Bernard,
As I understand it, the current fractional reserve system depends on growth.

I've suggested this several times now, and it is VERY relevant to this topic:

http://www.chrismartenson.com/crashcourse

A set of videos that last about 3 hours. IMO the easiest quickest way to get up to speed on this.

We live on a finite planet, and so there is a limit to growth. That fact has a basic influence on a choice of system, and the longevity of the current system.

Another major topic is Peak Oil and Peak Resources.
We have been benefiting from the Oil Age. A period of cheap energy, giving us spare energy to grow.

All of this is extremely well covered in Chris's Videos.
Steve

Thank you Bernard for putting this up.

Let's hope we can create some constructive discussion which was sadly missing the in recent Parliamentary Inquiry into Monetary Policy.

There are several papers on my website which outline some of the foundations and issues around money. John Kutyn's "The Nature of Money" explores the legal development of money from 1500s as paper bills came into common usage either as claims on gold or a transaction (accommodation bills). He also looks at how banking developed from this and the legal definition of deposits and liabilities. This is enshrined in our Reserve Bank Act which grants only the RB the power to create money.

That banks also "create money" is clear but has not been seriously challenged in court though there was a minor case recently (Rupa vs Bank of New Zealand 13/1/08).

John shows that the nature of compound creates a situation where interest demands will always outrun the ability of the money system to repay them thus causing busts.

It's a long paper but without the knowledge you will be fishing in the dark.

John Tomlinson's paper demonstrates how banks operate and how confidence in them is the prime ingredient for the banking system to work.

It is true that money is simply created into existence. There are two main ways to do this:

- The issuing authority prints notes and puts them into circulation (this is debt free money). There is no claim on this money.
- A private institution issues digital money (in a cashbook or spreadsheet) in the form of a loan (debt) on which interest is charged.

The main question at hand here is whether, and to what extent, the issuing authority can introduce new money directly into the economy with no interest upon it.

Currently less than 3% of the money supply is in the form of notes and coins with the rest, over 97% being debt based interest bearing money.

I'd like to start with a proposal that sees more debt free money being introduced, via direct government spending, into the economy.

To make this neutral to the money supply (another issue altogether) i would envisage banks being required to maintain higher capital ratios ie therefore being able to lend out (and create) less money.

I don't think there's any dispute that banks create money?

"In the normal course of their operations, banks create money" (Blomqvist, Wonnacott, and Wonnacott, "Economics First Canadian Edition"pge. 201)

"The actual process of money creation takes place primarily in banks." (Federal Reserve, "Modern Money Mechanics") http://landru.i-link-2.net/monques/mmm2.html

"Commercial banks and other financial institutions provide the greater part of assets used as money through loans made to individuals and businesses. In that sense, financial institutions are creating money. " (Bank of Canada, "Bank in Brief")

http://www.bankofcanada.ca/en/backgrounders/bg-m2.html

I do not see the Social Credit prescription as an "alternative to the current monetary system", but as a way to correct an accounting flaw within the current monetary system. This flaw was identified by Douglas is his A+B theorem which is reproduced below:

"A factory or other productive organization has, besides its economic function as a producer of goods, a financial aspect"”it may be regarded on the one hand as a device for the distribution of purchasing-power to individuals through the media of wages, salaries, and dividends; and on the other hand as a manufactory of prices "“ financial values. From this standpoint, its payments may be divided into two groups:
Group A - All payments made to individuals (wages, salaries, and dividends).
Group B - All payments made to other organizations (raw materials, bank charges, and other external costs).
Now the rate of flow of purchasing-power to individuals is represented by A, but since all payments go into prices, the rate of flow of prices cannot be less than A+B. The product of any factory may be considered as something which the public ought to be able to buy, although in many cases it is an intermediate product of no use to individuals but only to a subsequent manufacture; but since A will not purchase A+B; a proportion of the product at least equivalent to B must be distributed by a form of purchasing-power which is not comprised in the description grouped under A. It will be necessary at a later stage to show that this additional purchasing power is provided by loan credit (bank overdrafts) or export credit."[1]

As stated in the last sentence above, the consequences of this accounting flaw is ever increasing debt. The system is not "self-liquidating" in terms of incomes and prices. Prices grow faster than incomes, and the only way that consumers can have access to all the goods and services they produce is to either give it away in exchange for iou's, or what is known as a "favorable balance of trade", or increasingly mortgate themselves to the banking system.

To correct for this flaw, Douglas proposed two methods whereby monies, which have not come from the productive system, were given to consumers. It is important that these monies do not come from the productive system, since they then will not have a direct effect on prices.

These methods were:

1) A price rebate in the ratio of consumption/production. The basis for this rebate is the recognition that the real cost of production is consumption over an equivalent time period. Also, it should be noted that production is to include "potential production" not just what has already been produced, but what could be produced.

2) A national dividend paid to consumers. The basis for the dividend is to allow people to increasingly consume leisure as technology increases the productivity of labour.

I have seen other mechanism for distributing money to consumers being passed off as Social Credit in this forum, but I must state that these ideas are not Social Credit, and there's reasons why Social Crediters oppose these ideas, which I hope we can reasonably discuss in this forum.

Take care.

Sorry folks,
I cant comment today, as I have been, apart from a weeks holiday last week, working 10-14 hours a day, plus studying, plus running my own campaign, In the interest of preservation of my young family I have made a deal with them that Tues, Thurs and Sun are politics and economic free days. My family is the most important thing in the world to me, thus I fully intend to keep my bargain.
Bernard and Bryan, you guys uphold all that is intended of the fourth estate, many, many thanks. Thanks also to the amicable manner of most every participant on this site.
I will be back tommorrow to participate in this great opportunity and I to think it can be far more useful than the recent select committee future monetary policy inquiry.
Cheers
Iain

Well, it seems the French President wants to talk about change too! Sarkozy is quoted as saying this today (Reuters);

""I confirm my appeal for a summit in the coming weeks to set the foundations for a new international financial system," he said, adding that the meeting of the leaders of Britain, France, Germany and Italy would help to establish the agenda."

C H Douglas in his younger days:

" The so-called unemployment problem is really a problem of leisure"¦.The problem really is a problem, first of the distribution of purchasing power to those who are not required, and will decreasingly be required, in the industrial system, and secondly, of ensuring that the total purchasing distributed shall always be enough to pay for the goods and services for sale"¦.

We believe that the most pressing needs of the moment could be met by means of what we call a National Dividend. This would be provided by the creation of new money - by exactly the same methods as are now used by the banking system to create new money - and its distribution as purchasing power to the whole population"¦.this is not collection-by-taxation, because"¦the very rapid and drastic reduction of taxation is vitally important. The distribution by way of dividends of a certain amount of purchasing power, sufficient at any rate to attain a certain standard of self-respect, of health and of decency, is the first desideratum of the situation.

"¦The issue of a National Dividend would be a recognition of the fact that, if work is not available, [the worker]"¦has the right to an income sufficient for self respect and subsistence - as by right and not as a "dole.""¦.It is of course, suggested"¦that if you did that to any considerable extent without taking further steps, there would be a rise in prices"¦.But we propose that a further issue of credit be made for the purpose of lowering prices"¦.We propose to apply a certain proportion of the total created money to a reduction of prices. The public will thus pay a part of the price out of their own pockets in the ordinary way, and a part of the price will be paid by various means through the creation of national credit. The effect will be a drop in the price level, while at the same time the producer and the business man will not be losing money. They will enjoy the dividends and the increase in trade which comes from the ability to charge lower prices. They will not lose money as they would if they had to lower prices without the aid of the creation of national credit.

In that way we believe that it will be possible at one and the same time to increase purchasing power and to lower prices while preventing anything in the nature of what is called inflation. That covers in principle nearly all that we have to propose"¦.The great difficulty, of course, is that it is extraordinarily hard to bring sufficient pressure to bear upon this world-wide monopoly of credit "

I want to point out too, that this monopoly of Credit means that the experts will always refer to the banking/money system as sound, even if nukes are being launched because of it!
It is understandable, as it has created a system for a long long time where every piece of capital, every piece of work and energy, is ultimately owned by the few hands at the top of the money pyramid once all the layers are stripped back to the origin. Not only that, but we, the un-aware people with all our set in stone ideologies that we fight over, are meanwhile charged compounding interest year after year for the priviliege of being totally owned.

Many thanks Jim.

The velocity of money is used to explain an observable phenomen, namely that when people are expecting inflation this creates an increase in inflation. This is explained by the theory that people choose to spend money more quickly in inflationary times, in an attempt to avoid being left holding currency which is losing value. This increases the velocity of money and therefore the purchasing power in the economy increases, further devaluing the currency.

The social credit theory denies this theory as holding validity, so therefore an alternative explanation is needed to address the 'self-inforcing' inflation effect.

How would you explain this Jim?

DSC, please explain to me how I'm "confusing the matters at hand"?

DSC08 or should I say 'Democrat for Social Credit 2008' aka probably Iain Parker, I find Jim's comments insightful and not at all confusing the matters at hand that are important to me.

I am at a loss to understand even how you disagree with his comments?

The jury for me is still out on whether Social Credit is a better system or not, and the only way I am going to draw a conclusion is by properly understanding the basis for the theories.

DSC please show me where Douglas states that "[the worker]"¦has the right to an income sufficient for self respect and subsistence "

The size of the dividend is dependent on the ratio of capital appreciation/capital depreciation and has nothing to do with "an income sufficient for self respect and subsistence". How much income gives an individual "self respect"? Wouldn't this vary from individual to individual?

It seems to me that you are confusing the matter greatly, but I know you mean well.

Jim, my question is how would Social Credit deal with an economy where GDP is decreasing on a year after year basis?

Please refer to Chris Martenson, PHD (www.chrismartenson.com/crashcourse) for an explanation of why exponentially declining reserves of energy & resources interacting with exponentially growing population will result in a lowering standard of living for much of the world's population over the next 20 years.

Chris properly identifies that the current debt based monetary system relies upon exponential growth in the money supply which is a broken model if you have a declining standard of living over many years.

My thoughts are that Social Credit would need to be able to address this possibility if it were to be considered a contender for a fix to the debt based monetary system.

The risk of this happening is high, technology may come to the rescue to some extent but a model for the future must be sufficiently robust enough to cope with a future where economies are contracting.

Jim, you are entitled to, but to me, your posts which seek to clarify seem to raise more issues than they solve, if they solve many at all.
At least in amongst it all, you have managed to get out the driving source problem of the gap between sum prices of goods/services and income earnt in production of those i.e. deficiency of purchasing power, and the monetary reform Social Credit proposals of a National Dividend for purchasing power part of problem and Compensated Price method as being one of the alternatives for assistence on production side.

I am not going to get into a wrangling match n blog a dissertation over say a term like "self respect", why that might be important in a monetary system for people and poss. different examples of that etc..... i think it would be missing the point.

THe New Zealand National Dividend in plain sight in last GDP figres made available has recently been calculated, if fully paid out, as abit over $14k per citizen(tax free n inflation free-i.e. self liquidating)..and we have over 4 million citizens now.

THe quote of Douglas' comes from 1935 in a presentation he gave to the King of Norway. It is sourced from one of Richard C Cook's articles at global research websight, which if you hunt through them you'll be able to find.

Dubious.
I won't add my bit to your questions but essentially a money CREDIT system calibrated as a public utility grounded in measurements of the real economy, like the Social Credit model, will in the main self-adapt to many of the scenarios you have asked about and in the process show that many of those problems are not givens or being caused by what you thought.

I think there is a download of the Social Credit book on the web free, and if it hasn't been tampered with, that as well as Richard C Cook's writings alone should provide you with the basic answers or tools to address your questions.

Dubious,
source on the web Douglas' article/speech, not sure which, titled
THE DELUSION OF SUPER PRODUCTION.

it was written in 1918.

Dubious,
I'm glad you liked the Chris Martenson videos.
There appear to be only two types of person in this world:
1. Those who watch the videos and "get it".
2. Those who, for whatever reason do not, and don't "get it".

I'm sure you will also like these:

Prof. Albert Bartlett

The Most IMPORTANT Video You'll Ever See (parts 1 of 8 - great videos on basic economics, like what exponential growth is, 70 / % = years to double

Part 1: http://www.youtube.com/watch?v=F-QA2rkpBSY
Part 2: Pb3JI8F9LQQ
Part 3: CFyOw9IgtjY
Part 4: yQd-VGYX3-E
Part 5: qHuwgxrTKPo
Part 6: -3y7UlHdhAU
Part 7: RyseLQVpJEI
Part 8: VoiiVnQadwE

Basic mathematics which nicely demonstrates the basic limits to growth that we face.

How many minutes to 12 is it ?
Steve

Well,
Hi All, No DSC08 is not Iain Parker in disguise, I assure you I am he. Just goes to show what it takes to gain trust in this screwed up world. I have been working since 2am this morning, have just finished catching up with this thread, I am a bit fried, but will give it a shot. I to found http://www.chrismartenson.com/crashcourse a great resource to add to the collection.
I have for ten years now studied the history of the impact of currency and banking, markets, politics etc.
Jim - until stumbling across the NZDSC website 12 odd months ago, I was a frustrated man with not a clue how this banking pyramid scam could be stopped, I just knew that until it was, nothing much in the repeated cycles of history was going to change.
You seem more intent on preserving the ideals of the founder of Social Credit than adapting them with other ideas for a better result. In your eyes I am probably barstardising Social Credit, but in my eyes I chose the NZDSC because I believe those before me have taken the best of many things to come up with the only thing that I have seen that goes anywhere near being a sustainable, viable hope of societal stability. That said I request to start my case for a Debt Free Based Money System from here;
Debt Free Based Money System
I believe the past is relevant to understanding the present and improving the future.
I think all regulars on this blog know that the modern(300 odd years) Debt Based Monetary System which allows a small group of elitists to conjure up the worlds money supply out of fresh-air by way of a process known as Credit Creation and loan it out to everyone at compounding interest, has once again turned out to be another system of financial extortion with many levels and many devious products.

This does not need to be if we take the best of what has been before and discard the unfair;
If a nation who is currently in infrastructure deficit, cant afford to maintain its vital infrastructure because of its ever increasing debt servicing burden, or is adjudged under current criteria as foreign capital dependent, which is many, begins to spend its own money supply into circulation debt free at the first step in the money chain by way of the building/upgrading of and future maintenance of vital infrastructure, sustainable energy sources, roading, health, education etc it removes the burden of private bank interest having to be factored into everything we attempt to do or calling upon some multinational corporation to do it for profit alone.
This would allow us to do anything we needed that we have the human and physical resources for, any national project that was wished could be done, creating employment and truly free public services. First home owner loans of 1% and 1% local government loans for worthy local projects would come from the reclaimed Reserve Bank also. This would not be inflationary or cause over consumption as far more care is taken to keep a connect between available human and physical resources than is being given any consideration at present. As resources depleted, the system would adjust down with them, whilst at the same time making any technological development programs affordable. As fossil fuels inevitably disappear it would allow an orderly decentralization of services and population to areas closer to means of production.
Capital Adequacy Requirements will be lifted slowly and orderly at the same time and control of the amount of interest that the financial sector can charge, either by competition from our national bank (Kiwibank) or regulation, all interest to become simple interest as opposed to compounding interest. Borrowing reserves short and lending created credit long with its inherant flaws would be alleviated. These steps will immediately begin to lift living standards and increase savings, which would still be loaned for growth expansion through the commercial banking sector, but at far lower cost, larger deposits required and a steady sustainable rate.
As our own money enters circulation, backed by the utilization of our own resources, we begin to pay down our foreign debt as it becomes due. As our debt repayment obligations reduce, we can reduce taxes/rates across the board. Eventually doing away with GST. Reducing income tax to a minimum.
A surcharge tax on foreign corporate or foreign exchange speculation would be applied to make it less attractive to those that invest here with no longterm social intent, making our companies affordable to a more fair-minded ownership. If they did not want the projects offering fair and reasonable profits in a stable thriving nation, then we would do it ourselves. The adopted these measures in Malaysia against the IMF advise during the Asian crisis and the investors still came and Malaysia came through the most unscathed of them all.
If inflation were to begin to occur, money can be taken out of circulation by way of tax increases or reducing or increasing the term of the simple interest loans. This would not increase the overall cost to the borrower, but would alter their expendable income.
This system would not prevent the harder working person from accumulating more of the means of exchange than the less motivated. I also believe that once the many debt related hurdles are removed from in front of the average Kiwi, they would thrive when they can physically see themselves getting ahead. I believe this would create longterm peace and stability and lift the living standards of all. I also believe if this nation was to take its place as the greatest opportunity in history and become a system of equal opportunity, many Kiwi's would come home from abroad.
Also if we do restore equal opportunity, I am all for increased responsibility and a hard line on crime, because there would be no more legitimate excuses.
Those that worry about trade, you need not, once one nation did this, many would follow. There are already many nations out there making waves against this present system. An alternative clearing house for fair trade would soon develop. Lets face it, when the same goods are crossing in the middle of the ocean on ships going to the port from which the other left, who profits the most from that pointless exercise, the central banking network, that's who.
There is a myriad of other policy that would have to accompany it, which NZDSC having been around for fifty years has amply covered, but this is the guts of attending to what has been the common denominator in almost every human upheaval. I believe the nationwide financial destress that would follow the implementation of a Debt Free Based Money System would naturally assist in the reduction of a lot of the societal ills associated with financial stress.

There you go, seems plain and simple to me, no need for ap = q + h, maybe I'll email it to congress.

DSC, the quotations from Douglas and what you state about the size of the dividend are two different things. I've read Money and the Price System many times.

http://www.alor.org/Library/Money%20and%20the%20Price%20System.htm#1a

Dubious is trying to come to an understanding of the principles of Social Credit, which you and Iain are not promoting. It is Iain and yourself that are confusing the matter, by introducing a hodge podge of monetary reform ideas that are completely inconsistent with Social Credit. That is why there is great confusion on this subject.

Interest is bank profit. As Douglas said, those who support zero interest loans are "propagandists for totaltarianism", because they are really socialists, but fail to recognize it. In fact, by only condemning bank profit, and not the entire profit system, they are termed "monetary cranks" by socialists themselves.

Like Douglas said, nobody does something unless it is in some sense of the word profitable to him. Banks are the world's bookeepers, and banks have costs and a right to earn a profit.

Well it is a Douglas quote i'm afraid Jim, to a KING no less.....and is completely consistent with his emphasis on systems being made for people, not people for systems.

The interest issue has been explained and you are making extremely false accusations and associations.

I know what you are getting at with the national dividend, it is dynamic.
If for whatever unlikely bad circumstances it nosedived( and as you must know, capital appreciation far exceeds depreciation to put it in terms you like) , my inclinations are for a guaranted basic income top up approach via tax to make basic neccessities not a priviledge in order to have the flowing benefits of social cohesion and personal freedom that inevitably exist in a just society.

DSC, I have confused some of your posts with Iain's and I apologize for that.

In terms of the size of the dividend, you are correct that Douglas did say that in a SPEECH before the King of Norway. What is stated in a speech, and the actual determining factor for a dividend are two different things.

Douglas said these things because there was no doubt at the time, and even at this time, the size of the rebate could be made in such a way that it gives the person income sufficient for self respect and subsistence. However; that is not the JUSTIFICATION for the dividend. The justification is that capital appreciation is greater than capital depreciation, and if the ratio of apprecation/depreciation were ever unity or less, then there would be no dividend. To believe that the justification is "self -respect and subsistence leads to errornous beliefs that the dividend could be funded through taxation. Douglas never advocated the funding of a dividend through taxation. That's socialism!

Also, Douglas never advocated that money be spent into circulation by the goverment to close the gap between income and prices. That's more akin to Keynsianism. If the government ever gets ahold of the "goose that lays the golden eggs", the consumer will never have any money distributed to him via a dividend or price rebate, but will be forced to do the government's bidding. Again, this is socialism, not Social Credit.

Further, Douglas did not attack the charging of interest on loans, nor did he advocate zero interest loans. Interest is merely bank profit, and every organization has a right to make a profit. Banks have real costs associated with their activities.

I'll get you the info Jim, for the New Zealand "national dividend" as a courtesy but it is the New Zealand Democrats for Social Credit party and i'd appreciate your respect of that fact, especially in regards to our National Dividend.
It's unfortunate what happened with your S.C. party but I'd prefer DSC makes it's own destiny thanks.

I am personally very sympathetic to just wanting to stick to the national dividend and price rebate model, as once implemented they are less dependent on the vagaries of politics and i too have come to be leaning towards just distributing the purchasing power directly to the people as much as possible because of that, as well as being very curious as to just how well those two things alone would solve problems as Douglas advocated for, and you have to have a great deal of respect for him.

However, other monetary reform practices have been very successful in the past, they are easier for more people to grasp, and the one area where i disagree with Douglas is implementing structures that people don't understand ( much like the current monetary structure which many people havn't got a clue about and even fewer about coherent alternatives) in order to em-power the whole society at large, . Ultimately, people have to have a vague idea of what they are benefitting or it won't last long, and if Douglas' two mechanisms are truely all that is required, and i don't dis-count that possibility, then this will present itself to people once you get on the general track.

As to interest, you are missing the point of what has been blogged, it is not contradicting where you are coming from.

AS you know, the tax burden will be dramtically decreased with out the current private compounding debt burden, so the guaranteed basic income would add to the national dividend in hard times without the citizenery being subjected to heavy burdens of tax-And it is a system made for people, not other way around.
Many of Douglas' essays were written or published in the context of being an advanced form of socialism i think(off hand don't know the name of the publication), which doesn''t imply support for the prevailing kind, although that is my preference if only other choice were finance capitalism to be honest, but there is some shared ground there with the emphasis on a shared community brought to fruition through SOCIAL CREDIT......not private compounding debt.

Hi DSC:

I understand that you want to chart your own course, and I'm actually hopeful that you can. However, everything I see in terms of the course seems very similar to what happened in Alberta and the Social Credit Parties in Canada. However; I do wish you luck in the upcoming election, and I do appreciate the fact that you and Iain are promoting Social Credit in New Zealand. In fact, I came across Iain's podcasts, wrote him an email, and linked those podcasts in the article on Social Credit at Wikipedia.

I must ask you to produce anything where Douglas states that Social Credit is a "higher form of Socialism".

However; I'd like to stick to the task at hand and explain Social Credit to those who are unfamiliar with it. In this circumstance, I must ask that you differentiate the Democrats for Social Credit policies from Social Credit, because I do believe that it's confusing for those who do not understand the difference.

While I agree that other monetary reform proposals are easier to grasp, I do not agree that they've been successful. Keynsianism is inflationary. Gesell's disappearing money is the heaviest form of continuous taxation ever devised. Zero interest loans are a misnomer, as someone ultimately has to pay the costs of bank administration for those loans.

You say that interest on the debt is a heavy tax burden, and I agree. However; which came first, the debt, or the interest? Social Crediters propose to eliminate the debt. No debt, no interest on debt, no heavy taxation. Are you familiar with the term "root cause analysis"?

Hi Dubious

In reply to your comment dated October 1st, 2008 at 10:20 pm:

1. Credit expansion and expansion of the economy are highly positively correlated. When credit is used predominantly for production as against consumption, the real growth occurs. No credit no growth.

2. When credit is misued, problems start. Central banks must play a greater role here rather than leaving it to the free market. For example, it wouldn't have been too hard for RBNZ to impose on banks to seek a higher margin for mortgages (instead of just increasing the OCR).

3. Without credit, there is no freedom to be entrepreneurial. Social credit system will produce only traders and not entrepreneurs.

4. It is immpossible dileneate credit from debt. Any credit or debt involves risks. Individuals may not manage risks well but insitutions can.

5. No system can be perfect. The current problems call for governmental and central level controls to be bulit into the monetory system. The social credit system is not a remedy. It will simply kill the growth driven economy, and will lead to primitive trade based old lifestyle.

Sam when credit is used to pay for product that enables additional production, guess what happens?
Duh!
When credit is un-affordable guess what happens?

Credit has to be a public utility if to not eat everything else, and entrepreneurialism only requires centralisation when demanded, not dictated.
All of which Social Credit takes into account.

The so called A+B theorem is too naive. The value of output (Q) and prices (P) can never be a fixed quantity. If they become fixed. who fixes it? Free markets can alone determine what Q and P can be at a given point of time but they can never remain constant. The variables in A+B theorem are stochastic variables, involving huge errors in measurement, and hence cannot be approximated by a simplistic equation.

The A+B theorem assumes that there is one currency and one natation etc. Markets extend beyond a single country. So many economic and social variables are ignored in the socalled A+B theorem.

Credit is like knife. If credit is used for consumption as against production, problems begin. This is precisely going on now. Markets will correct; sometime causing pain to a particular section of the society or country.

Both society and economy organically integrate; make mistakes; learn, correct and evolve. Free market economy matches well with the freedom of human beings. It may not work with all cultures but must fit well with democractic cultures.

DSC, you're absolutely wrong about Douglas and zero interest loans.

The following is a quote from him in the "Social Creditor"

"The rapturous iconoclasm of certain groups of monetary reformers', to whom Usury", the sparring-partner of the bankers "inflation" is the Scarlet Woman of Babylon, has had the inevitable effect of encouraging the financial authorities to abolish, for practical purposes, the interest paid on undrawn current balances, and deposit accounts. We do not say they would not have done it anyway - the one thoroughly sound feature of the banking system was its dividends to shareholders and its interest payments to depositors which I jointly with the insignificant mint issues, provided almost the only fresh unattached purchasing-power. It is obviously lost time to beg of our amateur currency experts to consider whether they really mean what they ask, which is, the replacement of unattached purchasing-power by loans. But they must not complain if we, and others with us, regard them as propagandists for totalitarianism. "
The Social Creditor, Oct. 27, 1945.

Jim....... i bloggged zero-interest loans by mistake and corrected it in following post if you had only taken the time to read, which if you had, would once again have found i am in no way advocating the purging of legitimate interest and the purchasing power this creates and distributes.

Jim

One thing I am struggling with a little, is the following:

In Social Credit, the national dividend and price-rebate balance purchasing power with production. This, if it were technically possible to do in an accurate manner, would remove inflationary/deflationary tendencies from the currency.

This would in effect be some fairly heavy and consistent distribution of new money by the authority.

However, if banks could still loan money then the credit expansion effect would still exist and therefore the new money could end up being strongly inflationary, as the ability to borrow to consume could end up pushing purchasing power above A+B.

What are your thoughts on this?

I believe the savings effect basically would quickly increase the consumption of leisure instead of natural resources in the growth of the economy.
Also it would decrease the amount of purchasing power being distributed by interest mechanism from loans, and this is where people would be confused, for this is taking away from overall cost due to efficiency of Social Credit economy, and thus is anti-inflationary also.

DSC, I didn't have time this morning to read your second post. Sorry for the confusion.

I agree there is a difference between "usury", or the charging of excessive rates of interest, and the normal profit that any organization would expect to receive (i.e. banks included). Most countries already have usury laws.

Dubious, as to your comment on savings, some people save money while others are spending their savings. The only time savings becomes a real issue from a macroeconomic perspective is when it is increasing. The main reason why people save now is fear due to economic uncertainty (i.e. "saving for a rainy day"). This fear would be removed in a Social Credit society, so instead of savings, you would most likely see people increasingly consuming leisure as DSC points out.

Dubious.
Increased savings will decrease demand for loans, either in process of creating product or consumption of.
The availibility of credit in the Social Credit economy will off course provide more opportunity to individuals to expand their personal wealth through enterprise-that is a big part of the point inherent to it-, but their enterprise will still be judged by the demand and supply in the society in the determination of its profitability (they will be competing against the increased availability of leisure also) and they will individually bear the consequences.

The increased distribution and creation of wealth via National Dividend, price compensation mechanisms or substitutions to that effect(yes Jim, i know last one slightly more in-efficient & pushs boundry of doctrine..) will establish equilibrium with production as more growth is able to be consumed on leisure(signified by increased savingsto draw on), again being anti-inflationary.

"Increased savings will create deflationary effects, but only if the money is not lent out"

exactly.
first statement of mine above your post:..."Increased savings will decrease demand for loans, either in process of creating product or consumption of."

And as has been covered, national dividend n price compensation r dynamic to Social Credit economy which by neccesity is reflecting values of real tangible wealth due to negation of private compounding Debt aspect dictating value system via filling purchasing power gap year after year.

Dubious you blogged in one of your earlier entries above:
"The current system where all money is loaned into existence automatically leads to distortions because new money enters the system as a cost, and all costs are reflected in prices. The effect is continually increasing prices (inflation) and continually increasing debt. "

Now you have the pip and claim to not understand:
"And as has been covered, national dividend n price compensation r dynamic to Social Credit economy which by neccesity is reflecting values of real tangible wealth due to negation of private compounding Debt aspect dictating value system via filling purchasing power gap year after year."

It is the same point.

I think the main thrust of Social Credit monetary reform has been covered quite adequately in this thread, thank you for the opportunity for that, and if people choose not to understand for ideological reasons or personal issues that is their prerogative.

Dubious:

The money distributed by the National Credit Authority to the consumer cannot be used as reserves, and they cannot magically change into reserves. Reserves are cash and coin,deposits held by the commercial bank at the central bank, or government securities. These reserves would still be lent into existence as they are now.

You failed to differentiate between savings, and reinvenstment of savings. These are two totally different concepts. Again, people would be free to invest or save in a Social Credit society. Reinvestment of savings creates a new cost without creating fresh purchasing power, and thus is also a contributor to the gap between purchasing power and prices. However; the compensated price and national dividend are designed to correct for this gap. I still don't understand what you're driving at here.
People would be free to save and invest in a Social Credit society.

While I do not understand what you are driving at with savings and investment, because people would still be allowed to save and invest in a Social Credit society, I will discuss with you the effects of savings at any time, but I do believe this to be a "red herring".

"The persistence of the idea that monetary savings has a physical counterpart in physical accumulation will no doubt exercise the attention of historians of the present period." (C.H. Douglas, "The Monopoly of Credit")

"My points are not contradictory. Money entering the system outside of the cost centres can also lead to inflation. That is an axiom. " (Dubious)

It can if too much is created. I still don't see your point? At that point the inflationary effects may reverse some of the price reducing effects of the rebate, but not to the point where they are greater than the rebate, because if that were true, then there would be absolutely no reason for the rebate, because consumption=production (or potential production).

The whole point of the rebate is to LOWER PRICES at the point of retail, not to inflate them.

The math above was incorrect. I was writing that first thing this morning.

If the price rebate was set at 1/2 and it should have been 3/4 then the size of the rebate is 50% too large, and retailers would inflate their prices to $150, which means that the consumer would pay $150 * 1/2 = $75, which is still less than the $100 he would have originally paid.

In other words, even if too much money is pumped into the system through an error by the Credit Authority in measuring aggregate consumption and production statistics, the negating effects of the rebate in terms of prices will always be greater than the inflating effects of the rebate if it is too large. This will always be true for all circumstances where consumption < producton (or potential production).

I have only a few minutes or I will be divorced, but we will give it a shot.
You guys are beginning to become those that examine goodthings to death, by creating that much static you destroy the original simple effective idea. Jim you are adding static here by throwing in your obssesive preservation of everything CH Douglas,
where as, thanks to contacts on this blog, I have realised that although NZDSC is our vehicle, we have refined to become more aligned with the entire historical movement for a Debt Free Based Public Money System encompassing the study all the alternatives of history, as opposed to Debt Based Private Money System that has predominated.
At present Credit/Money is created at two levels, the externally by Private Central Banks that lend to nations and internally by the Commercial Banking Sector who expand it further within nations. Currently we pledge future taxes of the nation for externally created credit at interest, then spend it into circulation as a cost to society. A Debt Free Based Public Money System(DBPMS) would see the nation remove the cost of external interest having to to factored into everything down the chain, by the nation taking back the right to be the creator of its own money supply from the private central banks and spending its own debt free money into circulation, at the first step only, by paying for the building and future maintanence of its vital infrastructure. Worthy local governments projects would be also funded by low interest loans from the national monetary authority and first home buyer loans. At the same time Capital Adequacy Requirements for internal Deposit Taking Institutes would eventually be lifted to 100%, for every dollar taken in by internal Deposit Taking Institutes 50c must be held in reserve with the monetary authority, meaning they can never loan(create) more than they have cover for. Compounding interest would be replaced with simple interest. The only creation of money takes place at the first step by productive means, regulated by available resources. The internal Commercial Banking Sector cannot any longer create credit, but can fund a sustainable economy by redistributing savings for a fair administration fee and non userous interest rates. As we pay down our current massive external debts, the need for tax revenues that are currently servicing those external loans will decrease, allowing us to decrease taxes, rates, fees and levies across the board. Dramatically increasing living standards across the board as money is returned to a service to society, not a cost(thanks Dubious, that best little explanation)
By connecting the only created money in the system to available resources and removing money creation from the internal banking system, a sustainable Real system should result with very few inflationary pressures, which if did occur would be easily controlled by the decreasing of repayment period or small increase in already massively reduced tax rates. The system would also be protected from speculative foreign created credit by external surcharge taxes at higher levels than internal taxes.
A national dividend replacing benefits would only be at a level to offer subsistence, not a holiday lifestyle, the national dividend would only be increased at the rate that business reinvestment in automation reduced the need for human labour, thus available employment. The biggest issue facing a DFPMS would be the fact that at some stage the human family as a whole is going to have to have a talk about family planning so we do not exceed our available resources.
Mother nature will determine how long we stay on this planet, we can only control how enjoyable that stay will be. Whether you believe we were created or evolved, I think most would agree our recorded behaviour thus far has been disgusting.

"Jim you are adding static here by throwing in your obssesive preservation of everything CH Douglas,
where as, thanks to contacts on this blog, I have realised that although NZDSC is our vehicle, we have refined to become more aligned with the entire historical movement for a Debt Free Based Public Money System encompassing the study all the alternatives of history, as opposed to Debt Based Private Money System that has predominated." (Iain)

Iain, C.H. Douglas IS Social Credit, so let's not confuse the Democrats for Social Credit policies with actually Social Credit - that is static, and confusing to anyone trying to understand the principles of Social Credit.

Secondly, I'll be more than happy to debate the fallacies associated with zero interest loans, or the belief that interest is the root of all evil. A bank cannot operate without profit, and interest on loans is the only way that a bank can earn a profit and recover its costs (believe it or not, there is real costs with administering loans).

Thirdly, you seem obsessed about what type of administration actually creates money (i.e. whether the government or privately owned institutions). Following is a quote by Douglas:

FUTILITY OF BANK NATIONALIZATION

If you are willing to admit that this ownership is justified there is nothing to be said; but if you are not - and I do not suppose in Northern Ireland (where there seems to remain a spark of that independent character which is apparently disappearing in England) that you are - do not be misled by any such phrase as 'The nationalization of banking.' The State and the banking system are very nearly one and the same thing at the present time and are wholly one in policy.

While the Bank of England is a private bank owned by international financiers, the Treasury plays straight into its hands, and the nationalization of, for instance, the Bank of England, would mean the transfer of the Treasury into the Bank of England rather than the transfer of the Bank of England into the Treasury.

The Commonwealth Bank of Australia is a Government Bank, but its policy is identical with the policy of the Bank of England; and the same comment is applicable to the Bank of New Zealand, which has just been nationalized with the able assistance of its governor (who was sent out from the Bank of England to do the job), and the Bank of Canada.

No nationalization of banking will put one penny into the hands of the individuals comprising the countries over whom it rules, so long as this question of the ownership of money is left unaltered. But if it once be admitted that the community, not the Government, is the owner of the money, and the individual, as part of the community, is entitled to his share of it, the situation is obviously very different. "

http://www.alor.org/Library/Dictatorshipbytaxation.htm#1a

David, read when that speech was given.

The Ulster Hall, Belfast, 24th November 1936.

What Douglas stated in terms of the Bank of England and Australia's central bank were true at the time it was stated, and what he says about the nationalization of banks is still true today. I posted the link below the quote.

Do a little research before you spew ad-hominem.

Dear All,

I have been away this week but i had hoped this wouldnt degenerate into a debate over social credit.

alas it has :-(

this is why social credit has made no headway in the mainstream.

this is why i believe incremental changes are best.

so i am proposing a move towards 30% of the money supply being debt free money created as Mo currently is.

banks may continue to act as normal but in a vastly reduced structure of leverage with the overall money supply being expanded on an agreed limit (much as we do with the CPI currently).

perhaps it is best to focus on specific proposals rather than philosophical battles which have been played out ad infinitum for the last 70 years :-)

My view point is that the reserve ratio would sort itself out when or if the driving catalyst of how Credit is organised/injected into the economy is resolved.
While the Social Credit approach as blogged in this thread would be the ultimate stabilizer for that, as well as delivering the best outcomes to individuals i will welcome any moves towards that direction.

All that is required is a viable media information system where the Social Credit POV is allowed to be aired alongside a new public credit course of action, once this starts to happen the validity of the model's relevance in the course of the trial and error public credit approach will become more and more apparent.

I will resist from any more posts and thank you to all who have taken the time to read this thread.

I have to go to work right now, but trust me Jim, I will get back to. Have you ever heard of the word Denomination of, or adapting for a wider cause of good. I think I can see why you have trouble maintaining relationships in a Democratic environment, because with you, it is everything your way, or destroy every semblance of good of the whole concept. NZDSC is the only vehicle in this country even offering to inform of, let alone reform our current extortive monetary policy, so thats what we have to use, plain and simple. How many times do have to say we are not fundamental Social Credit, but a Denomination of, with ideas from every Debt Free Based Public Money System ever successfully implemented in the past. Debt Free BASED, not zero interest throughout the system, which would have been obvious if you had taken the time to actually read a bloody thing I have written, rather than skim it in your haste to get your next C H Douglas promoting post up and running. If you persist with this line, the question will have to be asked, just what interests you do work for?
I will refute with ample evidence every attempt you are making to associate us with failed Socialism or Communism of the past.

Iain, if someone wants to pay me for the time and effort that I've put into Social Credit, I'd certainly appreciate it. The truth is that I've dedicated my life to this movement because I believe that C.H. Douglas perhaps the greatest economists of all time (even though he was an engineer by profession), and I also believe that his policies are the only way to save us from economic suicide.

What I especially take issue with in terms of the NZSD party is that they call themselves "Social Credit". They are NOT promoting Social Credit. If you want to promote socialism, or lincoln's "greenback" movement or any other movement, then go ahead. I will still show the error of this thinking, but at least this is not deceitful.

To promote something other than Social Credit and call it Social Credit is highly dishonest!

You call me a "fundamentalist", but over the years of study, I see exactly why Social Crediters do not want to be associated with these other movements. They either will not work, or they are a form of socialism, which is the philosophical ANTITHESIS of Social Credit. DSC even stated in a previous post that Social Credit is a "higher form of Socialism". Douglas was HIGHLY critical of all forms of socialism. I could pull scads of quotes from Douglas in relation to Socialism, but do not have the time tonight.

Introducing "debt free money" by the government spending it into circulation is an old "greenback" policy. Of course, the government will keep us all busy bees as we are controlled by the currency that they create in order to do their bidding. God forbid that the government should give the money directly to INDIVIDUALS !!!!

Tell me the difference between debt free money spent into circulation for infrastructure and zero interest loans to the government for infrastructure when governments can roll over loans?

You know what Jim,

Checked the IP's and they don't match. Fake dsc08 you are banned.

Bryan Spondre
Blog Producer

cmon Bryan have a sense of humour! This fellow ought to be spending his time investigating ufo's his powers are wasted debating social credit. Perhaps I could suggest his socialist agenda would be more appropriate on http://unrepentantcommunist.blogspot.com/

no offence comrade :)

fake, FYI I don't have a sense of humour. Posting under someone elses pseudonym is trolling and not acceptable. Please don't do it again it just makes work for me & I'm already busy enough.

You are un-banned.

Bryan Spondre
Blog Producer

Dubious, the above was a typical example of the so called arguments against Social Credit. These people cannot find flaw in the ideas, so they resort to ad-hominem attacks either against the person forwarding the message, or against Douglas himself.

DSC, I don't know what opinions were yours or an imposters, so if I confused your opinion's with an imposter's I apologize.

Hi All,
I will start with an apology, with working 10-14 hours a day and trying run and fund my own election campaign, I am a little more ornery than I like to be.
This thread was a great opportunity for something really positive and meaningful. We have a number of people who have put more of the pieces of the puzzle re international fiscal and monetary policy than quite probably no more than about 5% of the entire worlds population. We may not agree on all, but I have learned a lot from many on this sight, and I hope I may have alerted someone to something they may not have been aware of. I think we at least agree the current system is fundamentally flawed and I reckon using the old pluses exceeding minuses theory. The pluses exceed the minuses for me for all on this sight but the most hard arsed law of the jungle, magic of the market, slave-minded elitists. We can get caught in the trap of analyzing the technicalities to death and have it die a natural or face the reality that unless you put any suggestions in a salable package to first attract a party of people sufficiently motivated to promote it widely, secondly in such manner that the wider populous can understand and support it, we will be wasting our time as society continues to crumble around our arguing ears. Lets keep this in the area of Fiscal and Monetary policy for now, as I would debate it is the glue that holds it all together or sees it all fall apart.
Someone has to be the first to risk ridicule putting forth some sort of step by step understandable package of measures that they believe will improve things for the better. I decided it might as well be me. So people can weigh up my pluses and my minuses and try and debate improvement. So what I would like to see from everyone is their complete understandable saleable package, step by step plan, in a length that can hold interest. So then we can all weigh up the pluses and the minuses. You never know, we might ascertain that we agree on far more than we thought we disagree on. Away again at three in the morning, I look forward to being part of intelligent minds finding a way forward.
Cheers
Iain

Ridicule and knock backs are just part of the process of change. New ideas should always be scrutinised and challenged.

I've just had a climate change paper published in "The Environmentalist" magazine in the UK. It had been rejected by the Journal of Climate Change as being too grand and not acceptable to the powers that be. It took 4 years to get published. That's just the way it is. Old ideas are heavily guarded and protected as we live in a tightly controlled and regulated world, a world that is slowly crumbling before our eyes.

The battle for a better money system has been going on since time began. All the information is out there but given its importance in our societal foundation the lack of education around money (and i don't mean financial literacy) is woeful.

So i propose the following. Feel free to ridicule :-)

- All money is created by a state based monetary authority and paid out to all citizens in the form of an unconditional income.
- the money supply will be expanded (or contracted) within agreed limits.
- Banks will become intermediaries in a new network of Peer to Peer lending or be overtaken by new p2p structures.
- Tax (if needed) will be collected on land and consumption and not income.

We will then get on with building a productive society and address the real challenge of resource depletion.

Hi Iain:

Yes, there is something fundamentally flawed with the current monetary system, but it's essential to determine flaw correctly. It's not just a matter of throwing out a whole range of monetary reform ideas. Some are quite simply technically incorrect, while others are philosophically incorrect (at least if you believe as Social Crediters that systems were made for man, and not man for systems).

The problem is complex, and that is why it takes time to understand it. This does not mean that the average person needs to understand the technical details. All they have to understand is that Social Credit will give them a dividend and a price rebate, and whether they want that. It is up to our "experts" to debate their "experts" to show that not only is there a flaw, but that these solutions are the only solution to that flaw. The person's door you knock on does not have to understand the mechanics of money expansion, and Douglas's A+B theorem. The results of the flaw are there for everyone to see - ever increasing debt.

All you have to tell people is that Douglas demonstrated that prices increase faster than incomes, and the result is ever increasing debt. In order to rectify this problem, consumers must be given a dividend and price rebate with monies which do not derive from the productive system and hence form a part of costs.

I'll leave off with a quote from Soren Kierkegaard:

"Truth always rests with the minority, and the minority is always stronger than the majority, because the minority is generally formed by those who really have an opinion, while the strength of a majority is illusory, formed by the gangs who have no opinion -- and who, therefore, in the next instant (when it is evident that the minority is the stronger) assume its opinion... while truth again reverts to a new minority."

Party politics is not the vehicle to promote Social Credit. All policies within a political party are determined by the majority. Social Credit rejects ballot box democracy.

JEEZ Jim what are u saying..????

"Party politics is not the vehicle to promote Social Credit. All policies within a political party are determined by the majority. Social Credit rejects ballot box democracy."

What other kind of democracy is there.......??????

Alexander Solzhenitsyn , the famous Author and Gulag survivor, would probably say that democracy is the only system that keeps the corruptive influence of power in check..... (somewhat)

I agree with David... Here was a chance to explain , in understandable terms , a debt free money money system .. u are blowing it.

Maybe if Douglas was re-interpreted in the Venacular of todays use of simple english...it would be more understandable...?????

You also said in one of your posts:
"You call me a "fundamentalist", but over the years of study, I see exactly why Social Crediters do not want to be associated with these other movements. They either will not work, or they are a form of socialism, which is the philosophical ANTITHESIS of Social Credit. DSC even stated in a previous post that Social Credit is a "higher form of Socialism". Douglas was HIGHLY critical of all forms of socialism. I could pull scads of quotes from Douglas in relation to Socialism, but do not have the time tonight."

Who cares what Douglas thought of Socialism.. ??? Are u a Douglas Disciple..??
Why are u such a purist (dogmatic)...???? Douglas ,surely , is no different to Keynes, Marx, Smith, George, Friedman, hayek....?????
All of these people had some very good ideas..... Nobody has a monopoly on truth.
AND any system that holds itself up as "knowing it all"...is dangerous, and unable to learn and change.

AND Freedom is like oxygen.... we only value it when we haven't got it...... Ballot box Democracy is the best system we have to be relatively free....??????

In theory a Fiat money system should work.... but it is the human side of it that stuffs things up... and always will.

I would like to add that I deplore the fact that this thread has become a slanging match predominated by Social Credit talk, I really hoped it would be a feild of wider ideas from many perspectives of people who all atleast seem to agree that the current Debt Based Private System is flawed, in a hope that we might be able to come up with a consensus on a plusses and minuses scale that could see a Debt Free Based Public Money System as a decent alternative. This can't be acheived without first getting a complete picture of your suggestions. So come on everyone. Trust me when I say, I do not care under just what banner a Debt Free Public Money System occurs, as agreed to by consensus, I only care that it oneday gets done again, because I passionately feel from my studies of when it has been done in the past, it is the only decent alternative.

I just found your debate here whilst via Google and this is something that has occupied my own thinking for a few months.

It is interesting that you are discussing Douglas as he was born in my home town. I've read a bit about Douglas's Social credit movement and it does present some very interesting ideas. Whether it is workable or not I am unconvinced but it does present a shot at getting money into a countries economy, debt free. I do see the issue of getting a permanent money supply within a country as key in resolving the central flaw at the centre of the financial system. Bank created, interest bearing generating, temporary money is what has driven us into the present crisis imv.

The idea of using so called hard money like gold backed money seems quite ridiculous. Apart from historic reasons why should gold be singled out? I can see no reason to adopt gold again. But having money coming into societies and backing physical assets to some extent does seem better than the social credit people's dividend. And it does have a natural choke effect so it does not go into hyper-inflation domains.

I make no claim that is the best idea but I was thinking along the lines of using something similar to what the present system uses to bring money into the society in a controlled way. I was thinking along the lines of government nationalising the provision of all residential mortgage lending and providing the new style mortgages interest free. i.e. every £ $ Euro etc that was paid back was reducing the amount owed. And the money that was paid back would form a beginnings of a non interest bearing permanent money supply within the countries. Thus money would not grow massively and have a physical asset that was linked to this money.

When you think into this in any depth I am sure you can come up with upmteen gotchas that are undesireable consquences or other problems but can they be mitigated or adpated to? I dont know.

Something similar could also be done with government infrastructure loans. i.e. the government would lend itself money at zero % and use taxes to repay just this principal with repayments reducing the balance owed and this money sticking around as part of the permanent money supply within a country or region. This is a kind of crude outline of what I think could form the kernel of an evolving system that progressively migrates to a NON debt based financial system.

One thing I am pretty certain of is that the getting from where we are to a new system is the main challenge. The ugly, evil system we have now is adapted to by the masses and getting that mindset moved along with the massive education needed is very big challenge indeed. With the unravelling of the financial systems that we see around the globe now there is no better opportunity to get these ideas out and discussed/considered.

"Good on ya Jim, just when intelligent minds were beginning to once again move forward, you attempt to stop it in its tracks. I once again challenge you, if you were to gain a position of influence today give us your step by step fiscal and monetary plan to improve upon the current model that you agree is flawed. Then we might be able to ascertain where youre coming from, because right know you are sounding like dictortorial control freak." (Iain)

Iain, I've taken the time to explain Social Credit and the monetary solutions to the problem in several posts, but you seem so intent on promoting your own agenda (under the name of Social Credit), that it is obvious you have not listened. You are free to forward any suggestion you wish, but don't expect me to agree with it.

However; you've already made up your mind, so my time here would be a waste of time. I've accomplished my mission by explaining Social Credit to Dubious. Explaining it to you would be a waste of my time. I do take exception to the fact that you will continue to promote your ideas as "Social Credit" in order to give them legitimacy.

In no way am I a "control freak". You're free to think and act for yourself. I'm here to actually promote Social Credit solutions to the current monetary crises, and part of that is rejecting "greenback", "Keynsian", or "gold standard" suggestions for "reform". Social Credit is completely incompatible with these ideas, and if you don't understand that, then you don't understand Social Credit.

Thanks Raf, makes simple sense to me. Jim I have studied Debt Free Based Public Money Systems for many years and only recently stumbled across NZDSC which is the only party looking to inform, let alone reform the NZ Debt Based Private Money System.
It is to close to the election to change names now, but depending on the outcome, I will be using this as a case study as to why we should change our name to reflect our modern stance on monetary reform and free ourselves of the impact of attacks from people like Jim who says things like these "Party politics is not the vehicle to promote Social Credit. All policies within a political party are determined by the majority. Social Credit rejects ballot box democracy."
Because on that Jim, we will most definitely have to agree to disagree.

Andrew in Ngaio -

not sure exactly where you're coming from. The current money supply is printed out of thin air. It's just that the banks do it, rather than the government, and they attach interest to it for the privilege.

If you don't understand this then you need to do some reading. It is a fact.

Well actually no-one on here has promoted willy-nilly printing of money, so I had to interpret your comments within the context of the thread.

The alternative suggestions to banks creating credit for our currency discussed on this thread involve linking the creation of currency to growth in the productive capacity.

Andrew i think you're missing the point here.

1) We are focusing on NZ as it has the best chance of any country in the world to change the money system.

2) All currencies all over the world are fiat (paper) based. I have Mickey Mouse $ from Disneyland...its the same concept.

3) The distinction being made here is between fiat money created interest free by a monetary authority subject to money supply targets and credit money created with interest by banks who are subject to capital ratio controls which are quite easy to leverage up.

You may be happy to pay banks for the privilege of creating interest bearing money but i, for one, am not.

There is a better way and it is coming to a place near you shortly :-)

Andrew in Ngaio

It is not the velocity of money that creates the money supply.

Nor do banks borrow short and lend long. They borrow short and write 'negotiable instruments' long.

Banks create credit by the mutual exchange of liabilities. Deposits in bank accounts are not government money. They are negotiable instruments from the bank which can be exchanged for government money on demand. When the bank wants to write a new loan, they only require a fraction of the total amount promised to be held in real money. Even if they are restricted to writing new deposits against existing deposits, they are still creating IOU's on IOU's on IOU's.

Money should be a neutral medium of exchange, to allow the free and efficient flow of capital into productive areas. The current system distorts that because currency is loaned into existence.

If banks were required to actually loan money, i.e. transfer their reserves to the counterparty of a loan, credit expansion would not exist.

But as 97% of the currency at present is bank created credit, there would need to be an alternative. Government would need to create the currency interest free and place it in circulation somehow.

Two resources which I found very helpful are 'Modern Money Mechanics' (Federal Reserve Chicago) - http://landru.i-link-2.net/monques/mmm2.html and 'The Nature of Money' (John Kutyn) - http://sustento.org.nz/wp-content/uploads/2007/06/nofm.pdf

Dubious

>>It is not the velocity of money that creates the money supply.

I agree.

>>Nor do banks borrow short and lend long. They borrow short and write "˜negotiable instruments' long.

I dont understand what you mean.

>>Banks create credit by the mutual exchange of liabilities.

I agree

>>Deposits in bank accounts are not government money.

I agree

In order we can focus on what we disagree on I think the following is the most fruitful point to consider.

"When the bank wants to write a new loan, they only require a fraction of the total amount promised to be held in real money."

Can you expand on this so i can be sure what it is you are saying. Any buisiness can legally promise to supply services if the receiver agrees to have those services and the buisiness knows that by having that promise it can then deliver what it has itself promised.

Are you saying something more than that?

Dubious

My thinking about eftpos was considering that whereas in the old days my wages were in an envelope maybe for several days handed to the wife, today the money does not leave the banking system. Therefore it seemed reasonable that if new money enters the system it is available for use around the globe and back again massively faster than was possible before we moved to these kinds of systems. Since banks create money via lending out deposits again and again and back again to themselves this kind of speed of deposit creation must have an influence on the way money supplies increase. But you confuse me by mentioning this increases reserves. It seems possible that Eftpos could mean that a bank is totally wiped out instantly if it does not manage its accounts correctly.

And i am also confused by the way you are so certain that use of wholesale money to create customer loans is not part of banking so that we cannot say borrow short lend long or we have to conclude that NZ banks are not "margin banks" but rather insolvent banks.

I have had these kinds of conversations before and i admit i get confused by the terms people use. You say:

"By real money, I mean central bank money, or reserves, as opposed to bank money."

If i have money in the bank and no money at all in my pocket are you saying i dont have any real money or are you saying that real money is a specific banking term? Not one i have heard of by the way.

At this point in time i believe you are incorrect.

Most banks are operated by very wealthy people. Naturally they dont want all their wealth in the bank but even so many banks are to begin with well capitalised. They can then begin the buisiness of doing what banks do which is to attract deposits and make loans. As they make loans they have to have more capital in reserve etc.

In your version the banks are insolvent shortly after they begin lending out money. That means there is no capital reserve in the bank to cover the loses the bank always makes and it always has to earn its way out of trouble.

One of us is wrong obviously. Your version is very much against the basic rules of capital requirements ratios equity and so forth that i seem to think applies. It is not the "money is debt" version either. In that version capital can be multiplied by 10 to create loans *but* deposits can only be lent out 90%. A bank that only lends out its capital 10 times is obviously limited by the wealth of its owners who are loaning out their very own money. Once banks attract deposits they are not lending out their capital as you say. Banks obviously go to quite an effort to attract deposits and once they lend out deposits their depositors are now protected by the capital requirements which began with the banks own money and share hold capital ect etc.

I wonder if you are getting confused between dubious bank accounting and dubious capital requirement regulation based on the same dubious bank accounting with the totally different system of sound accounting and sound capital requirement management? So rather than banking being as you describe it, what you are describing is more or less the de facto reality of *some* areas of banking in the world today.

Andrew,

I appreciate the debate but you are missing the point.

"If you think you can print pieces of paper and call it money and that is all you have to do, then you have to explain Zimbabwe and any number of countries that collapsed because their money became worthless"

All paper money can become worthless because it is backed by confidence in the economy to match claims with goods and services. That is the same for money in the US, UK or NZ.

The proposal is to simply replace bank credit with public money. It is a money supply neutral proposal.

That's it.

2 proposals can be found here:

http://www.sovereignty.org.uk/features/articles/manifesto07/mreform1.html

They differ slightly but have the same goal: to end the private banking pseudo-monopoly on creating credit.

Dubious

I read the wikipedia article a while ago. There is nothing in that, that in any way enables me to understand what you are talking about.

I suppose i dont really understand what you are saying. You say:

"I never said that wholesale money wasn't part of banking, but it is a fact that all banks lend out much more than they hold in reserves"

Why is that a problem? The basic banking model is to borrow what is then leant out. Naturally it is not in reserve it is leant out for a profit.

But you have already told me i am wrong to believe that yet you agree that wholesale money is part of banking.

I just dont get what it is you are saying.

Do you have broadband Andrew Nga? have you seen the video Money as Debt, the shortest plain language explanation of the two levels of credit creation, the one that takes place at international level to nations and the one that takes place internally by the deposit taking institutes within nations http://www.youtube.com/watch?v=vVkFb26u9g8
There would not be much wrong with the Debt Based private Monetary System, except that the bankers greed and those intermedairies that peddle debt for commission keep repeatedly lending more created credit at compounding interest than there is the ability to extract from available resources, the means to collectively repay. Which sees the same financial sector suspects walk away with the loot while the savings of the real sector evaporate into thin air.

What is Community Credit?
Community Credit is new money created for public use by the publicly owned Reserve Bank. It will replace new money created mostly for private use by privately owned commercial banks.

What makes public credit different from private credit?
Public credit is not created for profit like private credit. Unlike private credit, public credit can be debt-free, like notes and coins are; and unlike private-bank debt Community Credit created as debt can be interest-free.

Why isn't Community Credit used now?
Money has been progressively privatised with the help of computers and modern communications. At the moment, almost 98% of all New Zealand's money is created privately for profit. Banks and net depositors gain from the present system because interest has to be paid on private-bank debt forever, and they jealously guard the money power that gives them.

Doesn't private debt get repaid?
Yes, most private debts are repaid over time, but the whole debt keeps getting bigger as the economy grows and the costs of the private debt system rise. During the past ten years or so total debt has been growing at about 9% each year. Roughly 16% of the price of all goods and services goes to pay the cost of private-bank debt.

Has Community Credit been used before?
Yes. It was widely used in New Zealand in the 1930's to pay for housing and public works. Public producer boards had Reserve Bank overdrafts at about 1% interest into the 1980's.

Why is using public credit so important?
Cheap public credit will greatly lower the impact of interest costs on prices. It will make public investment much more affordable. At the moment there is rarely "enough money" for health, education, housing and environment projects or for public works like roads, water supply and sewage treatment because debt servicing can more than double their original cost. Governments also say National Superannuation is unsustainable because it "has" to be paid from taxation. Public credit will do more than sustain superannuation; it will help fund a Universal Basic Income (UBI) for all.

Will Community Credit harm the private banking system?
No. Once public credit is spent into the economy it will still end up as deposits in the banking system as it does now. Instead of creating private credit for profit, private banks will recycle public credit for profit. The banks' margins will be much the same as they are now but interest rates will be much lower.

Won't public credit cause inflation?
Too much public credit, just like too much private credit, would cause inflation. In practice, there will need to be less credit altogether using public credit than there would be using only private-bank credit. That's because less interest will be paid on the money supply as a whole. To make sure this is so and to guarantee a stable money system, new private-bank debt will be reduced as new public credit is issued.

What effect will using Community Credit have on taxes?
Community Credit adds an entirely new source of public funding to use in addition to taxation and borrowing from private banks. Over time, tax rates will be reduced as the amount of public credit grows and there is less private-bank debt

How much public credit will there be?
Present indications are that public credit can be safely increased by around $5 billion each year.

What will Community Credit achieve?
Community Credit will give New Zealand public control over its most important asset, money, without which there can be no modern economy. Public control over money will enable the economy to grow much faster than has been the case using the private for profit banking system; and ensure the benefits of that growth are, for the first time, fairly distributed among all New Zealand's people.

""I never said that wholesale money wasn't part of banking, but it is a fact that all banks lend out much more than they hold in reserves"

Why is that a problem? The basic banking model is to borrow what is then leant out. Naturally it is not in reserve it is leant out for a profit."

Andrew, the point I am making is;

1. Bank deposits are a promise to pay central bank currency,
2. Banks write new deposits against existing deposits, they do not lend existing deposits out.
3. This is what creates new currency, and it is done to the tune of 97% of our traded currency.
4. This currency comes at a cost, must be repaid, and distorts the allocation of capital because the banking system has control over where and on what terms it lends money to according to its own measures.

Because of 1-4 amongst other reasons, I believe that the current monetary system fails as a neutral medium of exchange.

From Modern Money Mechanics (http://landru.i-link-2.net/monques/mmm2.html):

"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system"

Modern Money Mechanics traces the process of deposit expansion so if you need an example to follow then look here.

Nothing I have said here is contrary to Chris Martensen.

Andrew, if you are not prepared to refer to the reference material I provided you with then how can you verify whether my comments are true, or whether it is you that is operating from a (common) mis-perception?

The quote in my last message came straight from Modern Money Mechanics, which was published by the Federal Reserve of Chicago. Are you saying that you would know better than the Federal Reserve of Chicago?

"Banks pay no interest on most account deposits used by people receiving wages and using eftpos. They pay a low rate for specified savings accounts and higher rates for specified term accounts and this long practiced method creates a system where it is profitable to lend long by borrowing short."

None of my comments dispute the above. All I am trying to do is explain the book-keeping mechanism by which it works.

Also why don't you look up money supply aggregates as well? They clearly show the amount of bank created credit is far in excess of currency created by the central bank. When you have done so, and can see that for a fact, ask yourself how the money can exist if it hasn't been created by the central bank?

Andrew

You seem intent on taking my comments out of context and distorting them to mean something that they don't.

There is an accounting sleight of hand at play here which you it appears that you haven't grasped, and the explanation is to be found in the reference materials I posted. Both Modern Money Mechanics and The Nature of Money explain the book-keeping entries at play.

"however you are using the observation that a single amount of centrally bank created money gets multiplied a zillion times to then say commercial banks create money out of thin air in a method that does not involve them having access to deposits so that they are working you claim in a way that makes them insolvent by design."

That's so far out of context it's unbelievable.

I never said central bank money gets multiplied a zillion times. It gets expanded either on a fractional reserve ratio requirement (as is the case in most countries), or is limited by risk adjusted capital adequacy requirements.

Banks are not legally insolvent as they have deposits to back their loans. You need to understand why I can say this and still hold the opinion that I do.

"In my life i have observed that banks recognise that money has tremendous power but if your belief were true they would not be frightened of the consequences of mistakes with that power because they could simply create some more. The fact is when you begin to work with money you can see the fear in the bankers eyes. the money they give you must therefore be something precious to them that is not simply created out of thin air based on my promise. It actually is a claim to that banks capital. and that is why you are charged interest for the right to use it."

That's so completely rubbish it's beyond belief. The instruments are created in the way I explained. They carry with them a legal obligation that the banking system must meet. I never said that there wasn't constraints around the creation of the instruments. In fact I detailed exactly what those constraints were. You are however correct in stating that bank deposits are a claim on the bank's capital. That is not disputed.

By the way when you talk of creating 'instruments in the way you have explained' and talk about banks borrowing short and lending long negotiable instruments *i have no idea what you mean*

So i suppose i could have made that clearer a while back?

so when you say:

"Banks are not legally insolvent as they have deposits to back their loans. You need to understand why I can say this and still hold the opinion that I do."

It seems that second part that i have made no progress in understanding.

I have done my best to meet you half way here. I have seen the debt is money video and pointed out it was not ideal. But you say that my suggested alternative which you are aware of does not invalidate your position.

I have pointed out that your earlier accounting was incomplete but you said that when fully explained as per your references it was complete. Even so you attempted to produce the fait accompli (like many do) with incomplete accounts.

Meanwhile from my point of view i just dont get this at all!

Andrew,

Apologies for not explaining this clearly.

Banks are actually insolvent but they are allowed to organise their balance sheets in a different way to a company. Just look at the balance sheet and see how much cash they have. Bank deposits are actually unsecured liabilities of the bank.

Have a read of John Tomlinsons paper "Why it necessary to have confidence in banks" on my website. He uses Barclays Bank as an example of how a bank's balance sheet is put together.

You also might find this interesting. It's a 1964 motion put forward in the House of Commons:

http://www.monies.cc/forum/actions/precedence.htm

Dubious

There are several points i want to make about your answer

The easiest ones to deal with are

1. I dont need cash to make a bank deposit.

2. Bank deposits are part of the money supply and are money.

3. Bank deposits and money are the same thing for ordinary people. There is no effective difference. Cash is only made of paper. Bank deposits just digits. They both represent a claim to that nations wealth via what they can buy at that point in time.

Then it gets a bit more complicated.

You used "someone" at the beginning, when you mean "you".

Why do you need the first deposit to create the loan if the loan creates its own deposit. Why have you mentioned the first deposit?

It seems you have mentioned the first cash deposit as if this creates some kind of complication about the bank being able to meet its obligations. I cant see that it does. In practice an ATM limit is about 2000 per day and even at the counter it is necessary to order larger amounts of cash of say 10000 or whatever it is today. Other deposits are divided into on demand deposits and term deposits. However even so as you say any bank can have a run on it.

But the bank has loans as assets and liabilities as deposits. If all deposits are requested the bank can with supervision sell assetts or ask for the money back -depending upon the agreement and still be able to delever to a point of solvency.

I believe banks are expected to be solvent at all times. Therefore if there is a run on the bank the bank can lend from the CB at the penalty rate and attempt to trade thru the problem and if it cannot be expected to delever to solvency it is busted. Maybe you can offer your view on that.

Dubious

Thanks for spending this time with me. i have now read the text you recommended.

I am going to have to read it thru again a few times to really be sure i understand it.

A question though. Debt as money and chris martenson seem to be saying different things. Are you saying they are saying the same thing?

Watched 'Money As Debt'

The only thing in there that I would question is his comments about the degree to which initial reserves can be expanded. He was talking about something like $1111 being expanded into $100,000.

Modern Money Mechanics explains that the total number of deposits that banks can create from the initial 'high powered' reserve money is limited to the fractional reserve requirement. So we would say that for $1000 of initial reserve, with a 10% requirement this reserve could support deposits of $10,000 in total.

Now there are some complicating factors.

There are financial institutions in the USA, such as the investment banks, that successfully avoided the regulatory requirements and just geared up their lending to much higher ratios. You will no doubt be aware of the fate that the majority have met.

Also, in some jurisdictions, such as New Zealand, deposit expansion is not limited to the initial reserve at all. Instead, the limit is based on holding minimum levels of capital to support expansion of the bank's balance sheets. This process is prescribed by the Reserve Bank and generally in accordance with the Basel Accords. Basically it means that lower risk assets require the bank to hold less capital than higher risk assets. So they can gear up more on residential mortgages than they can on credit card debt.

Dubious

I have been watching this guys incredible videos on the banking crisis and as it happens he has begun doing a series on banking this last week?

However his explanations are how i thought banking worked and dont support your belief that promissory notes create money against deposits but not actually using the depositors money to fund the loan. I am wondering if you have time you can watch the videos? 10 minutes each. You can begin i think at video 3 and follow it ok.

Plain vanilla village bank

http://www.youtube.com/watch?v=E-HOz8T6tAo&feature=PlayList&p=9ECA8AEB40...

A banks income statement

http://www.youtube.com/watch?v=h3lMANILkw0&feature=related

Fractional reserve banking using gold as an example

http://www.youtube.com/watch?v=nH2-37rTA8U&feature=user

Multiplier effect and the money supply (and how productive investment can create deflation) Example shows M0 of 1000 gold expanding to M1 of 2710 gold

http://www.youtube.com/watch?v=F7r7l1VG-Tw&feature=user

Hello everyone:

Been very busy over the last several days, so have not been able to post, and didn't have time this morning to read over all the posts, but I think there seems to be confusion over how commercial banks create money. The process is known as "deposit expansion".

Every loan creates a deposit, and every repayment of a loan destroys a deposit.

Banks do no loan deposits, they create deposits with every loan. The amount of deposits (or loans) they can make is dependent on their reserves.

Some countries have required reserve ratios, and countries like Canada do not. Regardless, all banks keep some reserves (cash in their vault, or deposits at the Central Bank) for liquidity purposes.

To say that banks "need deposits" to make loans is very misleading. Every loan creates a deposit, so deposits and loans expand, or contract, at exactly the same rate.

When a bank loans someone money, they are creating a new deposit. The loan is an asset to the bank, and the deposit is a liablility. Hence, their assets and liabilities increase by the exactly the same amount, and their balance sheet balances.

Social Crediters believe that the amount of currency in circulation is a poor basis for the amount of money that should be created. We believe that:

" it is necessary to transform the basis of the credit-system entirely away from currency on which it now rests, to useful productive capacity." (C.H. Douglas, "The Control and Distribution of Production")

and

"We know quite well that the core of this problem is in the disparity between the real wealth available and the monetization of that wealth; that it is within the power of monetization of real wealth that this power of credit lies." (C.H. Douglas, Testimony before the Alberta Agricultural Commission )

Dubious

You said:

>>Banks cannot write loans without incurring obligations. Their ability to sustain losses is very limited.

That was my own earlier understanding.

>Those videos are slightly misleading as he shows how the balance sheets end up looking but misrepresents the process. It is subtle and easy to do

So you agree the balance sheets are correct.

My confusion between our respective opinion possibilities therefore remains:

Can you please indicate if you agree with the following description of your opinion about banking?

1. Commercial banks create money that did not previously exist as money deposited with them.

2 Banks can only create money if they have deposits "against" the value of the loan.

3. Money created at 2 can be kept if the deposits against which they were created are no longer in the bank.

Can you clarify that is your belief?

I would like to go back to Mr Khan with some questions to clarify his and my understanding of the process. He seems an able and friendly man and has already answered some questions i have put to him.

Can you say how he has gone about misrepresenting this process?

The link you provided to me said:

""Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created."

But you are now agreeing it is easily possible to show how to account for money creation if loans are paid out from deposits - simply because the accounts are correct.

So it seems your beginning argument based on that link is not correct.

That is how i am reading this conversation so far.

When I get a moment I will address your comments more fully. But for the moment I'll just say that none of my comments are in opposition to what is printed in Modern Money Mechanics, put out by a branch of THE FEDERAL RESERVE. I do not have any reference material that I consider more authoritative than that. Certainly Khan's home made tutorials do not qualify as over-riding the Federal Reserve.

You are drawing erroneous conclusions from my comments and your logic is not appreciating how the system can work with individual private banks in competition.

Re-read Modern Money Mechanics. It explains how settlements to other banks drain reserves. As long as there is stability between the banks then the system can function as described.

For the moment I'll just say that none of my comments are in opposition to what is printed in Modern Money Mechanics, put out by a branch of THE FEDERAL RESERVE. I do not have any reference material that I consider more authoritative than that. Certainly Khan's home made tutorials do not qualify as over-riding the Federal Reserve.

You are drawing erroneous conclusions from my comments and your logic is not appreciating how the system can work with individual private banks in competition.

Re-read Modern Money Mechanics. It explains how settlements to other banks drain reserves. As long as there is a degree of stability between the banks then the system can function as described. In short, banks anticipate the level of reserves required in order to meet variations in cash withdrawals and inter-bank settlements.

Dubious

OK lets work it thru.

Wiki provides a theoretical example and concludes

"Instead, banks grow the money supply much more modestly and work together to grow the money supply 5 times such that no bank is committed to payments they cannot make."

So they have a requirement in practice that they are not committed to payments they cannot make. But what does that mean in practice?

The first paragraph of Wiki is:

"Fractional-reserve banking is the banking practice in which banks are required to keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) with the choice of lending out the remainder, while maintaining the **simultaneous obligation** to redeem all deposits immediately upon demand. This practice is universal in modern banking."

And as we know fractional reserve banking exists in parallel with central banking and bank regulators. Therefore at all times a regulated bank meets these requirements given that the central bank exists to allow a theoretical orderly unwinding of the banks trades if depositors arrived en masse. But in practice this would depress the economy i believe in any case. Even so theoretically it is true that the simultaneous obligation for immediate withdrawal can be supported with no losses with central bank assistance so that depositor money lent out can be returned with central bank loans which then transfer assetts to other banks and so forth either temporarily or permanently.

There is after all a required reserve to help this process be achieved.

Wiki tells us what that required reserve is:

http://en.wikipedia.org/wiki/Reserve_requirement

"The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.

The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates............As of 2006 the required reserve ratio in the United States was 10% on transaction deposits (component of money supply "M1"), and zero on time deposits and all other deposits."

So if a bank has time deposits there is no immediate need for a reserve to be held for them because money can be sourced in time to satisfy their redemption which occurs later after the agreed term has expired.

So this seems like fractional reserve banking all the same. A fraction of the banks wealth is held in reserve which depositors are entitled to get access to. As deposts grow then so must reserves. Effectively the banks reserves are very strongly linked to the total deposit amount as a smaller ratio of the total deposits.

So now we come back to the theoretical example in wiki.

Bearing in mind that wiki says that frational reserve banking requires:

1. the **simultaneous obligation** to redeem all deposits immediately upon demand

And

2. To hold a fraction of deposits as a reserve.

So the wiki text you quote says:

"using an initial deposit of $100 and a reserve requirement of 20%, a bank could theoretically keep all $100 in reserve and grow the money supply 5 times to $500 in one motion and still keep within its 20% requirement. However, this would be a foolhardy decision because in such a situation, it is likely that another bank would receive a deposit that is greater than the $100 the initial bank actually has"

So here we need to create a **theoretical** case where this bank creates no bank loan greater than 100 where money can be paid to another bank and where all the other "in practice rules" are satisfied.

So such an example in practice is:

The bank with an initial on demand deposit of 100 loans me 500 and stipulates no more than 100 can be drawn down at any one time unless by prior arrangement so that the bank can be satisfied my withdrawal results in an immediate simultaneous deposit to their bank to an account creating say 500 or any smaller amount where that deposit holder is also similarly unable to do anything without bank supervision and agreement. As you know something similar happens in practice to this in construction loans. A massive loan is agreed but apart from the first amount of the loan later payments are stage payments as supplier and contractor invoices are accumulated.

If we want other theoretical examples we need to keep in mind that at all times

"no bank is committed to payments they cannot make."

So if you want to use this as an example you seem to need to be able to come up with a practical example where more than only *80* can leave the bank before the minimum legal reserve is breeched. At 101 the bank is insolvent.

So i cant see you have made your case at all.

Khans video still makes sense.

Dubious:

You said, "Modern Money Mechanics states that deposit expansion is an iterative process that is limited to "˜reserves+deposits'"

The "deposits" that they are talking about are deposits that commerical banks have at the central bank. They are not talking about deposits that are held at the commercial banks.

"What Are Bank Reserves?

Currency held in bank vaults may be counted as legal reserves as well as deposits (reserve balances) at the Federal Reserve Banks."

http://landru.i-link-2.net/monques/mmm2.html

A commercial bank's ability to create deposits is determined by the amount of reserves they posess. Reserves are "Currency held in bank vaults may be counted as legal reserves as well as deposits (reserve balances) at the Federal Reserve Banks." In Canada, when we had required reserve ratios, short term government securities such as T-Bills also formed a part of reserves.

Banks create deposits. They do not loan deposits. Their ability to create deposits is dependent on the amount of reserves that they have.

Every loan creates a deposit, and every repayment of a loan destroys a deposit. That is how money is created and destroyed.

These facts are not disputed. This is how the modern monetary system works.

The loan creates an asset and a liability for the bank. The loan itself is an asset, and the deposit is a liability. Therefore, the balance sheet balances.

To say that banks need deposits to make loans is totally misleading. Loans create deposits, so yes, they both expand and contract at the same rate, but what banks need to make loans is RESERVES, which is cash and coin in their vaults, or deposits at the central bank. They only hold a "fraction" of these assets in reserve, which means that if everyone demanded cash for their deposit at the same time, the banks would only have a fraction of it. That is how FRACTIONAL RESERVE banking works.

Banks do not loan deposits, they create them with every loan. Banks compete for deposits, because they are in reality competing for reserves. When bank A owes bank B x amount, bank B will demand payment in RESERVES (i.e. cash, or an increase of their deposits at the central bank). The "asset" that banks are competing for is reserves. Banks create money based upon these reserves.

If you're interested in another link as to how the process works, read the following:

http://wfhummel.cnchost.com/index.html#1

Dubious

Also unless you say what kind of bank you are talking about we cant have a meaningful conversation anyway and you are likely to confuse me and yourself in the process.

Central banks create money via "writing a cheque upon themselves"

Commercial banks create money by expanding the money supply.

Commercial banks dont in fact create money. They instead expand the money supply.

Dont waste your time Dubious, it is clear that Andrew in Ngaios' aim is more to distort, defer and discourage this thread moving in a positive direction. Normally when anything that threatens the current system begins to grow legs, you will find someone will pop up to attempt to slow or destroy that threat. Its common practice, just like it was no coincidence that Roger Kerr of the Business Roundtable turned up on this website after some here began to open there minds to alternatives to the magic of the market and law of the jungle.

Dubious

I am working my way thru "modern money mechanics"

http://landru.i-link-2.net/monques/mmm2.html

And you highlighted this text to me:

"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system"

This text is related to the central bank depositing 10,000 of central bank money with Bank A.

This 10,000 creates a 10,000 deposit and a 10,000 reserve entry.

The bank therefore has via 10% reserve requirement $9000 in excess reserves available for lending.

It is therefore able to offer a loan to a customer of 9,000

This is shown in table 4.

.......Assets.............................................................loans......
Reserves with F. R. Banks.......+10,000..............Deposits: Initial .......+ 10,000
Loans . . . . . . . . . . . . . . . . . + 9,000..............Stage 1..................+ 9,000
Total . . . . . . . . . . . . . . . . . .+19,000.............Total......................+ 19,000

So in this case the initial deposit is 10,000.

I have added the money amounts to the text you highlighted to clarify its meaning to me.

"Of course, they do not really pay out loans from the money they receive as deposits. (10,000) If they did this, no additional money would be created.(to create money supply of 19,000) What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans 9,000 (assets) and deposits 9,000 (liabilities) both rise by $9,000. Reserves of 9,000 are unchanged by the loan transactions. But the 9,000 deposit credits constitute new additions to the total 19,000 deposits of the banking system"

So please have a look at what i have written here and look at the tables in the document.

How is this different to me depositing 10,000 in a bank as cash so that a new loan of 9,000 is created? I might add, of course the 9,000 deposit does not come from the 10,000 deposit. The 10,000 deposit is unchanged by the creation of the 9,000 loan. and there now exists 19,000 in deposits. with 9,000 available in the loan deposit account.

I am doing my best here to understand your point of view. So far to my relief, to be honest! I am finding that my own understanding is not being challenged by the documents you are asking me to read.

But please if you think i am wrong then help me to see why i am wrong.

Jim

You said:

"To say that banks need deposits to make loans is totally misleading. Loans create deposits, so yes, they both expand and contract at the same rate, but what banks need to make loans is RESERVES, which is cash and coin in their vaults, or deposits at the central bank. They only hold a "fraction" of these assets in reserve, which means that if everyone demanded cash for their deposit at the same time, the banks would only have a fraction of it. That is how FRACTIONAL RESERVE banking works.

Banks do not loan deposits, they create them with every loan. Banks compete for deposits, because they are in reality competing for reserves. When bank A owes bank B x amount, bank B will demand payment in RESERVES (i.e. cash, or an increase of their deposits at the central bank). The "asset" that banks are competing for is reserves. Banks create money based upon these reserves"

1. Can we agree that when a bank makes a promise to provide a loan it is fully aware that the loan money will leave its reserves if this money is to be *paid* to another bank/entity/person?

2. Therefore can we agree that a bank needs to replenish its reserves by an equal amount for each loan that is *paid out* if it does not want to reduce its reserves?

3.Can we agree that the money in reserve is real money?

4. Can we agree that banks are lending out real money from their reserves?

Can you indicate which numbers you agree with please?

Thanks

ok I'm back.

point 1. is valid
point 2. is valid
point 3. reserves are central bank money as opposed to deposits which are private bank money
point 4. is not linked directly to the loan in question. If there was only one transaction and the funds made their way to another bank, then reserves would have to be transferred to the second bank. However it is only net changes in reserves that need to be settled between the banks, over god knows how many daily transactions. If the net position remains fairly constant over time then the banks will not have to pay each other out.

I disagree with Khan's explanation of fractional reserve banking because his example only used one bank. If there is only one bank then loans are not paid out as the bank does not need to pay itself. It just holds the reserves and writes the deposit into the new account. His example showed the money actually leaving the bank and then coming back in. Not how it happens when you have two or more customers of the same bank.

Most transactions are conducted through either the chequing or EFT systems.

Let's say $1000 of reserves are held by a bank, initially deposited as cash and coins by Customer A. So deposits are $1000 and reserves are $1000.

The bank uses these reserves to create a loan of, say, $900 to Customer B
Customer B pays Customer C (of the same bank) $900 through either the chequeing or EFT systems.

Deposits have now risen to $1900 against the $1000 deposit, WITHOUT THE TRANSFER OF ANY RESERVES.

Dubious

I am not sure what you are wanting to say here.

A bank with no excess reserves can lend no money.

If A deposits 1000 there are now excess reserves of 900

Customer B can now be allowed to borrow 900 from those reserves that are dependant upon customers A's deposit to pay customer C 900

Customer C now has a deposit that is dependant upon the money deposited by Customer A

The bank is now liable for 1000 owed to A and 900 owed to C

If A wants their money back then the bank can do that providing C does not want to withdraw their money also. Otherwise the bank has to source an interbank loan or central bank loan

Nothing magical is happening here.

The bank is taking a risk and gets paid for taking risks because with those payments it has the ability to source extra loans as it requires to meet funding shortages.

If the bank did not operate fractional reserve banking then it would have to pay A for the deposit and have no ability to lend to B in order that C could be paid. The economy would collapse.

My example showed a concrete example of money being created WITHOUT ANY TRANSFER OF MONEY

I don't how you don't get it!?!

Banks write loans far in excess of reserves!

Sir Josiah Stamp (1880-1941), Director of the Bank of England (1928-1941), Reputed to be second richest man in England in his day, had this to say:

"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the Earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough money to buy it back again...Take this great power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this would be a better and happier world to live in. But if you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit."

hmmm ..

"Capital must protect itself in every possible way, both by combination and legislation. Debts must be collected, mortgages foreclosed as rapidly as possible. When through the process of law the common people lose their homes, they will become more docile and more easily governed through the strong arm of government applied by a central power of wealth under leading financiers. These truths are well known among our principal men who are now engaged in forming an imperialism to govern the world. By dividing the voter through the political party system we can get them to expend their energies in fighting for questions of no importance. It is thus by discreet action we can secure for ourselves that which has been so well planned and so successfully accomplished." - 1924 US Banker's Association Magazine

"Banks lend by creating credit. They create the means of payment out of nothing."
- Ralph M. Hawtrey, Secretary of the British Treasury

Dubious

>>Banks write loans far in excess of reserves!

I think you are making some kind of significance out of the reserve that you dont need to. In a perfect world the reserve could be Zero even if depositors wanted their money back. The reserve provides a buffer in case things go wrong so that loans, bonds, shares etc cannot be sold.

The bank and depositors wealth is in the loans the bank makes and the interest rate covers losses and so forth so adds to the banks wealth and ability to cover losses.

The reserve is a minimum amount to cover losses only.

When central banks can hand hold banks with temporary difficulties and provide even worldwide assistance then the reserve requirements can be much lower as they only cover unavoidable losses and are only there to protect the depositors.

Meanwhile the loan book of the bank is where its wealth lies and it pays out interest handsomely as often as not.

The reserve has little to do with the banks wealth. It is just a fraction of it.

man you are stubborn. Normally I think Iain Parker is a bit of a conspiracy crackpot but your position is so completely illogical you have to wonder ....

read the quotes I posted and WHO THEY ARE FROM ... and then ask yourself - 'who is looking at this the wrong way? Me or these top figures including central bankers?'

If you think that you know better then I would submit that you are an ego-maniac and beyond help.

"If you want to change the system i suggest you find the errors in the system and focus on them, rather than linking to central bankers own materials to prove your case."

Well logic couldn't do it so I thought maybe some expert opinions might sway you. I guess not.

"Clearly and obviously the documents you have asked me to read do not support your belief that money comes from thin air when a loan is created."

Clearly and obviously the documents I asked you to read support my belief that banks create money through the process of loans.

"For reasons beyond me you think that loans cannot be allowed to be greater than bank reserves. I have done my best with you."

WTF!?!?!?! Of course loans are greater than reserves! How the hell could I believe that when I'm arguing that banks create money through loans?

Dubious

Maybe i was not clear.

What i am saying is that for some reason 'you think something must be wrong if *total* loans are greater than reserves'.

So when modern money mechanics shows a deposit of 10,000 reserve creating 100,000 of bank money via lending you conclude the loans created bank money that did not previously exist at the time of each stage of the lending process.

I dont get it. 1000 creating 900 creating 810 etc seems so simple to me and to the central bankers who produced the document.

"What I said is that banks create 97% of the money in circulation. That is a fact."

A fact? 97% exactly? I imagine some human person produces that fact via some process which other people dispute and challenge and argue about. Is it a fact or some kind of guess? Is it a constant or a variable? Correct at a certain time or just so variable it is just a wild guess?

You like to create these facts

And it appears once you have these facts then people who disagree are described by you as being fanatical or mentally ill or egotistical. No doubt i have missed out some of the abuse but no matter.

I think you need to buy a mirror and have a good long look at yourself before you imagine you can say with such certainty that what you perceive with your mind is a fact that exists in reality.

I just had another read through the discussion, and this is clearly how it went.

You argued that all loans involved the transfer of reserves.

I argued that reserves are only transferred when going to another bank or if cash is withdrawn, but even then net settlements between banks are what is important.

I provided an example where clearly the creation of a deposit was a book keeping entry only. That was this:

"Most transactions are conducted through either the chequing or EFT systems.

Let's say $1000 of reserves are held by a bank, initially deposited as cash and coins by Customer A. So deposits are $1000 and reserves are $1000.

The bank uses these reserves to create a loan of, say, $900 to Customer B
Customer B pays Customer C (of the same bank) $900 through either the chequeing or EFT systems.

Deposits have now risen to $1900 against the $1000 deposit, WITHOUT THE TRANSFER OF ANY RESERVES."

Further to the above it is obvious when you look at the monetary aggregates that the deposits themselves have become money as they are traded between deposit holders through the EFT and chequeing systems.

Sorry,
Accidently hit the submit button, here is the last of the letter copy;
Received by Stan Fitchett from the RBNZ;

26 May 2003
Stan Fitchett
99 Suva Street
Upper Riccerton
CHRISTCHURCH 8004
Dear Mr Fitchett,
Thank you for your inquiry about the origin of money in circulation.
Basically, you are quite correct. Since 1990, notes and coins in circulation have ranged between 2 and 3 percent of M3, averaging approximately 2.3 percent. This proportion varies seasonally; it tends to be considerably higher than average over the christmas period. As you say, the other 97 per cent of the money is credit, created by the banking system.
Yours Sincerely

Isabelle Sin
Economic Analyst
Policy Team

This is obviously a copy, as I only have it in pdf and on our promotional material.
I could also provide you with a rather long winded one from Don Brash in a letter to another person, explaining the same. In fact there are many admissions from the bankers mouths to questions put by the monetary reform movement that has been in existance in NZ for 70 years.

Iain

How about sticking to a discussion without the insults?

"I will give you two web addresses detailing the processes of credit creation from the bankers own mouths and a letter to a Social Credit member from an RBNZ policy analyst, stating that the banks create 97% of the money supply"

I am not once arguing that banks do not create the money supply. The banks openly say they create the money supply.

So what is *your* point??

*My* point is that money is not created from thin air by commercial banks in the manner which has been been claimed.

Modern money mechanics demonstrates how loans expand the money supply.

If you want to understand the banking system you need to first grasp the method the bankers say is used and *then* you can go on to argue that it is all smoke and mirrors *if* this is the case.

But when people make claims using incorrect accounting it does not help your case or help me understand if i need to worry or can be relaxed!

"I did not say what you falsely claim i said. And if i did once somewhere then it was just in error. Clearly and obviously the khan video shows no transfer of reserves."

The Khan video clearly shows reserves being transferred. Perhaps yours and my understanding of the term 'reserves' are different? The gold coins initially deposited are the reserves. He shows the gold coins leaving and then being redeposited with the bank.

""Further to the above it is obvious when you look at the monetary aggregates that the deposits themselves have become money as they are traded between deposit holders through the EFT and chequeing systems."

You need to follow thru how the deposit liability is transfered from one bank to another and how this is accounted for and have knowledge of that before you can then argue that your bank created deposit becomes a tradeable within the banking system. Money is just not created in the simplistic manner which you keep claiming it is created."

Page 28 - http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1.pdf

Dubious

>>Page 28 - http://www.rbnz.govt.nz/research/bulletin/2007_2011/2008mar71_1.pdf

This does not help us. It shows deposit creation and the transfer of those created deposits from one bank to another. What it shows (to me) is that a real money loan created at one bank deposited at another bank transfers wealth/money/deposits from one bank to another.

But i understand you disagree.

Correct me if i am wrong, but you appear to believe the following:

If Bank A creates a loan of 1000 deposited in B that is written off by A and Bank B creates a loan of 1000 deposited in A which is written off by B then since nothing was created the result is net Zero and nothing is lost to the banking system.

However i believe that in a close loop system like NZ most of the vast amount of money has been created by lending out smaller amounts of money over a long period of time and losses like these represent a loss of real bank money or reserves which has now entered the economy to be owned by people without debt backing. It is still part of the money supply and has to be accounted for somehow.

If the money was simply created from thin air it could not represent a real loss and it could not be real money and would fundamentally have no power.

The banks have a good thing going i agree but i disagree that money created comes from no money and has no power and is only nothing that relies on confidance.

I think a further explanation is required on your example:

"If Bank A creates a loan of 1000 deposited in B that is written off by A and Bank B creates a loan of 1000 deposited in A which is written off by B then since nothing was created the result is net Zero and nothing is lost to the banking system."

In this example there is a clear loss of money from the banking system. Income producing assets (Loans) and their associated liabilities (deposits) are reduced by $1000.

The banks lose the income from the $1000 they each had deposited in their accounts.

But reserves are unchanged by the mutual writing off of these transactions as the net effect on reserves of the mutual loans was $0.

Therefore as the deposits have now disappeared but reserves retained excess reserves now exist and therefore the banks may both write new loans for $1000 each.

"What you are arguing is that in the case of the USA where entire communities plunge into negative equity and people hand in their keys where loans are so called none recourse and the banks are left whistling to get their money back that the net affect is no losses made by the many banks operating in that area, and that no restriction has been created on their ability to lend and they are now back to square one.

Do you really believe that is true?"

I'm not arguing that at all.

You are twisting everything I say way away from its meaning.

"In your example the group of banks have no risk providing they can attract deposits to replace money flowing to other communities or their loan interest income can cover that. How is a recession created in your view of banking? Why cant an individual bank lend in trouble customers this free money at zero interest rates to reduce their troubled loans? After all the bank only wants the interest back you say. The bank makes a profit and the customer can feel happier to borrow more from this helpful bank when they are able to. Why cant a bank just lower all of its own interest rates unilaterally if it does not require deposits to lend money?"

BANKS HAVE RISK, ITS COMPLETELY CONSISTENT WITH MY ARGUMENT THAT THEY CAN FAIL.

You seem to think that because I say that money is loaned into existence it can be done without restraint and with no regulations surrounding the practice.

That is blatantly not so.

Money is loaned into existence, but within carefully designed regulations that usually protect the system from failure.

Money can be loaned into existence and also be real. Just because it is loaned into existence does not mean it is not real.

"Why cant a bank just lower all of its own interest rates unilaterally if it does not require deposits to lend money?"

Because there is a relationship between deposits and reserves. Deposits are a call on reserves and therefore banks cannot sustain a substantial net outflow of deposits. Deposits must be retained and therefore they must pay interest on those deposits.

"In your example i cant see why a bank cannot issue a massive loan to the owner at zero percent that it creates from nothing where nothing needs to be returned to the bank and where the bank suffers no loss. Obviously this is not real money. It is just fake money that destroys the value of money."

What banks can do is purchase securities rather than make loans simply by writing the deposit into the vendors account, if they are purchasing from a customer of their own bank. This also creates money and is also explained in Modern Money Mechanics as a way that banks can increase their income if demand for loans is low.

Also I want to point out that the Reserve Bank of New Zealand publication that Iain Parker linked you to explains the system you describe as the 'traditional view' and then goes on to explain that the constraint to lending in the modern banking system is related to the effect on net outflows of deposits. It clearly explains that whilst the concept of reserves being withdrawn, circulated in the economy and then redeposited is one way in which things happen, IT IS NOT THE PREDOMINANT WAY CREDIT EXPANSION WORKS.

Dubious

Before we carry on it might be helpful to review the information you have supplied to me so far.

You said:

"Let's say $1000 of reserves are held by a bank, initially deposited as cash and coins by Customer A. So deposits are $1000 and reserves are $1000.

The bank uses these reserves to create a loan of, say, $900 to Customer B
Customer B pays Customer C (of the same bank) $900 through either the chequeing or EFT systems.

Deposits have now risen to $1900 against the $1000 deposit,"

So the point i want to note here is that you have said "Let's say $1000 of reserves are held by a bank, initially deposited "

So the reserve was *deposited*.

You then went onto produce this quote which i want to connect to what you wrote above:

http://landru.i-link-2.net/monques/mmm2.html

"Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created."

So we can agree here that it is not possible to create money from the deposited reserve. There is only 10000 of reserve.

"What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000."

And i think we can say that when they do this they are loaning excess reserves of 9000 which was 90% of the deposit entered earlier. but in lending it out or *giving it away* they are also obliging the person to legally be required to return it. And since most people do so, the bank can feel comfortable retaining a 10% reserve and loaning the remainder out due to the protection of the promissory note.

"Reserves are unchanged by the loan transactions."

Of course because there is only 10,000 in reserve and you cannot create money.

"But the deposit credits constitute new additions to the total deposits of the banking system."

So now the 10000 deposited has been loaned out to create a new 9000 deposit.

Of course there is not 19000 of reserves.
Of course the 10000 deposited has allowed the loan creation of 9000 of bank money.
of course the loan of 9000 came from the deposited money with 1000 held back in reserve.

But you have book entries now of 10000 deposited, 9000 loans and 1,000 reserves

So 10000 deposits created 19000 of deposits as 10000 deposits and 9000 loans with the 9000 coming from the 10000

There is no slight of hand here that i can see.

It is just accounting.

Can you please comment on this because we risk endlessly going on for ever and the answer is surely in this text already that *you gave to me*.

Iain

In order to understand more complex banking we have to agree on the simplest banking. So far even the simplistic banking is being said to be slight of hand. But it is not. If we can agree on the simplest banking then we can then move to more complex banking.

What we can agree on is that overburdoned tax payers are being asked to further extent their obligations in order to enable the banking interests to have no debt.

But dont worry yourself! That cannot work. We are overburdoned and will have to have debt forgiveness at some point. Sooner or later it will have to happen.

I think that you still haven't grasped what reserves are versus deposits. Re-read the definitions of reserves.

My example was showed a purchase of securities without a change in reserves. It was purely a book-keeping exercise by the bank. No transfer of reserves at all. Just an increase in asset (security) and liability (deposit).

All the bank is doing is taking ownership of the security in exchange for a promise to pay cash from its reserves. It is not actually paying cash in my example as the owner of the security was a customer of the bank.

This is head-banging-against-the-wall-frustrating...

In NZ in particular, where there is no legal reserve requirement, reserves are held solely for transfers to other banks or cash withdrawals.

Your comment that each loan or investment purchase can only come from 'excess reserves' IS totally wrong. Excess reserves is a term used to indicate that it is viable to create extra loans or purchase securities in exchange for deposits.

you are being frustrating if you wont deal with the examples you provided and want to bring in additional complexity before you have demonstrated you understand the simple examples you have shown me as being something of paramount importance that overrides **anything** i provide to you.

Why cant we stick with the simple example first so that you demonstrate to me that you understand it fully? And when you can prove your point from that then you have achieved your objective surely???

Even in zero fractional reserve banking the principal i have identified remains true. Ie money in money out. In practice there is a reserve requirement.

Why do you need to continually insult me when you find your opinion is challenged?

You need to understand the difference between reserves and deposits!!!!!!!

As I keep saying there is a RELATIONSHIP between reserves and deposits, BUT THEY ARE NOT THE SAME THING.

A DEPOSIT IS A PROMISE TO A RESERVE ON DEMAND, NOT A RESERVE

"The customer account is now credited with the amount that was in the excess reserves needed to purchase the security

The bank is now credited with the asset."

BUT THE RESERVES REMAIN UNCHANGED AS BOTH ASSETS AND LIABILITIES HAVE ALREADY BEEN ALTERED AND THE TRANSACTION MUST BALANCE

The only thing that changed in the purchase of the security was +Security on asset side of ledger and +deposit on liability side. Both sides balance. Reserves do not change unless the money is withdrawn as cash or transferred to another bank.

Reserves are set aside for the purpose of the bank holding sufficient liquidity to meet its promises - i.e. withdrawals. This needs to be enough based on either the fractional reserve requirement (most countries) or whatever the bank thinks is prudent (NZ/Canada/maybe others)

Deposits are not the same as reserves. Did I mention that?

It's completely consistent for me to state that reserves are required for the creation of deposits. How else would the bank meet it's commitments should a depositor call upon it's right to those reserves?

"The bank had excess reserves and deposited some or all of the excess reserves in the customers account and when the customer spends that money the excess reserves go to wherever they go which are not in the control of the bank."

RESERVES ARE NOT DEPOSITS!!!!

The bank had excess reserves so it could write a deposit! DEPOSITS ARE BOOK KEEPING ENTRIES!!!!!

What happens to THE BANK'S RESERVES when the customer spends that money DEPENDS ENTIRELY ON WHAT HAPPENS. If the money is withdrawn as cash, it calls on THE BANK'S RESERVES. If the money is transferred to another bank via EFT or Chequing, it calls on THE BANK'S RESERVES. If the money is transferred to another customer account within the same bank, THE BANK'S RESERVES are unchanged as one liability is reduced whilst another is increased - THE ASSET SIDE OF THE LEDGER REMAINS UNCHANGED.

Deposits are not reserves. Deposits are a RIGHT TO RESERVES UPON DEMAND.

Dubious

Earlier i wrote to you (which you might have missed as i began addressing Iain)

http://www.interest.co.nz/ratesblog/index.php/2008/09/30/alternatives-to...

"One of the issues we seem to be having which i am finding very confusing is the use of the word "˜deposit'. Deposit appears to mean an accounting entry in a banks book that in practical terms is quite meaningless and totally confusing in some situations. The thing we need to look at is reserves."

Via interacting with a guy in the UK on one of the housing bloggs there i have learnt:

Reserves = assets - liabilities

And when the *promise* of a loan is created it seems that under basle that assets cannot be greater than 25 times reserves.

So at this point in time i am taking this to mean that after the loan is created this test must apply. And i am clarifying that.

So if we had loans of 100 and deposits of 95 that ratio would be met and we would have 4% fractional reserve banking i believe. But i am clarifying this now. My contact tells me my understanding of simple fractional reserve banking is correct. But as we know we dont have simple fractional reserve banking. Even so we have to begin with simple concepts first and get aggreement on them.

Jim said:

http://www.interest.co.nz/ratesblog/index.php/2008/09/30/alternatives-to...

"The important concept to understand is that every loan creates a deposit, and every repayment of a loan destroys a deposit."

Dubious said:

http://www.interest.co.nz/ratesblog/index.php/2008/09/30/alternatives-to...

"It's completely consistent for me to state that reserves are required for the creation of deposits. "

For reasons i cannot yet comprehend you and Jim and others seem to think that a *promise* of a loan being created is the same as actually paying out the money. Obviously these are two different things.

A loan promise creates a book keeping entry called a deposit. But the book keeping entry has no direct connection to a reserve. A deposit is not the same thing as a reserve we seem to be able to agree.

http://www.interest.co.nz/ratesblog/index.php/2008/09/30/alternatives-to...

"Deposits are a RIGHT TO RESERVES UPON DEMAND."

So when a bank makes a loan aggreement it places an entry in the books indicating that the loan receipient has been given a promise to be able to receive the reserves indicated by the deposit amount at such time it is convenient for the loan recepient to draw down the promised funds from the banks reserves.

And when the loan is paid out, via another bank, reserves are transfered from the bank and when the loan is repaid the reserves are returned and the loan amount deleted.

That is how interbank banking works more or less. Promises recorded in the books get converted into transactions that do something. And when the thing that is done gets undone then the promise is deleted.

I say again. The promise of a loan which is called loan creation is one set of accounts and it involves the creation of a deposit and asset but all it represents is the promise to pay on demand a reserve amount of money. The next stage of the accounting has to be also contemplated and be part of the first one before what you say has any real world meaning at all.

A loan gets "created" and deposits exist since this is how a deposit is defined in banking which is a book entry. And of course all accountants say this is money. But it is only a promise.

Something else actually happens when it is time to spend the money.

To all practical meaning what happens is something is transferred from the banks wealth to you.

If the bank rejigs its accounts when it buys a security from a customer it transfers some of its wealth to the customer. Cant you see that??

If you cant grasp that i dont know what more else i can do.

Seems to me this whole discussion is largely hogwash. No government should have the power to create fiat money or credit, regardless of its political persuasions. While I absolutely agree with those who denounce the evils of the international banking cartels and debt-based money, I do not subscribe to the Social Credit solution.

The only moentary system that is worth considering is the gold standard. I suggest folks read this: http://www.kitco.com/ind/Nathan/oct212008.html

and this: http://www.kitco.com/ind/fekete/oct202008.html

Here's a thought - if NZ wants to get itself out of a hole, it should open its mint to gold. Turn the NZ dollar in sound money. Watch the rest of the world freak out! Would probably be enough to have Australia invade us on behalf of the USA.

The Other Russell,

You may need to do some research into how gold backed paper money systems have been consistently abused throughout the ages. You wont find any of that on Kitco, Gold Eagle and similar websites.

Whatever system we employ, imho, must have controls on the quantity of money supplied.

Without strict controls human flaws lead to debasement of the currency. Incidentally this is the same problem with greenhouse gas emissions.

Ultimately we must learn to live within limits.

Andrew,

No need to blow my candle out to make yours grow brighter. Were you subject to an over-bearing father or mother in your childhood? You do seem to be completely unable to admit when you are wrong and would rather twist my words and /or adopt them at your leisure.

I don't believe it is possible to offer you any more advice unless you are able to change your attitude, although I would suspect that the issue runs too deep for you to recognise.

I've encountered many people like yourself, not only lacking the breadth of experience and intelligence to assimilate facts and figures in way that allows them to build and visualise realistic models, but egotistically unable to accept that some beliefs currently held are in contrast with reality. Such people are usually well and truly held back from their true potential in their lives.

Whether you are honestly mistaken or just willfully trying to argue to make yourself appear right, your description of my explanations and communications has been significantly distorted by you. I think a large part is you insisting on reading more into my comments than I am actually saying. That is probably due to your inexperience in finance and banking causing you to misinterpret the definitions of key terms being used.

Russell,

I'm with you on that. I think the upcoming gathering to work through a new financial order will certainly look at a commodity backed currency, a more balanced trade system and an unleveraged lending system.

And a move to a more stable economy is long overdue.

Raf, Dubious:

A new system is desperately needed. I can handle criticisms that I might be living in a fantasy land. I'd level the same criticisms at my accusers. You might be interested in this piece asserting that the USA is essentially a fascist state ruled by Wall Street:

http://www.marketwatch.com/news/story/14-reasons-main-street-loses/story...

Dubious i dont know what your agenda is but if you insist on this wall of abuse i am going to do something about it

This thread was created for people to discuss things. I am getting tired of your endless abuse.

I am entitled to have an opinion that is different to yours.

We are not yet living in some god awful fascist state where i am not free to voice what i believe to be true. Or am i to believe you are the bully boy around here who will silence me just because i think you are wrong?

Stop it please. Just focus on a discussion of the facts as we know them

Surely that is not too much to ask?

Andrew

"In fractional reserve banking you lend out depositors money for a profit in return for giving your depositors an income for lending their money to you".

That would mean: I deposit $100 in my bank and they lend it out to someone else and i can't access it until its repaid.

I know its a tricky subject and very hard to explain but fractional reserves mean you hold a fraction of reserves as a requirement.

So banks don't lend out my money, they lend out my money x 1/required reserve which at the moment is about 14x or 7%.

In that process they expand the money supply AND charge interest on the loans they create.

The heart of any reform in this area is that Parliament actual create the money supply without interest. This would take away profits from banks that accrue to them by the very nature of being able to expand the money supply.

This perogative was given away by that silly man William of Orange in return for help given to him by Dutch bankers in overthrowing Charles II back in 1685.

That is really the crux of the issue.

The accounting treatment of loans and deposits is merely bookkeeping.

Why have the CBks around the world guaranteed deposits? Because they know there is only 3% or less worth of cash in the money system. The rest is just IOUs.

Fair questions.

Simple answers:

- Seignorage - the value that accrues from creating money.
- The growth imperative required to finance the interest burden from the creation of money.
- i have offered an alternative - Parliament creates all the money supply and puts it into circulation via banks, a basic income or govt spending (possibly all 3).
- Deregulation of capital requirements.
- Derivatives are just a way of packaging basic cashflows to produce nice fees and create "notional amounts" (like $55trln of CDS). It's just leverage on top of leverage. See SEC 2004 decision on voluntary regulation of investment banks.
- US needs to finance its current account deficit (as NZ does).
- Not having enough capital on the balance sheet to continue lending
- capital controls (my dad was a commercial banker for 42 years....even in his latter days he wouldn't lend more than 65% on a house).

Sorry to be brief.

It is not the money supply itself that is the problem. After all, as you note, who cares where it comes from.

The problem is:

- who issues it (and makes the seignorage).
- who controls the expansion and contraction (is it related to the value of goods and services in the economy).

The goal is a more stable economy and the removal of money as an unproductive investment class.

Dont do it to yourself Raf, that Andrew Nga is one of three things, 1-just a stirring low life trying to defer anyone new from taking interest in this thread, 2- dense as a H4 tanalised fence post, or 3- he is suffering from that henous decease known as Alzeimers, meaning he partakes in a discussion, then forgets and begins it all over again.
Just to put it simply for you Andrew, what is wrong with Fractional Reserve Banking is just the same as me being able to start knocking out $100 dollar bills on my lazer jet printer 24/7 and having them accepted as currency in the local economy. It is sweet if I am Robin Hood but if I am the Sheriff I would start to pay what ever it took to monopolise everything such as housing, food, water, energy, treating the Real Sector as a resource to be exploited and controlled until I owned everything and controlled everyone to the extent that they will work for very little personal gain, but only for shear choiceless survival.
To the other Russel,
The problem with returning to the Gold Standard is the fact that who currently holds the most of the worlds bullion would effectively be the only ones with any money from the day it was implemented, and I believe the Rothchild family have hold of most of it, thus I do not see them turning into Robin Hood overnight.

Andrew Nga, you said;
"Iain
In order to understand more complex banking we have to agree on the simplest banking. So far even the simplistic banking is being said to be slight of hand. But it is not. If we can agree on the simplest banking then we can then move to more complex banking. What we can agree on is that overburdoned tax payers are being asked to further extent their obligations in order to enable the banking interests to have no debt. But dont worry yourself! That cannot work. We are overburdoned and will have to have debt forgiveness at some point. Sooner or later it will have to happen."

Andrew,
The entire system at the international and internal levels is a closed loop and completely entwined, thus cannot be treated differently. As I have recently explained before you unfortunately appear to have suffered another of your Alzeimer attacks, is that the powered money brought into existance by slight of hand, is that written into the international electronic transfer system by the privately owned central banking network then loaned to nations at compounding interest, contracted to be paid back out of the future taxes of the nation at a set time in the future by way of a government bond. The other source of powered money written into existence out of fresh air is that typed in when every new mortgage is pledged to be paid back by a borrower. The powered money is then expanded further by the reserve ratio inside the internal commercial banking sector.
Andrew, if you cant see that this all adds upto nothing that is ever going to be good in the longrun, I suggest you ask for a higher dose of medication and let us beaver away in peace.
As for your suggestion that I relax, as there will be debt forgiveness given at some point, you need to do a Google search (greg palast vulture funds) and research the recent laws in the US making it harder to declare bankruptcy.

I just found this very clear explanation of how banks create money via fractional reserve banking. It seems to cover all of the various thing we have been talking about.

Economics By Campbell R. McConnell, Stanley L. Brue chapter 14 page 252

http://books.google.co.nz/books?id=XzCE3CjiANwC&pg=PA260&lpg=PA260&dq=de...

I had a "oh bloody hell" moment for a while when i read:

" a close examination of the Wahoo bank's balance statement reveals a startling fact: *when a bank makes loans, it creates money*"

And

"when banks lend, they create checkable deposits that *are* money"

However i relaxed when my previous understanding was confirmed by:

"A single commercial bank in a multibank banking system can lend only an amount equal to its excess reserves. When it lends, the lending bank faces the possibility that checks for the entire amount will be drawn and cleared against it. If that happens, the lending bank will lose (to other banks) reserves equal to the amount it lends. So, to be safe, it limits its lending to the amount of its excess reserves."

So this book proves that the basic principal of fractional reserve banking is that banks lend out excess reserves which are the deposits minus their required reserve. And the whole process is explained much more clearly than i ever could.

There is no slight of hand here as practiced in this book. It is just an honest way of facilitating trade and commerce by enabling excess deposits to be loaned to those who have need for money.

Raf,

>>So banks don't lend out my money, they lend out my money x 1/required reserve which at the moment is about 14x or 7%.

I now realise you are talking about the money multiplier. What this means is that your deposit can be loaned out and when/if redeposited it can be loaned out again while each time reducing the loan amount via the required reserve and if continually redeposited and loant out again as excess reserves then your money can be maximimally multipled by 14 times your deposit. But firstly the principal is that an amount *less* than your deposit has to be lent out as one single loan and this process repeated till there is no more excess reserve.

So the banks cant simply loan your money out for a figure instantly 14 times as much by creating money they never had - which you seemed to be believing?

In a simple banking model banks only lend the money they have in their excess reserves

Iain

At this stage all i have sought to do is clarify my own understanding of fractional reserve banking as it is performed at the commercial bank level. I have been doing this because of the intensely strong response i have had by a number of people who say i dont understand fractional reserve banking.

New Zealand has mainly foreign commercial banks supposedly supervised by a new zealand central banking organisation supposedly owned by the people of New Zealand supposedly being run for the benefit of new zealanders. However the worlds reserve currency the USD has influences here and dominates in ways that are so complex i am not sure any person alive really understands what is happening. The opportunities for mischief are obviously there. Meanwhile the US is supposedly the biggest debtor nation on Earth.

As i have implied a few times, to understand what is happening, first it makes sense to accurately understand commercial fractional reserve banking as it would be properly practiced by the proper definition of fractional reserve banking. Ie in essence depositors money is leant out with a fraction held back in reserve. Once we know the way that works we can then go on to examine in depth how central banking works with commercial banking. Then there are the IB's etc etc etc etc.

I am wanting to understand this in a step by step manner and i think it a good idea that others also understand it in a step by step manner.

I believe you are jumping to many conclusions if you make assumptions about my beliefs and my politics simply because i am somewhat doggedly working my way thru the processes that seem to be involved in the way bog standard fractional reserve banking works.

I realise it all gets very nebulous at the central bank level. But it is worth pointing out that groups like Ticker forum http://www.tickerforum.org who have an almost rapid distain for government in the USA have had a number of detailed technical discussions on the actions of the US federal reserve over the last few months. There was a moment about 2 months ago where many commentators around the world concluded that the US treasury was openly "printing" money via the sudden announcement of some treasury auction or what not. On that day the price of gold went up 100 dollars and a while later reached 950. However it was then concluded that in fact the US was not openly printing. And you might realise that in the last 24 hours the price of gold continues to fall in the electronic market anyway. Now 727. A massive fall.

You might be also aware of people like Mike Shedlock who has been long talking about deflation first using the banks own figures. While others have ridiculed him. It seemed only a few months ago that deflation was absolutely impossible. There are in fact many very well informed people who offer an opposite view that the Feds are openly printing. In my view they must be - but i dont know. Gold is saying somethig if the electronic price is connected to reality. But even that is disputed.

What i do personally believe is that we are in one god awful mess at the moment and i cannot see there are easy answers unless some kind of scandavian bank solution is implemented.

http://www.creditwritedowns.com/2008/08/swedish-banking-crisis-response-...

This solution in the 1990's brought for example Finland to its knees and destroyed buisinesses and banks alike. people were ruined and left in debt to this day to attempt to work their way out of their unpaid loans. Scandanavia recovered by taking some exstremely painful decisions but argueably they simply had no choice at all. However as in NZ there is a degree of social equity in Finland that is hard to find in many other countries in the world. My wife is Finnish and is in finland expecting a baby. It looks like i will have to live in Finland! so i am watching both finland and NZ. I have a house here which i am sitting in now:-)

I dont believe wealth can be created from thin air and i think you beleive that to be true also. Argueably todays banking and social crisis (for that is what it will become) was created by stupidity and greed before it was created by sinister design for some purpose. But who knows?

My only motivation in this thread was to ensure that what i think i know is actually true.

"Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof."

"One of the greatest pieces of economic wisdom is to know what you do not know."

John Kenneth Galbraith

"There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. "

Donald Rumsfeld

Jim, where Andrew seems to be getting stuck is in the simplified example where the loan that the bank creates is drawn upon by the borrower as cash or transferred to another bank.

In these examples the bank's reserves are required. The traditional explanation of deposit expansion shows this as being 'the way it happens', i.e. reserves are redeposited with the bank each time after being drawn on for each loan that is created.

The Reserve Bank of New Zealand publication explains the traditional view first, then follows with a section called 'What Really Happens'. I pointed this out to Andrew but he didn't want to know. In effect, what it explains is that lending growth is constrained because a single bank in the group has to be careful that lending growth does not result in a net outflow of reserves to other banks that could upset it's liquidity position.

Of course the fact that the deposits themselves become tradeable as money is the only reason why the system could ever work. Otherwise banks could only take long term savings as deposits or there is no way that in a world where transactions are all done in cash they could grow their lending to the point that they hold such a minimal amount of reserves. It just wouldn't work.

I understand EXACTLY what happens, your problem is you draw conclusions between points that are not logical and then claim the result as proof.

Tell me this;

How do you reconcile

a) your acceptance that deposits are money with
b) your comments that loans are not loans until 'drawn down'

On what basis do you assert that loan accounts have a separate recorded entry for the reserves that are moved into that account? Where in any of the texts does it say that? And why would this be a necessary accounting treatment for a bank? Or are you arguing that there *should* be this in some kind of hypothetical fantasy of "pure" fractional reserve banking?

What makes you think there is such a thing as 'pure' fractional reserve or 'plain vanilla' fractional reserve? I've never heard of these terms before.

It is you who is confused Andrew, and there has now been several different people come in supporting my position.

Thank you Jim. Yes I would like to move forward as well and look at alternatives.

What concerns me most about the current system is the ability for the money supply to balloon out as banks keep creating new loans.

This has led to serious monetary inflation which has then fed price inflation which is supposed to be controlled by interest rates.

We also have the interest burden imposed by the method of bank credit creation which provides the imperative for constant economic growth to repay that interest (fuelled of course by more loans).

So I think we need a Monetary Authority to do 2 things:

- Issue interest free money into the system.
- Maintain controls over the supply of money.

I'm trying to keep it simple and offer an overarching framework. The operation of the banking system within that framework is open to debate.

Jim,

I'd be interested in your thoughts on that and also to hear your proposal (in simple form if possible).