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

[wizardwatson]

This seems to be turning into a flame war by people with no patience against people who are genuinely trying to understand. I will explain it with ONE bank so as to get across what both sides are trying to say.

A deposits $100 in bank.

Bank liabilities = $100 to A, Bank assets = $100 in reserves.

Bank loans $90 to B. Be takes $90 and deposits it in his account in SAME BANK.

Bank liabilities = $100 to A, Bank assets = $100 in reserves. (only $10 left over after loan but B put $90 back in same bank)
Bank liabilities = $90 to B, Bank assets = $90 in receivables from B.

So you can see that assets/liabilities both equaled $100 after initial deposit.
After loan and subsequent deposit by B, assets/liabilites both equaled $190.

In BOTH cases net worth remains unchanged (assets - liabilities = 0).

What HAS changed is that now we have $190 dollars worth of claims on money (or receipts for the gold) when we only have $100 in actual money. So if both depositors try to withdraw their money immediately, the bank would be instantly insolvent, unless it could borrow what it is lacking, which it could in theory because it does have the assets on the books (B's loan liability is considered an asset).

It could use B's loan as collateral to borrow some cash to meet demand deposit withdrawals from another bank.

So even if this was the only bank in the universe, it could still practice fractional reserve banking.

 

[Deborah K]

Deborah,

What you are implying is that banks can create an infinite amount of money.
This is a misunderstanding of the money multiplier.

Due to the fact that a bank must set aside 10% of its deposits on reserves the amount of money created through FRB is FINITE.

You believe that:
100-->1,000-->10,000-->100,000-->1,000,000-->10,000,000-->100,000,000-->1,000,000,000 AD INFINITUM

So it takes SEVEN banks to turn 100 dollars into 1 BILLION!!!?????

Clearly this is mistaken.

As I said, after 35+ transactions there is no money left from an original deposit to loan out again.

100-91-81-73-66-59-53-47-43-38-34-30-28.....---->ZERO (numbers have been rounded)

Every loan is ten percent less than the previous as the bank sets that percentage aside as reserves.

This will be my final post. I sense it will not change your mind.

What about regulations and loan payback and such? What the hell is all of this crap about creating ad infinitum amounts of money? I never said banks didn't have regulations did I? I am refering to the phoney system we use to create money.

 

[wizardwatson]

Ever seen this video from Grignon? http://video.google.com/videoplay?docid=-9050474362583451279 Money as Debt. A video by the way, that is found on the recommended list of this forum.

I haven't watched the video but the analogy is correct. The extra (10x or whatever) 'claims on money' are 'backed' by the loan liabilities.

 

[Deborah K]

I haven't watched the video but the analogy is correct. The extra (10x or whatever) 'claims on money' are 'backed' by the loan liabilities.

So Money as Debt and the Mises video are saying the same thing then.

 

[Deborah K]

This seems to be turning into a flame war by people with no patience against people who are genuinely trying to understand. I will explain it with ONE bank so as to get across what both sides are trying to say.

A deposits $100 in bank.

Bank liabilities = $100 to A, Bank assets = $100 in reserves.

Bank loans $90 to B. Be takes $90 and deposits it in his account in SAME BANK.

Bank liabilities = $100 to A, Bank assets = $100 in reserves. (only $10 left over after loan but B put $90 back in same bank)
Bank liabilities = $90 to B, Bank assets = $90 in receivables from B.

So you can see that assets/liabilities both equaled $100 after initial deposit.
After loan and subsequent deposit by B, assets/liabilites both equaled $190.

In BOTH cases net worth remains unchanged (assets - liabilities = 0).

What HAS changed is that now we have $190 dollars worth of claims on money (or receipts for the gold) when we only have $100 in actual money. So if both depositors try to withdraw their money immediately, the bank would be instantly insolvent, unless it could borrow what it is lacking, which it could in theory because it does have the assets on the books (B's loan liability is considered an asset).

It could use B's loan as collateral to borrow some cash to meet demand deposit withdrawals from another bank.

So even if this was the only bank in the universe, it could still practice fractional reserve banking.

I understand what you're relaying here, but this isn't the way it's relayed on the Mises film or in the Griffin video or in the Rockwell column on Fractional Reserve Banking.

And any way, if the way you are suggesting, is the way frb works, then how do we get inflation?

 

[icon124]

I understand what you're relaying here, but this isn't the way it's relayed on the Mises film or in the Griffin video or in the Rockwell column on Fractional Reserve Banking.

And any way, if the way you are suggesting, is the way frb works, then how do we get inflation?

yes it is...they just skip over steps. Instead of going through steps 1-9 they go from step 1 and say this is where we will end up (at 9). It really is that simple. Trust me if they wanted to they would explain all the steps...but then they would probably lose 90% of their audience half way through.

 

[wizardwatson]

Another thing I think people are missing is the reason that banks do this.

"If the net worth remains the same who cares is you've created fake money or not?"

It is because of interest. Instead of getting interest on just the $100 the FRB's can issue, and collect interest on, $900 worth of liabilites, for every $100 in real assets.

In a non FRB world, interest rates would be awesome for people who actually saved. As it is now, all the interest we all should be making is sucked into the fraudulent banking industry, so while you work your ass off and drive a shitty car, your banker is working in a marble palace, wearing a nice suit, smoking a cigar in a place that does nothing but fill out a double-entry accounting ledger.

 

[Deborah K]

As it is now, all the interest we all should be making is sucked into the fraudulent banking industry, so while you work your ass off and drive a shitty car, your banker is working in a marble palace, wearing a nice suit, smoking a cigar in a place that does nothing but fill out a double-entry accounting ledger.

That's because banks create only the amount of the principle. They don't create the money to pay the interest.

 

[gonegolfin]

This seems to be turning into a flame war by people with no patience against people who are genuinely trying to understand. I will explain it with ONE bank so as to get across what both sides are trying to say.

A deposits $100 in bank.

Bank liabilities = $100 to A, Bank assets = $100 in reserves.

Bank loans $90 to B. Be takes $90 and deposits it in his account in SAME BANK.

Bank liabilities = $100 to A, Bank assets = $100 in reserves. (only $10 left over after loan but B put $90 back in same bank)
Bank liabilities = $90 to B, Bank assets = $90 in receivables from B.

So you can see that assets/liabilities both equaled $100 after initial deposit.
After loan and subsequent deposit by B, assets/liabilites both equaled $190.

In BOTH cases net worth remains unchanged (assets - liabilities = 0).

What HAS changed is that now we have $190 dollars worth of claims on money (or receipts for the gold) when we only have $100 in actual money. So if both depositors try to withdraw their money immediately, the bank would be instantly insolvent, unless it could borrow what it is lacking, which it could in theory because it does have the assets on the books (B's loan liability is considered an asset).

It could use B's loan as collateral to borrow some cash to meet demand deposit withdrawals from another bank.

So even if this was the only bank in the universe, it could still practice fractional reserve banking.

This is correct and is in alignment with what I posted earlier here ... http://www.ronpaulforums.com/showpost.php?p=1865473&postcount=32.

The above is also in alignment with the video cited in this thread. The video does not break the process down into its component parts, but it does illustrate the end result after the process reaches maximum leverage ... which as I pointed out many times is rarely the case in real practice.

Brian

 

[wizardwatson]

I understand what you're relaying here, but this isn't the way it's relayed on the Mises film or in the Griffin video or in the Rockwell column on Fractional Reserve Banking.

And any way, if the way you are suggesting, is the way frb works, then how do we get inflation?

The inflation is there in FRB's, we know this because of what happens when everyone takes out their cash, we get deflation. We just don't notice it because it is ubiquitous at the moment. It's already happened.

But FRB inflation is kind of a waxing/waning inflation. We could end it by everyone just dealing in cash and no one using FRB based banks.

But the other more deadly inflation is when the Fed actually monetizes debt. Which is quite literally simply printing up cash.

The government tries to sell bonds to raise cash. If the government can find no foreign buyers for the bond and can't meet it's budget outlays, it turns to the Fed to "monetize" the debt. Meaning, the Fed literally writes a check to the government and uses the bond as collateral.

Now we say the Fed is "printing up money" but the actual moment when the Fed writes the check and the moment when the Fed prints physical bills are not necessarily happening at the same time.

What is important is that any money the Fed 'creates' via this process is amplified by the FRB system.

 

[tremendoustie]

I understand what you're relaying here, but this isn't the way it's relayed on the Mises film or in the Griffin video or in the Rockwell column on Fractional Reserve Banking.

And any way, if the way you are suggesting, is the way frb works, then how do we get inflation?

Does FRB=fractional reserve banking, or federal reserve bank?

This 10x issue is not the way the federal reserve bank works, this is the way private banks work. We get inflation because the federal reserve bank can create all the money they want -- they set monetary policy, and they have created an ever increasing money supply (increasing faster than GDP).

Then, whatever the federal reserve injects, the fractional reserve banking system multiplies by 10x -- but only once, it's not like hitting the multiply button on a calculator. This is done by the method described -- 10% reserves for each transaction mean telescoping loans: $100+$90+$81+....=$1000.

The private banks do have an unfair and fraudulant advantage, and one that leads to increased indebtedness, but it's not true that they can just keep endlessly creating money.

The federal reserve bank is the chief culprit for inflation.

 

[Deborah K]

But the other more deadly inflation is when the Fed actually monetizes debt. Which is quite literally simply printing up cash.

.

Wait...our debt is already monetized.

 

[gonegolfin]

I understand what you're relaying here, but this isn't the way it's relayed on the Mises film or in the Griffin video or in the Rockwell column on Fractional Reserve Banking.

And any way, if the way you are suggesting, is the way frb works, then how do we get inflation?

Deborah, the steps that I laid out in my explanation http://www.ronpaulforums.com/showpost.php?p=1865473&postcount=32 and what wizardwatson states above is in concert with the video in this thread. They simply skip over the intermediate steps and reveal the end result if in fact the system achieved the maximum amount of leverage (which does not happen in the real world of banking).

As I stated previously, the video explicitly refers to banks (plural) and loans (plural), meaning that it requires many loans (many loan/deposit) cycles to achieve the end result shown in the video. As opposed to a single loan by a bank achieving 9x leverage off of its reserves (this is not possible).

Brian

 

[wizardwatson]

That's because banks create only the amount of the principle. They don't create the money to pay the interest.

Well interest is just the time value of money. I've heard people say this line before, but that isn't the actual problem with the system. The problem isn't that they 'didn't create the interest'. The problem is that the money the interest is based on never existed.

Consider the $100 depositor. We know the banks can create $900 worth of loans from this. Say 6% a year for all the loans non-compounded, just a flat fee at the end of the loan term ( if only, right ). This means that the banks in one year would make $54, from $100 of real money.

Assume a closed system. Where did that money come from? The only place it could come from is from the market process of people raising prices on goods and forcing our saver (the initial depositor) to fork over $54 dollars.

FRB's are an assault on the working man, plain and simple.

All capital flows to the banks. The bankers decide who in your community gets the loans, and who doesn't. They along with real estate people and your local chambers of commerce essentially run your town or city. This is simply the way it is. Older people in the business community realize this on some level but are apathetic about the prospects of changing it. We are young and naive as they say and think we can do something about it.

 

[gonegolfin]

Another thing I think people are missing is the reason that banks do this.

"If the net worth remains the same who cares is you've created fake money or not?"

It is because of interest. Instead of getting interest on just the $100 the FRB's can issue, and collect interest on, $900 worth of liabilites, for every $100 in real assets.

Certainly. Griffin makes the very point in his book. That is, banks have secured the right to earn interest on money they create. Although, the current leverage in the system is considerably lower.

Brian

 

[wizardwatson]

Wait...our debt is already monetized.

Well yes, I'm talking about when the Fed monetizes 'new' debt. Treasury bills/bonds.

 

[Deborah K]

The private banks do have an unfair and fraudulant advantage, and one that leads to increased indebtedness, but it's not true that they can just keep endlessly creating money.

FRB + Fractional Reserve Banking to answer your question. As to above, I never refered to so-called private banks, I refered to commercial banks see below:

"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."
__________________

This 10x issue is not the way the federal reserve bank works, this is the way private banks work. We get inflation because the federal reserve bank can create all the money they want -- they set monetary policy, and they have created an ever increasing money supply (increasing faster than GDP).

The film says otherwise:

If a central bank (aka Federal reserve 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.

Not trying to beat a dead horse, but looking at this at face value, which is what most people would do, it implies something different than what you and others are saying.

 

[Fox McCloud]

he's explained this in detail before, and he understands how the system works.

The only reason he says what he says is because when you start talking about technicalities of how/why the banking system, as a whole, can create that $900 out of $100, most people will be bored, turned off, or asleep, and you've lost your audience at that point.

really, the bank can only loan out $90, then the second, $81, and so on.....the key here is, they're not actually loaning out $90 of the $100, they're loaning out $90 in totally new money...so, when they make the $90 loan, there's actually a total of $190 in the economy now.

edit: made this a while ago to help people visually see how the banking system works:

The Money as debt video is...atrocious IMHO--it comes close to the truth, but then perverts it just enough to point you in the wrong direction and thinking the wrong thing.

edit edit: there's a mistake in the image I made; I do believe scenario A does exist, but only in the instance of a credit union and not a bank (I could be wrong though).

 

[Deborah K]

They simply skip over the intermediate steps and reveal the end result if in fact the system achieved the maximum amount of leverage (which does not happen in the real world of banking).
Brian

Very misleading, if true. I know I am not the only person who interpreted FRB in this way.

 

[youngbuck]

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

He used it as a transitive verb.