Money creation through bank lending… help!

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  • Wed, Oct 15, 2008 - 04:10pm

    #1
    CharlesHarris

    CharlesHarris

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    Money creation through bank lending… help!


As Martenson says, this is a very difficult concept for us economic
ludites. He suggests I may have to watch a few times, but it’s just not
going to help me:

You know, the example where Bob gives his $1000
to Bank A who loans $900 to Judy who gives it to Mary who puts it in
bank B, who loans $810 to Frank…. etc, until you have $10,000.

I’ve
seen this over and over and I just don’t get it. I simply don’t get
this. As far as I can tell, it’s still $1000. If you replace "banks"
with "people", then it is still just $1000.

If I loan $1000 to my dad, who then loans $900 to my uncle…. that doesn’t mean there is suddenly $1900!

I mean, it seems to me the dollar amounts below each person or bank are
misleading. For example, the first bank has $1000 under it. As far as I
can tell, this is the not the amount it has in its coffers, or the
amount it has given out. It is therefore the amount it owes. Now the
first guy has $900 underneath him. That makes sense, because he owes
$900. But wait! The next guy has $900 underneath him, but he was simply
paid the money by the other guy. He doesn’t owe anything! See what I’m
saying?

I know I’m wrong, and I just don’t understand, but can someone please explain to my why I’m wrong…

  • Wed, Oct 15, 2008 - 06:34pm

    #2

    rmurfster

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    Re: Money creation through bank lending… help!

Watch this video:

Money As Debt (47
minutes):

 
Or, you can watch it broken
down into 5 segments:
 
Money as Debt – Part
1:
 
Money as Debt – Part
2:

 
Money as Debt – Part
3:

 
Money as Debt – Part
4:
 
Money as Debt – Part
5:

Hope this helps,

Richard

  • Wed, Oct 15, 2008 - 06:57pm

    #3
    CharlesHarris

    CharlesHarris

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    Re: Money creation through bank lending… help!

Thanks for the tip. I’ve watched this before, and am watching it now again, just in case it does jog my understanding.

 

However, a simple explanation would be worth a lot more. As I posted above, it would probably be helpful to just have a ledger in which you add up all the money that comes out to $10,000. The dollar amounts shown below the icons in Marenson’s video don’t seem to be consistent.

 

Again, if A loans $1000 to B, who loans it to C, and so on all the way down to Z, it’s still $1000!

 (this is before we get into interest, which is a separate subject).

  • Wed, Oct 15, 2008 - 07:37pm

    #4

    rmurfster

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    Re: Money creation through bank lending… help!

Charles,

The problem is that A, B, and C still owe the full amount of what they have borrowed.  A owes $1000, B owes $900, C owes, $800, ….  So when all the money is paid back, it doesn’t add up to $1000, but $1000 + $900 + $800 ….

Richard

  • Wed, Oct 15, 2008 - 07:45pm

    #5
    CharlesHarris

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    Re: Money creation through bank lending… help!

Ok, can someone please carefully spell out this concept?

 

I’ll try: A loans 100 to B.

 B keeps 10.

B loans 90 to C

C keeps 9.

C loans 81 to D.

D keeps 8.1.

D loans 72.9 to E.

 

STOP.

 

E has 72.9.

D has 8.1.

C has 9.

B has 10.

 

72.9 + 8.1 + 9 + 10 = 100. Together they all have 100!! WTF am I missing?

  • Wed, Oct 15, 2008 - 07:56pm

    #6

    gyrogearloose

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    Re: Money creation through bank lending… help!



Ok. lets change some numbers.

Say we run with a fractional reserve of 90%  ( banks have to retain 90
% )

Of Bobs original $1000, Judy can only borrow $100 to give to Mary who puts
it in bank B……etc

Under this  it only tallies up to $1111. not the $10,000 at 10%
Fractional reserve

Not many people get to borrow under this scenario, less money floating
around

Think of it not as how many notes that are floating around, but as how many
times they are used.

There are just as many physical notes around, but to Judy there seems to be lots if the reserve ratio is 10% but vely little if it is 90%.

 

Now on to the NASTY part of FRB . If say at the end of the year everyone who
has money at the bank decided to take out all their cash to go on holiday say
😉  the banks would have to ask every one who they lent money to for it
back.

If by some miracle all the borrowers happened to have the money because they
worked hard all would be fine. 

The NASTY bit comes in if there is
interest….. in that case there is not enough money, because at say 10%
interest Bob for example should end up with $1100, but he can’t because there are not
enough notes.

  • Wed, Oct 15, 2008 - 08:00pm

    #7
    CharlesHarris

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    Re: Money creation through bank lending… help!

I get the crazy insane infinite interest rate concept. Please let’s everyone assume there is no lending at interest right now, as this is the premise of Chapter 8’s example anyway.

 

I don’t know.. you kind of just adjusted the fractional reserve rate there and showed a smaller amount of money creation.

 

I’m saying that I don’t see money created in the first place. Money has been moved around, and there are a lot of people owing a lot of people money, but at the end of the day, it can all be unwound and you have the same amount of money.

 

Can someone please address this:

 

Ok, can someone please carefully spell out this concept?

 

I’ll try: A loans 100 to B.

B keeps 10.

B loans 90 to C

C keeps 9.

C loans 81 to D.

D keeps 8.1.

D loans 72.9 to E.

 

STOP.

 

E has 72.9.

D has 8.1.

C has 9.

B has 10.

 

72.9 + 8.1 + 9 + 10 = 100. Together they all have 100!! WTF am I missing?

 

  • Wed, Oct 15, 2008 - 08:10pm

    #8
    Kjalnot

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    Re: Money creation through bank lending… help!

 

Ok, imagine this.

 You give me 100 dollars, because I promise to give you 5 dollars a year as long as I can keep the 100 dollars.

 You can collect them whenever you wish. 

 What you don’t know is that I have in fact given those 100 dollars to my mother.

 You perception is that you have 100 dollars (but in the bank). My mother’s perception is that she has 100 dollars (the bill in her hand).

 Now there exist a total of 200 dollars in this example, from 100. 

 As long as you dont’t collect your money it will work.

 

Magnify this by 1000000000000000000000 times and you will have modern banking 🙂

(this is not accurate, but should help you to understand)

  • Wed, Oct 15, 2008 - 08:11pm

    #9

    rmurfster

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    Re: Money creation through bank lending… help!

Charles,

I’m not an economist, but I think your problem is that B doesn’t loan directly to C.  Here’s the scenario as I understand it:

Bank 1 loans $100 to A ($100 total loaned out)

A buys a car with the $100 loan.  The car lot deposits $100 in bank  2

Bank 2 now loans $90 to B (there is now $190 total loaned out)

B deposits $90 in bank 3

Bank 3 loans $81 to C (there is now $271 total loaned out)

Richard

  • Wed, Oct 15, 2008 - 08:11pm

    #10

    Reuben Bailey

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    Re: Money creation through bank lending… help!

Charles,

   Take a look at my post on your other thread by this title and see if it helps.

All the best

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