Hidden history of the great depression: A major monetary reform initiative that no one seems to know about

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DrKrbyLuv
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Hidden history of the great depression: A major monetary reform initiative that no one seems to know about

One of the few good things that happened during the great depression was the naked exposure of our usurious private debt based money system. The depression could and should have been quickly stopped through true monetary reform but the private Federal Reserve, through FDR, chose to save and solidify their system at the expense of the people and the country.

We are on the cusp of a major depression that will make the 1930’s look like a mild recession. And once again, the reigning bank cartel is intent on saving themselves while using the chaos to seize more power. The hidden plan of the 1930s is as relevant today as it was then…but hopefully this time people will take the time to understand true monetary reform.

Bill Still recently reminded us about the 1939 Program for Monetary Reform:

Its lead author was Paul H. Douglas, an esteemed professor of economics at the University of Chicago who later in his career became a U.S. Senator and was described by Dr. Martin Luther King, Jr. as "the greatest of all the Senators."

Other professors of economics who were authors of the paper were: Irving Fisher - Yale University, Frank D. Graham - Princeton University, Earl J. Hamilton - Duke University, Willford I. King - New York University and Charles R. Whittlesey - Princeton University.

The document states that it had been approved of without reservations by 235 economists from 157 universities and colleges. Additionally, forty more economists had approved it with some reservations and 43 had expressed approval. I’m not sure how many professors of economics there were in the United States in 1939, but I’m willing to bet this was most of them.

It opens with an ominous warning to the world as it was then, and as we are rapidly heading towards today.

"The great task confronting us today is that of making our American system, which we call “democracy” work. No one can doubt that it is threatened. However, the danger lies less in the propaganda of autocratic Governments from abroad than in the existence, here in America, of ten millions of unemployed workers, sharecroppers living barely at subsistence level, and hundreds of thousands of idle machines. On such a soul fascist and communist propaganda can thrive. With full employment such propaganda would be futile."

The document then lays out the basic problem with the current system – as it was in 1939 and still remains today.

"If the purpose of money and credit were to discourage the exchange of goods and services, to destroy periodically the wealth produced, to frustrate and trip those who work and save, our present monetary system would seem a most effective instrument to that end.”

"Practically every period of economic hope and promise has been a mere inflationary boom, characterized by an expansion of the means of payment, and has been followed by a depression, characterized by a detrimental contraction of the means of payment [the money supply]. In boom times, the expansion of [money] accelerates the pace by raising prices, and rising prices conjuring up new money, the inflation proceeds in an upward spiral till a collapse occurs, after which the contraction of our supply of money and credit, with falling prices and losses in place of profits, produces a downward spiral generating bankruptcy, unemployment, and all of the other evils of depression.”

"The monetary reforms here proposed are intended primarily to prevent these ups and downs in the volume of our means of payment with their harmful influences on business."

The professors then review the problems with the “gold standard”.

"During the last ten years the world has largely given up the gold standard….

"In September 1931 England found it impossible to maintain her gold reserves and was forced off the gold standard. Since then, every other gold-standard nation has either been forced off gold or has abandoned it voluntarily. Those countries which bowed first to this pressure were also the first to recover from the depression. France was among the last to abandon gold; and she is still suffering from her mistake in waiting so long.”

"The depression experience of all countries under the gold standard has shown that it is scarcely worthy of being called a “standard” at all. It has shown that the so-called “stability” of gold and of foreign exchange destroyed the stability of the buying power of money and thereby the stability of economic conditions generally. In fact, the effort to retain gold as a “standard” has had such disastrous results all over the world that, for the time being, international trade has been deprived of some of the useful services which gold might still render it….”

"After the experience of the past decade, it is improbable that many countries will want to give their currencies arbitrary gold values at the cost of domestic deflation and depression…."

The document then lays out what a correct monetary system should do, namely create and maintain stability in the quantity of money.

"Our own monetary policy should… be directed toward avoiding inflation as well as deflation, and in attaining and maintaining as nearly as possible full production and employment."

The document then proposes the establishment of a Monetary Authority to control the quantity of money and keep it at arms length from the political tides of direct Congressional manipulation. But the Monetary Authority would be subject to strict guidelines established by law by Congress to manage the quantity of the American money supply to achieve the above objectives.

"The criteria for monetary management adopted should be so clearly defined and safeguarded by law as to eliminate the need of permitting any wide discretion to our Monetary Authority."

They then propose two ways of keeping the money supply stable. The first is called the “Constant-per-Capital Standard”.

"Establish a constant-average-per-capita supply or volume of the circulating medium, including both “pocket-book money” and “check-book money”…. One great advantage of this “constant-per-capita-money” standard is that it would require a minimum of discretion on the part of the Monetary Authority….”

"Under [this system] all the Monetary Authority would have to do would be to ascertain the amount of circulating medium in active circulation, and whatever amount of circulating medium seemed necessary to keep unchanged the amount of money per head of population. For this purpose, the statistical information regarding the volume of [the money supply] should be improved.”

Of course, this is exactly the opposite of our current situation where since 2006 the Federal Reserve has hidden the broadest measure of the money supply (M3) from public view.

Constant-Cost-of-Living Standard

The second proposed method of keeping the money supply stable is called the “constant-cost-of-living standard”. By this method, the cost of a number of commodities would be regularly sampled and then the volume of money would be adjusted to keep the average cost of this basket of commodities constant.

Unfortunately, we see today that this method is employed to try to gauge inflation by the Federal Reserve and the weakness in this system is that when a certain commodity fluctuates in price in a way that does not suit the political need of those in power, it is removed from this market basket of commodities. So, this method has been proven to be ineffective.

Fractional Reserve Lending

In order for the Monetary Authority to be able to keep the volume of money constant, the ability of the commercial banks to create their own fractional reserve money must be eliminated.

The astounding truth of our money system is that banks get to loan out many times the amount of money they actually have. Back in late 1930s when the Program for Monetary Reform (PMR) was written, the reserve requirement was 20%. In other words, banks could loan $10 for every $2 they actually had in the bank.

This was gradually lowered over the years from a 20% reserve requirement to a 10% reserve requirement. After the economic collapse in 2008, we discovered that banks had been totally ignoring the reserve requirement. Some of the biggest banks had loaned out 50 times the amount of their reserves. Mortgage giants Freddie Mac and Fannie Mae had loaned out over 70 their reserves.

In other words, it is impossible to control the amount of money in circulation when the commercial banks are creating money out of thin air and loaning it out, and the government has no idea how much they are creating. Included in this money creation is credit card “money” because when you go to the mall and pull out your credit card, it spends just as well as a $100 bill. And remember, when banks have complete discretion over how much they will loan out and to whom, it is fairly easy to buy influence with the various nodes of power in any nation; such as its politicians and its media. This is the very definition of the word “plutocracy”.

As the PMR put it:

"A chief loose screw in our present American money and banking system is the requirement of only fractional reserves behind demand deposits. Fractional reserves give our thousands of commercial banks power to increase or decrease the volume of [money] by increasing or decreasing bank loans and investments. The banks thus exercise what has always, and justly, been considered a prerogative of sovereign power. As each bank exercises this power independently without any centralized control, the resulting changes in the volume of the circulating medium are largely haphazard. This situation is a most important factor in booms and depressions….”

"It is a system which permits, and practically compels, the banks to lend and owe five times as much money as they must have on hand if they are to survive in the competitive struggle, which causes much of the trouble."

Flash forward to today’s world – or the world of 2007, that is. During an interview with the Financial Times, on July 9, 2007, Citigroup CEO Charles Prince tried to excuse his bank’s excessive money creation through the issuance of risky sub-prime loans.

"When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance.”

In other words, under the fractional reserve system, banks are driven to ever-greater distortions of the reserve requirements by the competitive demands for profits. As the PMR put it:

"Despite these inherent flaws in the fractional reserve system, a Monetary Authority could unquestionably, by wise management, give us a far more beneficial monetary policy than the Federal Reserve Board has done in the past. But the task would be much simplified if we did away altogether with the fractional reserve system; for it is this system which makes the banking system so vulnerable….”

"The 100% reserve system was the original system of deposit banking, but the fractional reserve system was introduced by private Venetian bankers not later than the middle of the Fourteenth century…. bankers began to lend some of this [money], though it belonged not to them but to the depositors. The same thing happened in the public banks of deposit at Venice, Amsterdam, and other cities, and the London goldsmiths of the Seventeenth century found that handsome profits would accrue from lending out other people’s money… a practice which, when first discovered by the public, was considered to be a breach of trust. But what thus began as a breach of trust has now become the accepted and lawful practice. Nevertheless, the practice is incomparably more harmful today than it was centuries ago, because, with increased banking, and the increasing pyramiding now practiced by banks, it results in violent fluctuations in the volume of the circulating medium and in economic activity in general."

How To Establish the 100% Reserve System...According to the PMR:

"The simplest method of making the transition from fractional to 100% reserves would be to authorize the Monetary Authority to lend, without interest, to every bank or other agency carrying demand deposits, sufficient cash … to make the reserve of each bank equal to its demand deposits.”

"The present situation would be made the starting point of the 100% reserve system by simply lending to the banks whatever money they might need to bring the reserves behind their demand deposits up to 100%. While this money might largely be newly issued for the occasion … it would not inflate the volume of anything that can circulate. It would merely change the nature of the reserves behind the money that circulates…. The bank would simply serve as a big pocket book to hold its depositors’ money in storage."

One objection to the 100% reserve solution is that banks might still try to cause depressions by coordinated action to get their way politically, as they have done time and time again in American history. The PMR addressed this directly:

"In such a case, it would, of course, be imperative for the Monetary Authority to increase the volume of circulating medium still further."

This would be literally free money the Government could spend into the economy without debt or increasing taxes. In fact, the Government could even reduce taxes while increasing spending levels.

"The profit to the Government from the creation of new circulating medium would be a fitting reward for supplying us with such increased means of payment as might become necessary to care for an increased volume of business….”

"In early times, the creation of money was the sole privilege of the kings or other sovereigns – namely the sovereign people, acting through their Government. This principle is firmly anchored in our Constitution and it is a perversion to transfer the privilege to private parties to use in their own real, or presumed, interest.”

"The founders of the Republic did not expect the banks to create the money they lend. John Adams, when President, looked with horror upon the exercise of control over our money by the banks."

The PMR then rightly reassures us that banks would not disappear under the 100% reserve system.

"Lest anyone think that the 100% reserve system would be injurious to the banks, it should be emphasized that the banks would gain, quite as truly as the Government and the people in general. Government control of the money supply would save the banks from themselves – from the uncoordinated action of some 15,000 independent banks, manufacturing and destroying our check-book money in a haphazard way.”

"With the new steadiness in supplying the nation’s increasing monetary needs, and with the consequent alleviation of severe depressions, the people’s savings would, in all probability, accumulate more rapidly and with less interruption than at present. Loans and investments would become larger and safer, thus swelling the total business of banks….”

"Incidentally, there would no longer be any need of deposit insurance on demand deposits."

No More National Debt...The PMR then tackles the thorny problem of what to do about the existing National Debt.

"A by-product of the 100% reserve system would be that it would enable the Government gradually to reduce its debt, through purchases of [existing outstanding] Government bonds by the Monetary Authority as new money was needed to take care of expanding business. Under the fractional reserve system, any attempt to pay off the Government debt, whether by decreasing Government expenditures or by increasing taxation, threatens to bring about deflation and depression."

In other words, since all our money is created out of debt under the existing system, paying down the debt during a deflationary period is an impossibility since it would further reduce the money supply.

"Whatever increase in the circulating medium is necessary to accommodate national growth could be accomplished without compelling more and more people to go into debt to the banks, and without increasing the Federal interest-bearing debt."

The PMR concludes with a solemn warning that is just as applicable to today’s situation as it was in 1939.

"If we do not adopt the 100% reserve system, and if the present movement for balancing the budget succeeds without providing for an adequate money supply, the resulting reduction in the volume of our circulating medium way throw us into another terrible deflation and depression, at least as severe as that through which we have just been passing.

"When violent booms and depressions, in which fluctuations in the supply of money play so vital a part, rob millions of their savings and prevent millions from working, Constitutions are likely to become scraps of paper."

Complete article link

The 1939 Program for Monetary Reform was based on an earlier collaboration between Henry Simons and Paul Douglas referred to as the “Chicago Plan.” Stephen Zarlenga explains the "Chicago Plan":

FIRST: Only the government would create money. The Federal Reserve banks would be nationalized, but not the individual member banks. The power to create money was to be removed from private banks by abolishing fractional reserves – the mechanism through which the banking system creates money. So the plan called for 100% reserves on checking accounts which simply meant banks would be warehousing and transferring the money and charging fees for their services.

SECOND: The Plan separated the loan-making function, which can belong in private banks, from the money-creation function, which belongs in government. Lending was still to be a private banking function, but lending deposited long-term savings money, not created credits. In this way they’d restrict an unstable practice known as borrowing short and lending long – making long term loans with short term deposits. Some variations proposed this be done through mutual fund-like mechanisms, or by chartering entirely new types of banks.

THIRD: The proposal recognized the distinction between money and credit, which had been confused through fractional reserves and what was called the “real bills doctrine.” The confusion was seen as one of the causes of the depression, because when businesses reduced their borrowings on commercial bills which occurs during any downturn, parts of the money supply had been automatically liquidated. The Chicago Plan saw the instability of this – that it aggravates a downturn.

The best economic minds supported the Chicago Plan:

Paul Douglas wrote: “This proposal will of course be opposed by the bankers from whom it takes the lucrative privilege of creating purchasing power. It would however insure the safety of deposits, give large revenues to the government, provide complete social control over monetary matters and prevent abnormal fluctuations in the capital market. At the same time it would permit the allocation of productive resources…to remain primarily in private hands. All in all it seems the most promising program for the reform of our monetary and credit system…” (CP, p.141)

Frank Graham wrote it was self evident that the right of issuing money belongs in government, and that banks seignorage profits were a kind of tax on the community. “This privilege that the banks enjoy is in no way essential to the lending process.”

Marinner Eccles who became Fed Chairman under Roosevelt testified that the best course would be for the government to nationalize the Federal Reserve banks.

Irving Fisher of Yale, wrote on it extensively and popularly well into the 1940s. The young Milton Friedman was the best known advocate for the Chicago Plan in the postwar period, writing: “Henry Simons held the view…which I share - that the creation of fiat currency should be a government monopoly.”

BUT TURNING THE Chicago Plan into law proved elusive. When University of Chicago’s Chancellor Maynard Hutchins sent a copy of the plan to Senator Bronson Cutting in December 1933, Cutting asked him to draft a bill. Four months later he telegrammed Hutchins asking where it was, and Simons went to present the essentials of the plan to Cutting, who introduced it in the Senate on June 6th 1934. (S. 3744). Wright Patman introduced it in the House (HR9855).

The Chicago plan & New Deal banking reform, By Ronnie J. Phillips, explains that “Simon did not feel qualified to draft an entire bill…the actual bill was written by Robert Hemphill [former credit manager, Federal Reserve Bank of Atlanta]”

WHY DIDN’T THE CHICAGO PLAN PASS?

First there was no understanding or support for the proposal among the electorate. Only Irving Fisher seems to have understood the necessity for popularizing the matter.

Second the Plan was mishandled politically. Cutting appears to have misunderstood his own bill, and incorrectly said in interviews that credit as well as money creation was also to be a sole function of government.

Third, the bill suffered a major setback when Senator Cutting died in an Airplane crash in May 1935 while being forced to defend his election results in New Mexico by challenges from the Roosevelt Administration which was then held responsible for his death.

The last attempt at 100% reserves was when Senator Nye of North Dakota tried to place it in part of the Administrations 1935 banking reform legislation, but his amendment was defeated.

The FDR administration had its own banking reform bill and remained ambiguous on the Chicago Plan, never commenting on it even though the political climate and professional support for the plan was sufficient to get it passed, had they made some effort. Instead his Treasury Secretary Morganthau was trying to make minor adjustments without fundamentally challenging the banking system.

Can we learn from what John Maynard Keynes was doing during all this? He was squarely behind the bankers and against such real reform. Yet he knew that he had to break out of orthodox economics or the whole system was in danger of being overturned. Keynesianism was a way to allow banks not government to keep control over the money-creation process, and while the more narrow minded economists fought Roosevelt’s attempts to create money and jobs as inflationary, during the nations worst deflation, Keynes knew better.

Keynes inappropriately warned Roosevelt not to create the money for this, but only to borrow it, and wrongly advised him that there was already enough money in circulation, and that: “increasing the quantity of money…is like trying to get fat by buying a larger belt.”

Keynes was therefore not “revolutionary” except in relation to the utter backwardness of the financial establishment. He didn’t come close to a real solution, but essentially protected his class. The real question has always been whether the nation’s money should be created under law, by government, or under the private caprice of bankers.

What were the Austrian economists up to? Frederich Hayek was arguing against national currencies – arguing for in effect an international control over all economies through the gold system incredibly writing:

“There is no rational basis for the separate regulation of the quantity of money in a national area that remains part of a wider economic system;” arguing that independent national currencies cannot insulate a country from foreign shocks; and that fluctuating exchange rates would be bad.

Hayek tried to twist hundred % reserves to covering them 100% with gold. A deflationist. This is the position supporting the creditors and usury and plutocracy; the normal outcome of Austrian Economics. They talk a freedom game, but promote serfdom.

Always remember, had we followed the ideas of the Austrian School, there would have never been a United States of America. If we follow their ideas now, there will soon not be a United States of America. Unfortunately the present administration has made this seem like a worthy goal to many of the worlds oppressed peoples.

Complete article link

Like the great depression of the 1930s, the coming one can be prevented through monetary reform.  Hopefully these hidden initiatives will spark some understanding and demand for true monetary reform.

Larry

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Re: Hidden history of the great depression: A major ...

Why is it so difficult, impolite or preposterous  for people in this country to question the role and necessity of a private central bank?

I know it is a rhetorical question, it is just quite frustrating.

Thanks DrKrbyLuv...keep doing what you are doing!

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Re: Hidden history of the great depression: A major ...

Maybe people will listen to the old CEO of one of the biggest privately held banks saying that he was compelled by the very nature of the capital markets to manage his balance sheet such that it grew and generated positive EPS growth despite the fact that he knew it was setting up a disaster.  This is the source of exponential growth...

Citigroup's Prince wrote:

"When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance.”

What could be more obvious than the sky is blue?  Put money creation in the hands of the commonwealth.

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Re: Hidden history of the great depression: A major ...
Southerner wrote:

Why is it so difficult, impolite or preposterous  for people in this country to question the role and necessity of a private central bank?

I know it is a rhetorical question, it is just quite frustrating.

Thanks DrKrbyLuv...keep doing what you are doing!

"The horror oh the horror , the horror" Colonel Kurtz Apocalypse Now

V

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Re: Hidden history of the great depression: A major ...

" Are you an assasin?"

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I doubt that there is any answer to our economic problems other than to start by taking control of our monetary system in the way Strabes, DrKrbyLuv and others suggest and then working to re-build our needed manufacturing & agricultural base on a sustainable basis

Jim

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I've been reading through the forums for a couple of weeks now and this 'Chicago Plan' is the best monetary policy idea I've seen. Thanks for posting this Larry. I’m impressed with the men who had the courage to stand together against the FED and bankers, but it’s truly unfortunate that Senator Cutting seemed to lack the political skill to pull this off. Of course it looks like his death is some serious CT topic fodder!

It seems so simple and elegant. Perhaps some of you with far more monetary policy knowledge can comment on it? Is there something about this plan that makes it’s totally unworkable (technically speaking, I know the bankers would make this sound like socialism or something)? Not enough negative feedback in this plan?

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Re: Hidden history of the great depression: A major ...

I second everyone's approval of Larry's post and agree that the "Chicago Plan" seems to make great sense.   Where is the political push for something like this today?  Is there someone preaching this message in Washington?  Knowing the answers to both of those questions has me big time frustrated. 

It seems there is no way to stop what's happening.  Fitting quote V.

Shack

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Re: Hidden history of the great depression: A major ...

This assumes that one desires a monetary system that is "controlled' - perhaps a bit like trying to control the climate.  And there's a damn good reason for that comparison to be valid.  The reason none can predict the climate, let alone control it, is the number of variables is almost infinite.  All the Cray computers working at full power have nowhere near sufficient computing capacity let alone anywhere near enough data inputs of all of the variables to even begin predicting "climate", let alone the weather for any specific point 60 days in advance.  An economy is in the same boat.  An economy is the sum total of all of the decisions and the actions and reactions to those decisions of every individual oin the planet every second of every day.

To call economics a "science" is laughable. To purport that anyone can come up with a scheme to always have the "perfect" amount of money in a system at any one moment is lunacy.  Much as the Fed's setting of the "perfect" interest rate is a joke other than to say that that the Fed follows a whole lot more than it leads.

If you ask 100 economists anything you will find the response to be heavily clustered in a narrow range of "consensus".  They are like schooling fish, sticking together in the comfort of safety in numbers and knowing that swimming beyond the edge of the ball of fish is asking for a predator to swoop in and take away your grant.

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Here's a basic issue with 100% reserve lending: inadequate return on equity. 

Currently, it's considered solid performance if a bank can earn better than 1% return on assets -- the whole left side of its balance sheet, which is mainly the loan portfolio. With 10-to-1 leverage thanks to10% fractional reserves, this puny 1% return on assets translates into a healthy 10% return on equity -- comparable to that available on competing investments such as industrial stocks.

With no fractional reserve leverage, banks would need to shoot for 10% return on assets, by lending at interest rates more than 10% above their deposit rates on CDs and the like, even to prime borrowers. Corporations with direct access to the securities market would flee the banks, borrowing via bond issues. Auto companies would start lending via their in-house finance subsidiaries. Non-bank 'consumer loan' companies also would step into the breach, as would payroll, pawnshop, and criminal syndicate lenders. Banks would be severely disintermediated; hundreds of them would close.

Fully-reserved lending can work only with comprehensive regulation of leverage throughout the economy. Imposing leverage controls only on banks would wipe out most of them. 

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Re: Hidden history of the great depression: A major ...
machinehead wrote:

Here's a basic issue with 100% reserve lending: inadequate return on equity. 

Currently, it's considered solid performance if a bank can earn better than 1% return on assets -- the whole left side of its balance sheet, which is mainly the loan portfolio. With 10-to-1 leverage thanks to10% fractional reserves, this puny 1% return on assets translates into a healthy 10% return on equity -- comparable to that available on competing investments such as industrial stocks.

With no fractional reserve leverage, banks would need to shoot for 10% return on assets, by lending at interest rates more than 10% above their deposit rates on CDs and the like, even to prime borrowers. Corporations with direct access to the securities market would flee the banks, borrowing via bond issues. Auto companies would start lending via their in-house finance subsidiaries. Non-bank 'consumer loan' companies also would step into the breach, as would payroll, pawnshop, and criminal syndicate lenders. Banks would be severely disintermediated; hundreds of them would close.

Fully-reserved lending can work only with comprehensive regulation of leverage throughout the economy. Imposing leverage controls only on banks would wipe out most of them. 

I think you just crashed this little block party and rained on everyone's parade...Surprised

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MachineHead wrote:

Fully-reserved lending can work only with comprehensive regulation of leverage throughout the economy. Imposing leverage controls only on banks would wipe out most of them.

Okay, so where are most banks heading within the current monetary system?

Shack

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Quote:

Here's a basic issue with 100% reserve lending: inadequate return on equity. 

Currently, it's considered solid performance if a bank can earn better than 1% return on assets -- the whole left side of its balance sheet, which is mainly the loan portfolio. With 10-to-1 leverage thanks to10% fractional reserves, this puny 1% return on assets translates into a healthy 10% return on equity -- comparable to that available on competing investments such as industrial stocks.

With no fractional reserve leverage, banks would need to shoot for 10% return on assets, by lending at interest rates more than 10% above their deposit rates on CDs and the like, even to prime borrowers. Corporations with direct access to the securities market would flee the banks, borrowing via bond issues. Auto companies would start lending via their in-house finance subsidiaries. Non-bank 'consumer loan' companies also would step into the breach, as would payroll, pawnshop, and criminal syndicate lenders. Banks would be severely disintermediated; hundreds of them would close.

Fully-reserved lending can work only with comprehensive regulation of leverage throughout the economy. Imposing leverage controls only on banks would wipe out most of them.

But this is pre-2008, pre-3E thinking.  Our assumptions and ways of thinking about the market should change.  You're accepting private ownership of a debt-based money supply as a given (the source of exponential debt growth...1st E which drives the other E problems), and you're accepting the justification for fractional lending when your writeup here is a great example of why a few institutions should probably** not have government preferential approval to do business with assets that don't really exist on their balance sheet (if you can't get solid ROE following common law, you shouldn't be able to get government to change law to give you a competitive ROE...recipe for disaster...disaster is now upon us).  Rather than justifying why banks should be able to continue leveraging with a monopoly on money supply, your explanation here illustrates why they should not have that.

Banks would be disintermediated and some would close if they couldn't leverage?  What's happening now now that the leveraging system has run its course?  The problem now is that it's consolidating into a few super-mega banks (the remaining primary dealers) as opposed to disintermediating in a competitive way.  I wish the disintermediation and closings would've happened long ago, as you correctly say it would've if banks were forced to do business consistent with common contract law.  But now that we let banks continue justifying further leverage for the types of reasons you list here, we're facing the ramifications of 3E (horrific stuff) as the system resets to normal.

Companies getting direct financing?  Good.  Car companies financing their own operations?  Good.  Competitive forms of consumer liquidity?  Good...what's wrong with competition?  All this stuff already happens anyway.

 

**  Having said that, I do think a strict 10 to 1 ratio is manageable.  I don't think there's ever been a major failure when 10 to 1 reserve ratios were maintained.  So if we want a banking industry and we agree that controlled leverage is a good thing to maintain a modern economy, then the ratio needs to be maintained.  The problem is, the pressure to continue letting banks expand to maintain ROE to avoid deflation always results in the government letting them move beyond 10 to 1 and basically set their own ratio depending on what the market requires.  That's the danger of going over the slippery slope in the first place. 

 

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strabes wrote:
Quote:

Here's a basic issue with 100% reserve lending: inadequate return on equity. 

Currently, it's considered solid performance if a bank can earn better than 1% return on assets -- the whole left side of its balance sheet, which is mainly the loan portfolio. With 10-to-1 leverage thanks to10% fractional reserves, this puny 1% return on assets translates into a healthy 10% return on equity -- comparable to that available on competing investments such as industrial stocks.

With no fractional reserve leverage, banks would need to shoot for 10% return on assets, by lending at interest rates more than 10% above their deposit rates on CDs and the like, even to prime borrowers. Corporations with direct access to the securities market would flee the banks, borrowing via bond issues. Auto companies would start lending via their in-house finance subsidiaries. Non-bank 'consumer loan' companies also would step into the breach, as would payroll, pawnshop, and criminal syndicate lenders. Banks would be severely disintermediated; hundreds of them would close.

Fully-reserved lending can work only with comprehensive regulation of leverage throughout the economy. Imposing leverage controls only on banks would wipe out most of them.

But this is pre-2008, pre-3E thinking.  Our assumptions and ways of thinking about the market should change.  You're accepting private ownership of a debt-based money supply as a given (the source of exponential debt growth...1st E which drives the other E problems), and you're accepting the justification for fractional lending when your writeup here is a great example of why a few institutions should probably not have government preferential approval to do business with assets that don't really exist on their balance sheet (if you can't get solid ROE following common law, you shouldn't be able to get government to change law to give you a competitive ROE...recipe for disaster...disaster is now upon us).  Rather than justifying why banks should be able to continue leveraging with a monopoly on money supply, your explanation here illustrates why they should not have that.

Banks would be disintermediated and some would close if they couldn't leverage?  What's happening now now that the leveraging system has run its course?  The problem now is that it's consolidating into a few super-mega banks (the remaining primary dealers) as opposed to disintermediating in a competitive way.  I wish the disintermediation and closings would've happened long ago, as you correctly say it would've if banks were forced to do business consistent with common contract law.  But now that we let banks continue justifying further leverage for the types of reasons you list here, we're facing the ramifications of 3E (horrific stuff) as the system resets to normal.

Companies getting direct financing?  Good.  Car companies financing their own operations?  Good.  Competitive forms of consumer liquidity?  Good...what's wrong with competition?  All this stuff already happens anyway.

Having said that, I do think a simple 10 to 1 ratio is manageable.  I don't think there's ever been a major failure when 10 to 1 reserve ratios were maintained.  So if we want a banking industry and we agree that controlled leverage is a good thing to maintain a modern economy, then the ratio needs to be maintained.  The problem is, the pressure to continue letting banks expand to maintain ROE to avoid deflation always results in the government letting them move beyond 10 to 1 and basically set their own ratio depending on what the market requires.  That's the danger of going over the slippery slope in the first place. 

 

Damon

You of all people should know that in the words of that great capitalist JD Rockefeller "  Competition is sin "

What happened in the first depression was a lot of banks went belly up. This was intentional as the big Eastern banks hated the banks out west and wanted them out of biz. What we are seeing right now is the consolidation once again. It is being paid for by we the people. What we are witnessing is the sharks cannibalizing each other and it is the law of the fish.......the big ones eat the little ones so the little ones gotta be fast. (ht the Radiators)

V

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DrKrbyLuv
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Re: Hidden history of the great depression: A major ...

Wow, I didn't think so many would read such a long post - thanks!  And, I appreciate the kind words.

ffshack165 wrote:

Where is the political push for something like this today?  Is there someone preaching this message in Washington?  Knowing the answers to both of those questions has me big time frustrated.

I share your frustration as no one in Washington dares share the fact that our monetary system is privately owned and impossible to sustain.  I think Wright Patman was the last American politician to tell the truth about our monetary system and to work towards real reform.  And some claim that John Kennedy was working towards this end when he had the treasury directly issue some money.  But that may be a reach as I've never seen any quotes that would support the claim.   

Here's a great Patman quote about congressional failure to fix the system:

  Wright Patman

“When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money... I am saying to you in all sincerity, and with all the earnestness that I possess, it is absolutely wrong for the Government to issue interest-bearing obligations. It is not only wrong: it is extravagant. It is not only extravagant, it is wasteful. It is absolutely unnecessary.

Now, I believe the system should be changed. The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks.

I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue. I make that statement after years of study."

I hope some day politicians, economists, academia and the media are called to the carpet to explain why this fraud has been allowed to go for so long.  I suspect that if the people began demanding reform, political champions would come forward.

machinehead wrote:

Here's a basic issue with 100% reserve lending: inadequate return on equity. 

Currently, it's considered solid performance if a bank can earn better than 1% return on assets -- the whole left side of its balance sheet, which is mainly the loan portfolio. With 10-to-1 leverage thanks to10% fractional reserves, this puny 1% return on assets translates into a healthy 10% return on equity -- comparable to that available on competing investments such as industrial stocks.

This issue is addressed in the plan as the banks would be able to borrow interest free money from the treasury to build and maintain the needed reserves.  And if banks can only return 1% of assets while they are able to create money for virtually free, then something is very wrong with their business model.  This may be part of the reason that 140 banks failed in 2009 ($36,432,500,000 cost to FDIC) and 109 so far this year ($19,118,900,000 to FDIC).

The esteemed authors claim:

"Lest anyone think that the 100% reserve system would be injurious to the banks, it should be emphasized that the banks would gain, quite as truly as the Government and the people in general. Government control of the money supply would save the banks from themselves – from the uncoordinated action of some 15,000 independent banks, manufacturing and destroying our check-book money in a haphazard way.”

Another approach might be to simply require banks to borrow all new money from the treasury and work off a spread like other businesses.  For example, banks could be charged 1 - 2% and make a profit by lending the money at a higher rate. 

machinehead wrote:

Corporations with direct access to the securities market would flee the banks, borrowing via bond issues. Auto companies would start lending via their in-house finance subsidiaries.

Many automobile companies already lend their customers money and many lease their products.  And, big retailers like Target, act as banks by issuing credit cards.  I think, but am not sure, that these companies create their money for virtually free just like banks.

If corporations can sell bonds to gain capital at a lower cost than through the banks, they should do so.  And, aren't many of the bonds issued by banks?

Larry

 

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DrKrbyLuv
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Re: Hidden history of the great depression: A major ...

Fractional reserve banking is a leftover of the 17th century goldsmiths when the logic was that no more than 10% of customers will ever want their gold at the same time.  This scam enabled the goldsmiths to lend or sell gold that didn't belong to them.

The Fed (NY) explains reserve requirements:

“Reserve requirements . . . are computed as percentages of deposits that banks must hold as vault cash or on deposit at a Federal Reserve Bank. . . . As of June 2004, the reserve requirement was 10% on transaction deposits [deposits immediately available to depositors]. . . . If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+ . . . =$1,000)."

Reserve requirements have little meaning in our system as explained by Ellen Brown in the Web of Debt

"First, some definitions: a time deposit is a bank deposit tht cannot be withdrawn before a specified date.  Transaction deposit is a term used by the Federal Reserve for "checkable" deposits (deposits on which checks can be drawn) and other accounts that can be used directly as cash without withdrawal limits or restrictions.  Transaction deposits are also called demand deposits: they can be withdrawn on demand at any time without notice.  All checking accounts are demand deposits.

But wait! These funds belong to to the depositors and must remain available at all times for their own use.  How can money be available to the depositor and lent out at the same time?  Obviously it can't.  The money is basically counterfeited in the form of loans."

Today, excess reserves held at the Fed total over $1 trillion which is considered "high powered money" because unlike "transaction accounts" the reserves are multiplied instead of divided.  So, the $1 trillion dollars may be expanded to $10 trillion through loans.

And now comes the real crazy part...the money multiplier (the reciprocal of the reserve ratio) has fallen below 1!  Which means that there is no fractional lending taking place...we are at over 100% reserves.

Larry

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Re: Hidden history of the great depression: A major ...

Larry wrote:

And now comes the real crazy part...the money multiplier (the reciprocal of the reserve ratio) has fallen below 1!  Which means that there is no fractional lending taking place...we are at over 100% reserves.

Hi Larry,

This statement sounds extreme - 'we are at over 100% reserves', and I wonder about all the off-balance sheet debt that all these banks are hiding? My wild guess is if that those debts were accounted for, we would still be at a fantasticly high reserve ratio. Any comment? J

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DrKrbyLuv
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Re: Hidden history of the great depression: A major ...

I wrote:

And now comes the real crazy part...the money multiplier (the reciprocal of the reserve ratio) has fallen below 1!  Which means that there is no fractional lending taking place...we are at over 100% reserves.

Hi Larry,

This statement sounds extreme - 'we are at over 100% reserves', and I wonder about all the off-balance sheet debt that all these banks are hiding? My wild guess is if that those debts were accounted for, we would still be at a fantasticly high reserve ratio. Any comment? J

Hello John,

Falling to one is extreme and I thought it was impossible to go any lower.  Theoretically, the money multiplier should not go below one and I don't think it ever happened before.

As of a year or so ago, we began paying the banks interest on bank reserves which causes them to grow separate from traditional forces.  So, the equation can go under one.  I can't remember where I read this or I'd supply a link.  I don't know if this alone accounts for difference but I think it is a factor.

One bad thing, if you multiply by less than one, you end up with less than you started with.  According to Karl Denninger:

"...when the multiplier is less than one the more money you spew into the economy the worse the impact, as you get less for each additional dollar.

M1's multiplier going below 1 strongly implies (but does not yet prove) that we have reached that "zero hour".

The foundation of his entire thesis as a banker is that a central bank can always reverse a deflation by printing money.  Unfortunately as he has done so velocity has fallen and the multiplier has now gone below 1.  If this induces him to do even more of what caused this decrease there is a very real risk that the actual market reaction will be to tighten the monetary flat spin.

This is because the underlying problem in the economy isn't the lack of debt (money) in the system.  It is that there is too much debt of all sorts, and since money is in fact a form of debt, you can't fix the problem by playing helicopter drop!

Karl Denninger's argument may be off as he may not of accounted for the interest growth.  Maybe someone else can clarify this?

This brings up another concern, excess reserves are over $1 trillion and the interest rate on them is 0.25%, which works out to around $25 billion a year that we have to pay.   The Fed has said they are increasing their balance sheet which I think will add to their reserves.  If so, the interest will compound - exponential growth of reserves?

Larry   

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Thomas Hedin
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Re: Hidden history of the great depression: A major ...

What could be more obvious than the sky is blue?  Put money creation in the hands of the commonwealth.

+1

What gets me Strabes is that all I want to do is have the numbers represent wealth (what people think money represents today) instead of having it represent unpayable debts owed to the banking system.  I've been thinking for days about why any thinking person would actually defend debt money and fight against wealth based money.  My best guess is that those people simply do not want to face the fact the have been lied to about how out monetary system currently functions.

Larry,

I wish you could find the person who drew that and have the octopus spitting out human rights into a trash can.  I'm tempted to start calling this the slave money system.

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DrKrbyLuv
Status: Diamond Member (Offline)
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Re: Hidden history of the great depression: A major ...

Hello Thomas - I agree we are under more than a just financial attack.  Here is an appropriate quote from Professor Carroll Quigley, "Tragedy & Hope: A History of the World in Our Time" -

"...the secret of the international bankers' success is that they have managed to control national money systems while letting them appear to be controlled by governments"

Larry

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ffshack165
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Re: Hidden history of the great depression: A major ...
Thomas Hedin wrote:

I'm tempted to start calling this the slave money system.

I'm with you on your temptation.  The idea of Debt being a form of slavery is taught in a really old book of wisdom and survival that i enjoy studying.  It's too bad that parts of the establishment that teaches from this book have themselves ignored this wisdom.

Larry, Thanks for the information you have posted and will post here in these forums.

Shack

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Thomas Hedin
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Re: Hidden history of the great depression: A major ...

ffshack165,

Thanks for writing.  I'm just lost as to how any thinking person could ever defend a debt money system.  Maybe I answered my own question there with the whole "thinking person".  Maybe there isn't a whole lot of thinking people left in America.  Just a lot of people schooled into believing that being a slavery based, unpayable debt to people who never loan anything is the only way money can work.

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