Can we agree that any system that allows borrowing will multiply the money supply?

@davidjohnston Hi David :) Yes, I agree that if you limit the lending to only those coins, that WILL indeed EXPAND the money supply as you have described.

Now, if in this system you also allow lending MORE than just the 1000 coins, let's say up to 10 times more, that would in fact CREATE new money, not just EXPAND the physical money. This is where I make the distinction. In this case, new money is created on books (physical or electronic). So in your example, I go to an person named Mr. Banks who has a credit tracking system, and ask to borrow 5000 electronic coins. They have no coins currently, but they simply type in "5000" to my new account, and POOF, I have 5000. I have to pay it all back, however, at some future time. Also, this Mr. Banks has a policy of holding physical coins that equal 10% of loaned amounts. He then borrows 500 physical coins from you as "reserves" against my loan.

@davidjohnston I'm not sure I understand.

You have increased your debt by borrowing back the money that was already in the system. Technically would this not be a reduction of money in the system?

In the system there is still 1000c but (say you borrowed back 5 times) you now owe Bob 4000c (Bob has the 1000c back from the last lot of widgets you bought).

So there is a deficit in the system of 4000c that you owe Bob? The debt is greater than the total amount of money in the system.

Plus where did Bob get his widgets from? Did they cost him anything?

@wadevuglar There is increased debt and money...both. That is how money gets expanded through lending, which as you correctly noticed, also increases the overall debt in the system. In our system, DEBT = MONEY, and MONEY = DEBT, since ALL money is borrowed, even from the central bank.

Looked at another way...for every dollar of money in the system, there is a dollar of debt some place also. The inverse is also true, and that is why I've maintained that lending creates money. Every dollar of new debt creates a new dollar of money.

The ONLY place this isn't true is that small place between the mint and the central bank. The central bank can order currency (which is also money) to be printed/coined, and there is no debt in that. From that point on, however, debt is always involved, either creating it or destroying it. Creating debt also creates money, and destroying debt also destroys money.

In a financial exchange, it all depends what comes first, the work or the payment. Let's say you are going to work for 3 months on a project, and you will be paid after it's all done. In that case, no lending occurred. If, on the other hand, you get paid up-front, and THEN you do the work, in effect you have taken a 3 month loan, and technically could be charged interest. You could take that money and invest it, or do something else with it, and the person you are working for has nothing yet in return. You have use of the money AHEAD of the value creation, and that is what a loan allows.

That is what our whole DEBT-BASED economy operates on. First, get the money (through lending), and then go do something useful with it.

@wadevuglar It's an increase in money supply. Even though there is only actually 1000c, I have 5000c available to spend.

Yes, I have increased my own personal debt, but also notice that I also have a bunch of widgets now. Also, Bob has increased his own personal credit. His books show that he's owed 5000c.

Regarding where Bob got the widgits from, he is creating value. We can say he is creating it 'out of nothing', which is essentially what we always do! For example a writer turns some tiny amount of raw materials (paper, ink), and creates a story worth far more than the paper and ink it's written with. He creates value, out of thin air as such. This is what Bob is doing.

Often we are turning significant amounts of raw materials (eg, bricks, mortal, steel), into something more valuable (a factory), but we are still creating value.

@wadevuglar @kennethkopelson Note that it's possible for me get out of my debt position. If start creating zidgets say, and Bob buys them from me with the 1000c he's holding, then he demands his 1000c loan back, buys another 1000 zidgets, etc. Eventually our positions equalise.

@kennethkopelson and others. This discussion bothers me immensely because it is totally wrong. You are not making a distinction between money supply (the amount of money in circulation at any moment) and the market total product (the total goods that can be produced by that money).
It is not the money that grows endlessly; that remains constant. What grows within limits is the supply of goods.
If we had a stable population, produced the same goods without innovation week after week and there was always an excess of raw materials so there was no price increase due to scarcity, the market would be quite stable and continue indefinitely without any increase in money supply at all.

There seems to be a misconception of what money is. It is just a token. Say I am employed producing widgets. At the end of the week I want to be paid, but not in widgets, which I cant use. I am paid in tokens based upon the value of widgets determined by the marketplace.
Imagine that all the consumer goods produced are put into a massive warehouse. The value of all the goods equals the value of all the tokens.At the end of a working week each worker takes goods to the value of his tokens from the warehouse. At the beginning of the market, the workers have all tokens and no goods; at the end of the market the workers have goods but no tokens, which are paid back to the manufacturers for next weeks wages. Next week the cycle begins again... indefinitely.
If the banks were not allowed to print money so that it is lent into existence as debt, instead of being issued free by the Reserve Bank, what I have described would be what actually happens and is much more sane. It is not an exact description because it doesn't allow for saving, or research and development but its good enough to make a point. I think this proposal should close.

@dennisdorney First off, this is not a proposal, it is a discussion. Secondly, you are not correct about your explanation. I work at a bank (ASB), and have discussed this matter at length with top lending people here. Private banks create money. Do you know the difference between narrow and broad money? Do you know what M0, MB, M1, M2, and M3 are with regards to money supply? Private banks create what is known as "commercial bank" money. It is common knowledge here at ASB that we create money. Everyone here knows we do...we make it out of thin air. It's not CASH, or CURRENCY. That is only made by RBNZ. But that kind of money only accounts for a very small percentage of the money in circulation. The reason this conversation bothers you is because you have always misunderstood banking, as the VAST majority of people do. It DOES NOT work how the economic text books teach it. I refer you to this document put out recently by the Bank of England, which is part of the same system:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

This conversation is going to stay open, because there are quite a few people who want to discuss this, because MANY people totally have no clue how banking REALLY works.

@dennisdorney I also refer you to this explanation of the money supply, which you said I am taking into account. I am fully aware of how the money supply works, and I can tell you that it is far more complicated than what you have thought:

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

Please refer to the section that explains all the various kinds of money. The ones we have been talking about are "Demand Deposits", which is electronic money created at commercial banks in order to make loans. It seems there are a lot of people on this incubator who do not understand how banking really works, and this seems to be getting in the way of us coming up with some good progress. Perhaps we need to hold a class for people to get properly informed about how things REALLY work, so that their misconceptions can be corrected.

@dennisdorney I find it very hard to believe that you say I am confused about what money is. I am not only QUITE clear about what money is, having explained it ad nauseum in other topics, but I am also the one here who clearly understands the details about the money supply measurements, and the exact process that occurs when banks make loans. I'm the one talking about narrow and broad money types. For example, you say that banks "print" money, but that is not true. Only the Reserve Bank of New Zealand prints currency notes and mints coins. They lend the currency to commercial banks at wholesale lending rates. This currency accounts for less than 10% of all money in circulation, which is mostly electronic money transactions created for lending. While Marc Whinery also talked about the Money Supply types, he has since gone off the rails, claiming that commercial banks do not create any money, which is patently false. As stated, the central bank produces currency (notes and coins) which accounts for LESS than 10% of all money in circulation. Who is there then that can produce the other 90%? Well, there is only one other kind of bank, and that is the private commercial ones, like the one I work at.