the loan process.

But the balance sheets of everyone involved all still balance.

That's terrific, then, say I have $100. I'll loan you $90, but instead of paying you cash, I'll keep my $100 on "deposit" in my pocket, and have it available to be spent at the same time you have your $90 available to be spent.

That way, we'll miraculously have $190 available to be spent between us! Why, we should all be in the banking business! Lending is fun when you don't actually have to give up any money ...

Hint: Your sheet isn't balanced (in any meaningful, real life, non banking voodoo sense of the term) when you claim that the borrower, and the original depositor, can spend the same exact money at the same time. The fact is, they CANNOT actually do what the bank claims they can (both spend the money at the same time) -- the bank would be unable to pay the creditor and borrower simultaneously.

When you claim to offer services you are mathematically unable to deliver on, or when the total amount of money you have promised your clients as available to them is greater than your actual assets, it's called fraud in the real world.

Banking is a confidence game. You pretend to offer what's mathematically impossible, and hope you don't actually get called on it. There was another confidence game played by a former NASDAQ exec recently, if I recall. He's going to prison.

 

[wizardwatson]

That's terrific, then, say I have $100. I'll loan you $90, but instead of paying you cash, I'll keep my $100 on "deposit" in my pocket, and have it available to be spent at the same time you have your $90 available to be spent.

That way, we'll miraculously have $190 available to be spent between us! Why, we should all be in the banking business! Lending is fun when you don't actually have to give up any money ...

Hint: Your sheet isn't balanced (in any meaningful, real life, non banking voodoo sense of the term) when you claim that the borrower, and the original depositor, can spend the same exact money at the same time. The fact is, they CANNOT actually do what the bank claims they can (both spend the money at the same time) -- the bank would be unable to pay the creditor and borrower simultaneously.

When you claim to offer services you are mathematically unable to deliver on, or when the total amount of money you have promised your clients as available to them is greater than your actual assets, it's called fraud in the real world.

Banking is a confidence game. You pretend to offer what's mathematically impossible, and hope you don't actually get called on it. There was another confidence game played by a former NASDAQ exec recently, if I recall. He's going to prison.

I think everyone agrees its fraud. Like I said, it seems people are having trouble understanding the process. The movies and videos about FRB's usually skip over the accounting details about how banks keep their sheets balanced while doing this.

Also, if you're interested in the property rights argument for why it is fraud, Walter Block in the Rockwell archives does a good job of explaining it from that angle.

 

[tremendoustie]

I think everyone agrees its fraud. Like I said, it seems people are having trouble understanding the process. The movies and videos about FRB's usually skip over the accounting details about how banks keep their sheets balanced while doing this.

Ah, agreed. And while the "money creation" effect is very real, and it is fraud, it would be an error to say that a bank can immediately lend 10X a deposit. You are right to point out that fallacy.

The 10x happens on a system wide basis, as the telescoping loans bounce their way between banks. It is the sum of 10+9+8.1+.....

If one is pointing out a flaw in a system, or is accusing someone of fraud, it is a good idea to get one's facts straight. Let's not pretend it's anything approaching legit though.

 

[teacherone]

Are we all saying the same thing only in different ways? I'd like your opinion as well as Teachone's opinion of that excerpt from the mises video. It's less than 2 minutes starting at 22:50 to 24:10 http://www.youtube.com/watch?v=iYZM58dulPE

No, we are not all saying the same thing.

You are implying that a 100$ deposit can become one million in three steps.

This is incorrect, impossible and wrong.
A 100$ can only become 1000$ as it travels through the banking system.

Even that requires NUMEROUS steps as banks retain 10% of their deposit on hand and loan out 90%. I just did the math up to 30 steps and I am still up not to 1000$. I can send you those sums if you wish.

The video is misleading. If you listen closely enough you will hear the narrator say BankS and LoanS (PLURAL). You need a minimum of 35 transactions just to turn 100$ into 1000$.

 

[gonegolfin]

It is irrelevant that the deposits are unlikely to be made at the same bank. The banking system is a closed system -- the only way the money will not be deposited somewhere is basically if someone hides cash in their sock drawer. Thus, the banking system as a whole creates 1/n times the original money in the system, where n is the reserve requirement. If a new $100 enters a banking system with a 10% reserve requirement, there will be a total of $900 in loans made off of that $100 (or close to it), despite the $900 never existing in the first place. The banks in total will have distributed $900 in loans, and will have $1000 in deposits, all from that original $100. This is because one persons deposit is the SAME MONEY as another's loan, yet both can spend it simultaneously.

I think you misunderstood my point. If you read my posts (and examples), we are in sync.

My point, to which you responded, was that a single bank can create that $900 (from the original $100) in a certain unusual circumstance (via a series of loans and deposits).

If a bank begins with a $100 deposit ... and all loans emanate from and all resultant deposits (from these loans) are made to this same bank, then that bank would be allowed to achieve approximately 9x leverage from the original deposit. Not in one loan (as was being espoused by some folks in this thread). But via the series of loans and deposits that follow until the process is fully leveraged.

In practice, the leverage in the fractional reserve system is well short of the maximum possible.

Brian

 

[icon124]

^ I've been doing some research on this, and if I'm not mistaken the multiplier historically over the past decade has been in the range of 2.50-3.00...clearly WELL short of the 9x leverage everyone always makes it out to be.

Not that you are saying it is 9x...just letting others know that it rarely meets that (if ever). I'm sure you already know that though.

 

[Chester Copperpot]

I think you misunderstood my point. If you read my posts (and examples), we are in sync.

My point, to which you responded, was that a single bank can create that $900 (from the original $100) in a certain unusual circumstance (via a series of loans and deposits).

If a bank begins with a $100 deposit ... and all loans emanate from and all resultant deposits (from these loans) are made to this same bank, then that bank would be allowed to achieve approximately 9x leverage from the original deposit. Not in one loan (as was being espoused by some folks in this thread). But via the series of loans and deposits that follow until the process is fully leveraged.

In practice, the leverage in the fractional reserve system is well short of the maximum possible.

Brian

Brian,

It has been my understanding from sources such as MISES and Griffin, that the one bank is able to do this.. Ive also read from other sources.. Maybe you know the correct terminology as I forget it in this case.. But in the case of a $100 deposit, the 10% or $10 is thrown in as a reserve, but the left over $90 is considered some other type of reserve.. extra reserve, offline reserve.. something wacky like that.. do you know what Im talking about?? And that the bank can indeed create this surplus of money over and on itself?

I mean if I went and got a $500,000 mortgage from a bank today.. That $500,000 in new money would be created the moment I signed the mortgage correct? Just the one bank does that all by itself. And they can only do that if theyre compliant with their reserve requirements.

 

[gonegolfin]

Brian it's less than 2 minutes of your time. Please look at it. As to your link to the Fed bank, forget it. I don't trust anything coming from the central banking system.

You are misinterpreting the video. Pay attention closely to what they state at about the 23:45 mark. The video states that the commercial banks take this $1000 and can multiply it into $10,000 through fractional reserve loans. I highlighted banksand loans to illustrate that they are referring to banks plural and loans plural. They are not referring to a single bank making a 9x loan (singular) off of a deposit. Is it clear now?

As for not trusting the data from the Fed, well ... you are shortchanging yourself if you believe some of the videos crawling around the net versus official publications and monetary statistical releases from the Fed. Looking at this thread, a lot of people would actually learn something if they read the paper I linked.

Brian

 

[Deborah K]

No, we are not all saying the same thing.

You are implying that a 100$ deposit can become one million in three steps.

This is incorrect, impossible and wrong.
A 100$ can only become 1000$ as it travels through the banking system.

Even that requires NUMEROUS steps as banks retain 10% of their deposit on hand and loan out 90%. I just did the math up to 30 steps and I am still up not to 1000$. I can send you those sums if you wish.

The video is misleading. If you listen closely enough you will hear the narrator say BankS and LoanS (PLURAL). You need a minimum of 35 transactions just to turn 100$ into 1000$.

Really how am I implying that? In the video, 3 steps results in $10,000 NOT a million.

 

[Deborah K]

Please explain this quote from the Mises film: "The commerical banks are permitted to create 'checkbook' money on top of federal reserve notes. That is to say, the commercial banks are only obliged by law to hold reserves in the form of federal reserve notes of 10% to back all demand deposits that they have. Ninety percent of the demand deposits are backed by nothing."

 

[Deborah K]

You are misinterpreting the video. Pay attention closely to what they state at about the 23:45 mark. The video states that the commercial banks take this $1000 and can multiply it into $10,000 through fractional reserve loans. I highlighted banksand loans to illustrate that they are referring to banks plural and loans plural. They are not referring to a single bank making a 9x loan (singular) off of a deposit. Is it clear now?

As for not trusting the data from the Fed, well ... you are shortchanging yourself if you believe some of the videos crawling around the net versus official publications and monetary statistical releases from the Fed. Looking at this thread, a lot of people would actually learn something if they read the paper I linked.

Brian

Brian, the number of banks involved isn't the issue. It's the way the system is implemented that's the issue.

 

[Josh_LA]

Fractional Reserve Banking means that a fixed fraction of deposits must be kept in reserves.

But G Edward Griffin says a sample scenario here at about minute 25 to 26. A guy deposits $100, and he says the banks can now lend $900?! Because 100 is 10% of 1000 and they can lend the difference? Isn't it just $90 the bank can lend?

Plus, he, an author, uses the word loan as a verb instead of lend! But I can live with that.

So I go to try to use his example, and as I'm explaining it, I'm thinking wait, wtf, I don't understand. Hell, he's probably right, I dont see how he could get so much praise from you guys and make a huge error, but anyway, someone please explain this to me!

If he is wrong, then that affects his whole argument doesn't it?? What is it the bankers get out of it? He said the government gets to spend money when it wants and plus it's pre-inflation (and all that remains true), but then his argument for why it's a win for the bankers is that "they get interest on nothing." Nothing? Someone deposits $100, you lend $90 and get interest when it's paid back. It's $90 the bank lends, not nothing. Help me out please!

it's VERY misleading to say they can lend out 9x what they have on reserve, that DOES give the impression that when Joe puts in $1, they can lend out $9.

When in fact, $9 is the END RESULT OF accumulated debt/money supply. (after you add up the series of transactions, $1, .9, .81, .73, .64, .55............................) OR, after the bank lends out 90 cents, 10 cents they have on reserve is 1/9 of what they lent out.
Just stop and think, WHO GIVES A F*** about interest rates if banks are allowed to pump $9 every minute? Who do banks fail if they can pump money to save themselves?

Simple answer : they can't, and didn't! They are subject to the Fed Res interest rates and money supply, they cannot create new money without the man's permission.

 

[Deborah K]

Also from the video:

If a central bank has 100.00 worth of gold reserves in its vault, and 10% reserve requirement, it can print up to 1000.00 of new notes and deposits which become the reserves of the commercial banks. The commericial banks take the 1000.00 and if they're required to hold 10% again in their reserve, they can multiply 1000.00 into 10,000.00 through fractional reserve loans. So an inverted pyramid is created with 100.00 worth of hard money at the bottom and 10,000.00 of inflated paper money at the top.

 

[Josh_LA]

Really how am I implying that? In the video, 3 steps results in $10,000 NOT a million.

$10K and $1000K is only 2 digits off, so it's still only 5 steps (and if by your understanding, a step takes literally minutes, who'd be stupid to stop at 3 or 5 steps?)

 

[icon124]

Please explain this quote from the Mises film: "The commerical banks are permitted to create 'checkbook' money on top of federal reserve notes. That is to say, the commercial banks are only obliged by law to hold reserves in the form of federal reserve notes of 10% to back all demand deposits that they have. Ninety percent of the demand deposits are backed by nothing."

^ I think I'm probably going to shoot myself over this....some people just really at the end of the day have no business trying to learn this stuff...

If you don't and still haven't gotten it yet after all of these explanations there is no hope.


One more time

"The commerical banks are permitted to create 'checkbook' money on top of federal reserve notes. That is to say, the commercial banks are only obliged by law to hold reserves in the form of federal reserve notes of 10% to back all demand deposits that they have. Ninety percent of the demand deposits are backed by nothing."

Let's say the Federal Reserve gives Bank A $100. Bank A in turn has to keep 10% of that, which leaves $90 for them to do whatever in the hell they want to do. Let's say Bank A gives a loan to consumer A for $90. Consumer A can then turn around and deposit that loan back at bank A, buy whatever he wanted with that loan (which means the person who receives that money will probably deposit it eventually), or deposit that money in a different bank B.

I'll go through all of the steps...let's say consumer A deposits that money in Bank A. Bank A now has required reserves of $10, a loan on the asset side worth $90, and demand deposits (liability) of $90. Because Bank A is required to keep 10% on hand Bank A now needs to add $9 to required reserves. From here a number of things can happen...more loans, invest in securities, leave the money as excess reserves...whatever. But anything that is really done after that becomes this "checkbook".

90% of deposits are really backed by nothing, BUT if it comes to it the Federal Reserve WILL print those notes if the demand for all deposits comes at once.

Back to the example...say Consumer A purchases a good from Producer A, in turn producer A deposits that money into Bank B. Bank B doesn't have that loan as an asset, but gets deposits of $90 and has to keep $9 on hand as required reserves. From there this bank can also do everything I mentioned above. Theoretically this can go on for about 9 more times, which is that common thought you always here in videos. (Making $1000 out of $100).

In REAL LIFE this DOESN'T happen 9 times. So don't believe all of the hype.

 

[gonegolfin]

Brian,

It has been my understanding from sources such as MISES and Griffin, that the one bank is able to do this..

Absolutely not true (that a single bank can do this using a single loan). And the video linked in this thread does not claim as such either ... as I explained to Deborah in a post just above. I have never seen material where Mises claims as such (or Rothbard). I would need to go back to examine the exact terminology Griffin uses in "The Creature From Jekyll Island". But I remember reading it several years ago and thinking, "this is not correct."

Ive also read from other sources.. Maybe you know the correct terminology as I forget it in this case.. But in the case of a $100 deposit, the 10% or $10 is thrown in as a reserve, but the left over $90 is considered some other type of reserve.. extra reserve, offline reserve.. something wacky like that.. do you know what Im talking about?? And that the bank can indeed create this surplus of money over and on itself?

As I showed in my example earlier in this thread, when a bank void of any deposits accepts a $100 deposit, this $100 is considered reserves. With a 10% reserve ratio, $90 of this $100 is considered excess reserves. The bank can lend off of its reserves in the amount of its excess reserves. In this case, the bank would be able to lend $90 (not $900).

From an earlier post ...
"http://www.ronpaulforums.com/showpos...3&postcount=51

Assumptions:
1) 10% reserve requirement (and no borrowed reserves)
2) Bank A has a $100 monetary base in the form of reserves (the reserves can be a combination of federal reserve reserve balances and/or vault cash)
3) Bank A has no loans and has a single deposit account of $100 (a cash (FRN) deposit made by the depositor upon the creation of the deposit account)
4) Bank B has no loans, no reserves, and a single deposit account that has been opened without a balance.

- Bank A can loan $90 of their $100 in reserves (not $900) and does lend that $90 to a borrower.
- Bank B accepts the $90 deposit from the above borrower. Bank B now has $90 in reserves and is eligible to lend $81 of this $90.

At this point, we have the following in the system ...
- Total Deposits of $190
- Total Reserves of $100

Obviously the lending process can continue. But note that the total $ of reserves in the system does not change. Reserves in aggregate (total) only change when the Federal Reserve creates or extinguishes reserves (or deposits are withdrawn from the banking system and hoarded or previously hoarded cash is deposited). Lately, the Fed has been creating reserves. However, simply creating reserves does not increase the amount of money supply."

I mean if I went and got a $500,000 mortgage from a bank today.. That $500,000 in new money would be created the moment I signed the mortgage correct? Just the one bank does that all by itself. And they can only do that if theyre compliant with their reserve requirements.

Yes. But in our example, the bank would need $500,000 in excess reserves to make this loan.

Brian