Should interest rates be capped at 10% across the board?

I kind of like having a credit card.

@hugheldredgrigg How would this affect you having a credit card?? If we fixed the monetary system properly, you wouldn't even need a credit card, so you clearly don't understand the issue

Well, I doubt banks would be willing to extend credit card services if they can only charge 10% interest - it wouldn't be profitable for them.

As for not needing a credit card - I'd never want to buy something that I didn't have enough immediate funds to cover?

Well banks wouldn't have any choice in the matter, if the Government made it law. Everything would be cheaper and you would have more money, if the Government fixed the economy like it should. So the need for a credit card wouldn't be there like it is now. You just have to think outside the box. Things don't have to be the way they are now

@ryansimmiss
How would banks "have no choice" would they not retain the choice to refuse service? Someone who walks up with 150 recent bankruptcies and wants the unsecured loan to play the lottery, and if he loses, he might have to go bankrupt again. The bank would have to loan him the money at no more than 10%? Or can the bank turn down bad risks? If you limit the rates, then some types of credit would dry up. How would that be addressed?

@marcwhinery Have you heard of fractional reserve banking? You do realize that banks print money out of thin air, then loan it to us with interest? Pretty sure they could just print more money again, if a loan went bad.
Any more than 10% is just blatant usury (debt slavery)

@ryansimmiss Yes, but isn't it -bad- that they print money out of thin air? Won't requiring them to lend money to people who are poor credit risks make this practice more common, not less?

@ryansimmiss Banks don't print money out of thin air. They relend money that they've been lent. For every dollar that they lend out, they owe someone else that dollar.

@ryansimmiss @hugheldredgrigg "You do realize that banks print money out of thin air, then loan it to us with interest?" "they print money out of thin air?"

The banks take my $100 deposit (or borrow $100 from the RBNZ), and loan you $90. If you don't pay back that $90, then when I go back for my $100, they won't have money to cover it.

They don't "print" money. They loan against deposits.

Yes, I understand that the $90 they loan someone goes into a bank somewhere and has $81 loaned out against that, and so on, until my $100 has $900 loaned out against it, but it's all related in a chain. Any non-payment in the chain "breaks" the chain and results in a shortfall for the deposit the loan was made off of, and thus all the way up the chain, if there was a run on the banks.

They don't "print" money. They multiply it.

But $$$ * 0 = 0, so there still can be a loss.

If they simply printed it, they could loan themselves infinity dollars and loan that out to others for a profit. They can't and don't, which proves they don't "make" it or "print" it out of "thin air" but instead base it in a real deposit that can be loaned against.

@marcwhinery But they aren't loaning out peoples savings that are in the bank, like most people think. They create new money that wasn't there before. Lets say there's a 10% reserve requirement..if there's $1000 in the bank vaults, they are allowed to lend out $10,000 to people, and charge interest on it. So they do essentially create money out of 'thin air'.

@ryansimmiss They are loaning out people's money, not printing it.

1) form a new bank (new because when you have $10,000,000 in reserves, you don't have to think about where the $1 comes from that they are loaning out)
2) someone deposits $1000
3a) the bank loans out $10,000, or
3b) the bank loans out $900

The answer is 3b, not 3a. Why? Because the banks lend money, not print it. Loaning out $10,000 on $1000 of deposits is both impossible and illegal.

So where does the misconception come from? Lets line up an infinite number of people outside the bank that will take any loan offered and instantly put it back in that same bank. Give the bank a set reserve of 10%.

I (the only debt free person in this fictitious universe) put $1000 in the bank. The next person in line, Alice, takes out a $900 loan (90% of the reserve), and puts it in the bank.

The bank now has $1900 in deposits and $900 in debts, so it can lend out $1900*.9-$900 = $810 to Bob.

Charlie can take out a $729 loan.

Dave can take out a $656.10 loan.

After about 100 people, it rounds to $9,000 in loans.

But for each individual loan, they loan out no more than 90% of the "cash" they have on hand. So yes, they are loaning out people's savings in the bank, and are never printing new money. Every loan is no more than 90% of the new money deposited. No new cash is needed, no loan is for more than any one deposit.

For that $9,000 in loans, they have $10,000 in the bank vault. It's just that $8000 of that is borrowed.

I agree that the traceability of loans to deposits gets more muddled the larger the banks get, but the principles stay the same. They multiply money, not "create" it (aside from the RBNZ, who gets to "make" money, but they are a special case).

@marcwhinery Seriously dude..where are you getting your information from? Watch this before making more misinformed comments https://www.youtube.com/watch?v=t5ayg3hbhoM

@ryansimmiss I'm getting my information from master's level economics education and an actual understanding of how things work.

Do you get your information anywhere other than YouTube editorials?

If I said something wrong, point it out. If you can't, then there obviously isn't anything wrong, you just don't like to hear a reality that disagrees with your opinion. Confirmation bias. Look it up.

@marcwhinery Everything you said is wrong. How do you explain inflation then? Economics is a big scam. I thought you were on board with what Ken and I were talking about the other night?

@marcwhinery "I’m getting my information from master’s level economics education"

Just pointing out that that's an argument from authority.

@marcwhinery I fully respect that you have an education in economics..but who controls what you get taught in school, university ect? A: The Government. And i don't know about you, but i don't believe anything the Government tells me. Especially not the American Government

@reidalexanderwicks @ryansimmiss Funny how being educated is a bad thing. "avoid educated people, they may know stuff you don't like."

Do you get mad at your panel beater when he gives you the bill?

Whether I agree or disagree with mis-characterizations of the current system has no effect on my ideas for improvements.

We don't need an agreement on whether the front or back is most damaged to pick the car to replace the broken one with.

@ryansimmiss As for who chooses what is taught, master's level classes aren't like elementary. You get much more ability to pick what you study. They don't give you a workbook to work exercises from.

The government doesn't choose what's taught. All the accreditation organizations where I got my master's are non-profit educational organizations not controlled by the government.

If you want Uni accreditation in NZ to be managed by independent organizations, that'd be a separate proposal.

@marcwhinery That's not at all what I meant when I pointed that out. You need to calm down.

Qualifications are not a citation. Somebody asked you where you got your facts. They were asking for a citation. A source.

@ryansimmiss No Marc quite accurately described how the multiplier effect 'creates' money (creates debt and credit on the bank's books). (Effectively, it's not creating money, it's creating the availability of money. Ie. Money that would otherwise be sitting in a vault or a wallet not being spent, is constantly being relent and respent, allowing transactions to take place).

It's appears to be quite a common misconception that 'Fractional reserve banking allows banks to lend out N times as much money as they have sitting in their vault'.
Actually it's 'Fractional reserve banking allows banks to lend out all except 1/N of money lent to them'. Because that money gets lent back to them, the total money lent out ends up being N times the initial money. But the bank has to have the actual cash to lend out.

In reality, banks actually can just 'create money on the books' without having the hard cash to back it up. For example, the Bank A can agree to just create a $100,000 loan to Andy (adds a $100,000 balance to Andy's books), and then Andy spends that $100,000 at Bob's shop. Bob also banks with Bank A, so there there's no difficulty honouring this transaction, it's just a change of numbers on the bank's own books.

The difficulty for the bank then is, if Bob wants to withdraw this money as hard cash, or transfer it to another bank. Bank A then needs to come up with the cash from somewhere (eg. borrowing from someone).

This document here describes this process http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf Thanks @dennisdorney .

In New Zealand, this shortfall can (and must be) be made up from the Reserve Bank. Bank A borrows from the Reserve Bank each night to cover any short fall, at the OCR. The higher the OCR is, the less willing private banks are going to want to have a short fall are, so they less loans they make.

@ryansimmiss
Re: Then how does inflation occur?

Inflation occurs because credit allows more money to be available. Imagine you're sitting around with your friends , and one of them, Bob, has a pile of cakes he's selling. Only one of you have a $10 bill. One person buys a cake, and now Bob owns the $10 bill. Until Bob spends that $10 bill else where, no one else can buy cakes. So Bob's sitting with $10 and bunch of cakes, he's likely to reduce the price of his cakes to get rid of them.

Now introduce banking, so everytime the bill is spent, rather than sitting doing nothing in Bob's wallet, it's lent to someone else, who buys a cake with it. Now everyone can buy cakes! But there are more people than there are cakes. Bob realises this, and puts his prices up to account for it - inflation.

@marcwhinery @davidjohnston Banks would never tell you the truth about how it really works. Wouldn't be very smart business. But @kennethkopelson works for ASB Bank, so I think he would know.
I guess we'll just have to agree to disagree then! haha. Hopefully we can agree that the system needs changing though :)

@marcwhinery @ryansimmiss Wow, seems like I missed some stuff going on in here. Okay, let's a few things straight. Money is money, and money is NOT currency. Two different things. There are several kinds of money, and of particular interest, we are talking about two of them here:

1) Printed and Coined Money
2) Commercial Bank Money - otherwise known as demand deposit

The central bank (mint) prints/coins money, and that is what we also call currency. This is what we also mean when we say that banks need to have reserves...we are talking about the printed/coined money.

What @marcwhinery has failed to point out is that when a bank creates credit for a loan, once that credit is put into a bank account (either at that bank or another bank), the money (commercial bank) is now considered a DEPOSIT, and is indeed considered money. @marcwhinery you are indeed using a fallacious argument (appealing to authority) when you mischaracterise statements and then try to cause people to say "oh wow, he has an education, so we can just forget everything we know". Well, it is now a FACT that since 2008 banks do not require cash reserves before they can lend. Now, it all starts with getting a loan. Those old rules that you are somewhat getting accurate, no longer apply since major changes in worldwide banking. So, how does it REALLY work now? Here is how:

1) Bank makes a loan to person A for $100,000. This is created Commercial Bank money.

2) The bank will then order from the central bank an amount of currency that is some UNFIXED percentage of the loan. Marc, the 10% figure is VERY outdated, as it it now all about the bank getting an amount that is in keeping with the loan risk, the going interest rate from the central bank (different amounts have different interest), etc. This is a well provable and established fact.

3) The money lent to the individual is deposited into an account, let's say at the same bank. When that happens, the bank now shows an INCREASE in deposits, exactly the same as if the money had come from another bank. Notice that the money has been created FOR this loan, but the amount of currency is actually 0%, 3%, or 10%, depending on the situation. Here is a link from the Federal Reserve that explains how this works:

http://www.federalreserve.gov/monetarypolicy/reservereq.htm

4) The bank can then turn around and make another loan of any amount, which then gets deposited into that bank's accounts, showing as MORE deposit. This is showing as a LIABILITY owed to the bank, which the bank then charges you interest on. The bank will then order additional currency if needed for a reserve.

So, you see, in reality we are NOT on a fractional reserve system any longer, which is something I have verified through asking around at ASB, and also researching online. The situation is now much WORSE than FRB, where the banks can find ways of creating money with the need for any printed currency in their vaults, or on deposit with the central bank.

@marcwhinery What's up with you anyhow? We came to your house and had what we thought was a great conversation and understanding.

@davidjohnston That is what people THINK that banks do, but you could not be further from the truth. Notice this section from the Wikipedia article on Money Creation:

"Through fractional reserve banking, the modern banking system expands the money supply of a country beyond the amount initially created by the central bank.[4] There are two types of money in a fractional-reserve banking system: currency originally issued by the central bank, and bank deposits at commercial banks:[5][6]

central bank money (all money created by the central bank regardless of its form, e.g. banknotes, coins, electronic money)
commercial bank money (money created in the banking system through borrowing and lending) – sometimes referred to as checkbook money[7]
When a commercial bank loan is extended, new commercial bank money is created if the loan proceeds are issued in the form of an increase in a customer's demand deposit account (that is, an increase in the bank's demand deposit liability owed to the customer). As a loan is paid back through reductions in the demand deposit liabilities the bank owes to a customer, that commercial bank money disappears from existence. Because loans are continually being issued in a normally functioning economy, the amount of broad money in the economy remains relatively stable. Because of this money creation process by the commercial banks, the money supply of a country is usually a multiple larger than the money issued by the central bank; that multiple is determined by the reserve requirements or other financial ratios (primarily the capital adequacy ratio that limits the overall credit creation of a bank) set by the relevant banking regulators in the jurisdiction."

@marcwhinery Even under the OLD outdated 10% fractional reserve system, an initial deposit of $1000 in cash (you as an individual go down and deposit $1000 in cash or coin), would allow the bank to lend out $900 in commercial bank money, thereby creating $900 of new money, which would be seen as a new deposit in the bank. So, the same money would be seen as a liability against the borrower, but also as a deposit by the same person, as if they had deposited that money in cash. This means, following the old 10% reserve requirement, the bank could lend out $810 of the new deposit, and when they did, it would once again be seen as NEW money, being put into another person's account as a deposit. So, the reason we have the money increase is because 90% of each deposit is loanable to another person, while also STAYING with the original person it is coming from. So, to make a computer analogy, 90% of each deposit gets COPIED to the next borrower, not MOVED from person to person. Anyhow, this IS how it works, though now, the so-called reserve is much looser and it doesn't have to be in the bank before a loan is made...it can be ordered from the bank after the fact.

@marcwhinery Because of the changes that occurred in 2008, we are no longer operating with a money multiplier mechanism, but rather the banks are generally writing loans as they wish, and simply "pulling" the needed reserves from the central banks after the fact. Prior to 2008, however, we DID have the money multiplier method where the central bank could indirectly control the amount of total MONEY in circulation by controlling the amount of CURRENCY in circulation. This is explained in the following article:

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

@marcwhinery I see where you made your HUGE mistake. The bank does NOT have to subtract its debts from its deposits in order to determine how much it can lend out. This is the fundamental flaw in your thinking. Let's just look at this logically:

How does new money get into our system? What triggers it? New people being born? Nah! The stars aligning? Nah! The bank decides to arbitrarily? Nah! Nah! One word...begins with "D"....DEBT! There you go! New money comes into the system through DEBT being created. Mr. @davidjohnston thinks the banks lend out the depositor's money, but that certainly doesn't explain where all the money comes from, does it. If we went with your flawed explanation, subtracting the bank's liabilities from its deposits, then the bank would NEVER be able to lend more money than what was deposited, and NO new money would be created in the economy...EVER! The concepts of "money multiplier" would have no meaning. Also, the mechanism of raising and lowering interest rates by the central bank would have no effect either. Also, where would the extra money come from to pay interest...which is the main thing that causes inflation.

Think now...the central bank creates $1000 and puts that into the economy...that's all there is, just that. You deposit that money into the bank, and they proceed to lend out $900 of it to a guy for 1 year, at 10% simple interest. So, at the end of the year, that guy has to pay back $990 dollars. Where is the other $90 coming from? Perhaps that guy works for you...but wait...you have $1000 in your account, and the other guy has $900 in his account. That's $1900 that EACH of you can spend. Now, as long as you don't try to use $1900 in cash, you're fine. You can do business with each other all day long. You do some work for that guy that costs him $1000. That's cool...the bank just moves the computer bits across into his account. He then buys some stuff from you for $1500, leaving him with $400. You then decide to pull your $1000 from the bank, and the bank gives you the cash...since they still have it. Now, if the other guy had converted his deposit (loan) into cash, the bank would have paid him, but then it would be in a pickle if you also tried to take yours out...but that's a different story. Back to the case where you take it out first...it then comes time for the guy to pay his $900 debt PLUS the $90 in interest. Well, the bank only has $900 of commercial money (since you took the $1000 deposit out)...so the bank would have to loan out 90% of the $900, or $810 to somebody else. Then, they would have total deposits of $1710, and hopefully you could sell something to the new borrower and get that extra $90 to pay in interest. The same problem will then come up for the new borrower, requiring more loans to be made.

@marcwhinery One more thing to that scenario is, as you pay the loan off, the commercial bank money is destroyed just as easily as it was created...simple computer entry. The reason this commercial bank money works is because mostly everyone is using banks to do transactions. I hardly EVER EVER EVER use cash, so in essence, I'm dealing with commercial bank money almost exclusively.

@marcwhinery By the way, I wrote a really good answer to your objections that VBE money would have no value...and quite honestly I was baffled by that, since you seemed to understand the system quite well when we were at your house. Then, as if someone wiped your memory/mind, you seemed to not understand it at all. I provided you with a very solid transition scenario, and I heard nothing back after that. Now, you seem to be completely oblivious to things that you seemed to understand before, as it pertains to banking. Are you just playing your head games that you said you like to do, playing the devil's advocate? If so, it's kind of a bad habit you have there...not very pleasant for everyone else who has to guess why your acting so inconsistently and almost like multiple personalities.

@davidjohnston Inflation is caused by there being TOO much currency in circulation. What we mean by too much is that there isn't enough GDP to match the currency. Prices go up because of inflation...inflation does not occur because of prices going up through supply and demand. You have it backwards. If you doubt me, then I suggest you look at the official document on money policy put out by the New Zealand Central Bank, where they explain this all quite clearly:

http://www.rbnz.govt.nz/research_and_publications/fact_sheets_and_guides/3064172.pdf

While your scenario CAN be a source of transient inflation, as the document explains, the more serious and permanent kind is caused by money supply.

If the Bank of England says that private banks create our money supply I think you had better believe it. The B of E has nothing to gain by putting out false information especially since the banks have been denying for decades that they print money.
Further, the B of England says that the descriptions about money creation in all the University text books is simply wrong and doesn't reflect what happens in the real world. What this means is that all the University lecturers are teaching their students misinformation. Also the Economists in Treasury, the Reserve Bank and the banks own economists are basing their decisions on faulty understanding of the monetary system.
And we are talking here of the most fundamental part of economics ...... how money comes into being and what it is. I dont see any point in this discussion or any of the related discussions unless we can reach agreement on this most basic point.

Bank also says that the information that has been taught

@kennethkopelson I don't recall discussing transition. In steady-state, it's "faith" that gives a currency value. But initially, before there is any faith, there must be a demand for a currency to generate "value". Whether it's taxes must be paid in it, or it's legally required to be used for certain transactions.

When the first $10,000,000,000 item is built, and 1000 workers get $10,000 each, and $9,990,000,000 is spent on materials and equipment in a "new" currency, why would anyone take those first new dollars at a store, rather than old dollars (presuming old and new co-exist with new as M0 and old as M2)?

I'm not trying to play devil's advocate on this point, but it was one that I don't recall being previously discussed, and as I reflected on it, it came up as another thought.

"Think now…the central bank creates $1000 and puts that into the economy…that’s all there is, just that. You deposit that money into the bank, and they proceed to lend out $900 of it to a guy for 1 year, at 10% simple interest. So, at the end of the year, that guy has to pay back $990 dollars. Where is the other $90 coming from?"

Obviously, the answer is that the $90 is borrowed. If that $1000 is the only money, and that $900 is the only loan, then the borrower must borrow another $90 to pay the interest on the loan.

It seems to me that you are confusing the steady states and initial states. When you take a single case, as an indication of a problem with the system, it's easier to eliminate all other confounds. When you look at a system with billions of dollars in millions of hands, it's easy to confuse where a few dollars here and there come from.

As borrowing is the only way to generate money in the current system, inflation is required. If the average interest rate is greater than the currency growth for a long period, then someone, somewhere will eventually be unable to pay back a loan from lack of currency.

Currency inflation is generated to accommodate the indebtedness of a society. If currency is constrained, then bad things happen.

The "cure" to inflation is to stop borrowing. But that also means no investment. There is no easy answer, and most decisions have unintended consequences.

" I see where you made your HUGE mistake. The bank does NOT have to subtract its debts from its deposits in order to determine how much it can lend out."

In a steady-state mature market with liquid reserve bank (they lend on demand, without restriction) then it may look like you describe, but that's not how it is supposed to work, nor how it does work (at least on paper).

(Deposits * 0.9) - existing debts = available loans

http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008mar71_1.pdf

See Table 1 page 27. It's the re-statement of the numbers I already gave. The ones you objected to. You referred to a change in 2008, so I was looking for that change when I ran across that nice chart, published by RBNZ (in 2008), not some YouTube rant.

Trying to make the current system look bad isn't a requirement for a new system. I'm not sure why there's so much effort spent on the old system. Make the new system work, not incorrectly bash the old system. It doesn't matter. People know it's bad, but people still like a know evil over an unknown good. Building faith in the new is more important than making it sound even better. Will it work, and how will make change, but complaining about the old system won't convince people.

@marcwhinery I like the document you referenced because it explains things clearly, and it also shows how what I said is correct, and so is what you said. The reason we had misunderstanding is because I was stating the formula used at EACH step in isolation, and you were using the formula used at EACH step in aggregate.

So, for your calculation at the second step, you would have 1900 * 0.9 = 1710
1710 - 900 = 810 <-- available to loan

My calculation at step two would be:
900 * 0.9 = 810 <-- available to loan

But you saying that banks do not create money is just totally counter to what your referenced document plainly says. Perhaps this too is another misunderstanding caused by your particular way of phrasing or wording.

The document flatly says:

"As this process continues, the ultimate outcome is that
the initial $1,000 in deposits can be used to create new
deposits (money) and credit (loans) to the value of $9,000.
This new money is generally termed ‘inside’ money to reflect that it has been generated by the private bank ‘inside’ this economy. Bank A’s balance sheet has grown from $1,000 to $10,000"

So, if you go back and read what I wrote in answer to your statements earlier to Ryan, they are exactly what this document you referenced (by the RBNZ) also says. Banks create money, and that money is NOT printed money, but is commercial bank money created as credits. As it can be seen, the central bank only creates 10% or less of all the money in circulation, while private banks create the other 90% or more.

@marcwhinery As far as discussion on transition, we did indeed talk about it some in the email exchange we had recently, where you said:

"The only way I can think of that works is to have "fees" paid to the government in M2, and the government has enough M2 to buy M0 at a set rate. And, at least in the beginning, that'll take a lot of M2, as M2 is the "trade money" and people are used to trading in the trade money.

There is some flow of M0 back to the government (asset sales), but the rate is so slow at first (especially the first year), that M0 will be valueless unless someone can trade an M0 for an M2, so they can buy an apple with it.

It would work "better" once the system is years old, and there's a steady flow of money back for destruction, but at least until the people are used to it, there needs to be an additional mechanism to prop up M0."

I answered you plainly with a good explanation in the emails that followed. The main value with the societal currency is that it is non-taxable...I contend that this will be extremely valuable to everyone. I also pointed out that well before any project is done with the new currency, all businesses will be highly encouraged to accept the new currency by merely opening an account that will automatically link to people's EFTPOS cards. So, you as a user of the new money will pay for things using an EFTPOS card from the Asset Bank you have just joined, and into which the government will pay you for your work once you start it. Before that day, however, businesses will be invited to open an account also, and they will be told that any transactions going through that account will be free from any tax responsibility, INCLUDING all business and income taxes. They simply open the account, and if somebody uses a new money EFTPOS card, it will transact with the new system. People who still use the old cards will still use the old system, and the business owner will have to pay taxes on that income. Believe me...people won't be able to adopt it fast enough!

So, in the current system, the value lies in its ability to pay taxes. In the VBE system, the value lies in the fact you don't have to pay taxes. I would argue that VBE incentive is stronger than the current incentive.

@kennethkopelson " Banks create money, and that money is NOT printed money, but is commercial bank money created as credits."

I disagree. and it looks like you are more interested in correcting my correct statements than discuss the issues of any new economic policy.

Banks "multiply" the money supply be allowing it to show on two balance sheets at the same time. I listed it the way I did to make it clear that the bank is lending out $9000 against $10,000 in deposits. They are not lending out $9000 against $1000 in deposits. That is the point on which we disagree.

That's not "printing" money.
That's not "creating" money.

That's how lending works, not matter who is lending. It's not caused by the banks, but by lending. Even in a zero-interest P2P loan system, money will be multiplied.

By your definition, you can create your own money, and don't need to be a bank to do it.

@marcwhinery I am quite interested in discussing the new system. Marc, there is no point in you disagreeing on what I said. You did say "deposits" and now that I realise you meant ALL deposits (cash reserves + commercial bank money), I agree with your statements. I take DEPOSITS to be the initial cash deposits PLUS the deposit of the money lent out. THAT IS EXACTLY what it shows in the RBNZ document you referenced. Did you read that entire section, or just post the table reference?

And yes, it is CREATING money...not currency...money. You yourself know about the different types of money, and created credit by banks is considered money....COMMERCIAL BANK MONEY.

And yes, anyone can extend credit to people, and "create" money in this same way. The banks, however, have a banking license which makes their lending fall under special rules, and provides certain assurances, etc.

You can look up any number of solid sources, and you will see that banks DO create money. You yourself made very clear distinction between money and currency. When my bank gave me my mortgage, they created that money for me. That is not money that somebody else deposited. They put an entry into their system saying I had the several hundred grand to buy the house. That money did not exist before they did that. It is just an entry in their system...that is all. But it IS money, and there is no point in your trying to say otherwise, because it will only make you look silly. Even an I.O.U. can be considered as money. Go read the wikipedia article on Money, and it will make it quite clear.

@marcwhinery for some strange reason you seem to be having difficulty in really reading what is written, referring back to previous statements, considering ALL statements made, and not just pulling a couple out to which you attack...like you did in the previous post. There IS no disagreement Marc, and I said this where I pointed out that we were simply speaking ACROSS each other, with our definitions of terms being slightly different. You used the term "DEPOSITS" which I took to mean "current deposit for that step", when you meant "all deposits". Had you simply said a more specific term like "All deposits to date", and "all liabilities to date", I would have understood. Look at what I wrote CAREFULLY, and you will see...here is what I said above:

"So, for your calculation at the second step, you would have 1900 * 0.9 = 1710
1710 - 900 = 810 <– available to loan

My calculation at step two would be:
900 * 0.9 = 810 <– available to loan"

This is where we got wires crossed. So, let's move on, shall we? Banks create "money" in the M1-M3 classification, and you know that Marc. You yourself have said that. Why are you trying to hold on to a dead horse?

It will be quite hard to talk about the new economic system if you are still maintaining that banks do not create M1-M3 money. Why don't you simply retract that statement, we'll forget you said it, and then we can move on.

@marcwhinery So, in that regard, I'm quite curious to discuss the last email I sent to you, where I addressed a possible transition scenario, and how the societal money has initial value simply because it allows transactions that are NOT taxed. I find this a very powerful incentive. In our current system, according to your statements, people felt that the money had value because they could pay taxes with it. This presupposes a pressure upon them which required them to pay taxes, which the money then provided a way to relief of that pressure.

I maintain that the new societal currency, from day one of its introduction, would have a value that is similar...by relieving the pressure to pay taxes. In the current system, a person finds relief from the tax burden, and also finds himself to be poorer from the tax payment.

In the new system, a person finds relief from the tax burden, and happily finds himself RICHER than he would be in the current system, having the need for taxes removed.

@marcwhinery You have maintained that banks do not create money. I direct your attention to the document you referenced by the RBNZ, on the bottom of page 26. It says

"Balance sheet of Bank A before it creates
money and credit"

Here, even the heading says the bank creates money. The chart following this heading shows deposited $1000 being treated as an Asset in cash on hand, and also as liabilities of $1000 in deposits, $500 from two different people. This is the situation BEFORE money creation occurs.

Then at the bottom of page 27, we see how the original $1000 cash deposit is lent out to create $9000 more. Just read the chart Marc, and the explanation before the chart on page 27. In step 2 they lend out $900 (created credit NOT cash), and that electronic money is turned around and deposited into the same bank. All of the deposits from step 2 down are CREATED money...commercial bank money...not printed currency. So, the total cash reserves is made up of the original $1000 that was deposited. The bank then created another $9000 on top of that.

I think you are reading the chart on page 27, where it says "Customer deposits" and you are thinking that those are cash deposits like the first one, but that is not correct. The explanation above the chart makes that very clear. Those deposits from step 2 down are the amounts LOANED to the people. No more money is obtained from the central bank in this entire set of transactions. So, the original $1000 deposit BECOMES the 10% reserve for subsequent loans, which can total $9000...this is created commercial bank money.

@marcwhinery You said:

"I listed it the way I did to make it clear that the bank is lending out $9000 against $10,000 in deposits. They are not lending out $9000 against $1000 in deposits."

In the description in the RBNZ document that you referenced, they show only $1000 being deposited that is not from loans. In the chart on page 27, all the other deposits from step 2 downward comes from the loaned amount in the previous step. This is indeed creating money, because it is allowing them to loan money, while still keeping it un-loaned on the books. It's the proverbial having your cake and eating it too.

Lending could work like this, and indeed this is how it works for non-bank people:

You give me $1000 in cash to hold for you. You say you don't need it until one year from now, so I decide to lend out $500 of it to a friend of mine, and he will pay me back in 6 months, with $50 interest. Now, you change your mind, and decide you want your $1000 back. In a normal lending situation, I would have to say to you...sorry mate...I don't have all your money right now. I can only give you $500. Or I could go to the guy I lent it to, and demand it back early.

THIS IS NOT how banks do lending. In the bank scenario, you would give me $1000, but when I give the loan of $500 to my friend, I don't give him the cash. Instead, I make an entry in my computer saying he has $500 in his "account", plus he owes me $500 + $50 interest. Now, the store up the street also uses my system, and my friend wants to buy something from that store, so the store owner calls me as asks how much money the guy has. I tell him $500. The store owner then tells me the guy is buying $100 in goods, so I make an entry in my system saying he now has $400 in his account...he still owes me $550 however.

Now, the original depositor can come and draw his $1000 out early, and I will have his money, since I did not lend out the cash he gave to me. If he does do that, I just call up the central bank and ask for $50 in cash be sent to me, to cover the $500 loan I have outstanding. Eventually, the borrower pays off the $500 plus $50 interest. At that time, I clear off his debt from the books, and the commercial bank money is "destroyed".

The whole thing that makes the bank lending system work is the fact that everyone is using mostly electronic currency transactions. I hardly ever use cash. As long as people use no more than 10% cash on average throughout the economy, this system works. Before we had electronic currency, we had CHECKS, BANK DRAFTS, LINES OF CREDIT, etc. Some folks still use those, I'm sure. Gosh, it's been years since I've written a check.

@kennethkopelson "So, you as a user of the new money will pay for things using an EFTPOS card from the Asset Bank you have just joined, and into which the government will pay you for your work once you start it. Before that day, however, businesses will be invited to open an account also, and they will be told that any transactions going through that account will be free from any tax responsibility, INCLUDING all business and income taxes. They simply open the account, and if somebody uses a new money EFTPOS card, it will transact with the new system. People who still use the old cards will still use the old system, and the business owner will have to pay taxes on that income. "

There are no "taxes on business income" only taxes on business profit. How would one determine which transactions were profitable and how much of total profit when they are accepting multiple currencies with different tax rules?

It seems like an impossible regulation, added on as an after-thought.

"So, in the current system, the value lies in its ability to pay taxes. In the VBE system, the value lies in the fact you don’t have to pay taxes. I would argue that VBE incentive is stronger than the current incentive."

An individual would want it because they are taxed at almost 40% of gross. A business wouldn't care because most are taxed well below 1% of gross, and they spend more on banking fees than taxes. Having the most common currency would be more important than the new one. No point "switching" to a currency that only 1% (or less) of the people have, it'd cost more to support both than to only use the old, and force the few people earning new money to convert before shopping.

I was looking for something compelling for reasons to move. Perhaps a $1000 kick start for everyone in New Money, set up in a New Bank. Then, when it "goes live" everyone will already have accounts set up.

But the "people will use it because I want them to" doesn't sound like a sound plan.

@marcwhinery Finally, since you have flatly said that banks do not create money, I leave you with this statement, directly from the official document put out by the RBNZ, found at the top of page 29:

"While money can be issued by the central bank or created by private institutions, as illustrated above, in the vast majority of circumstances there is no practical difference between these two forms of money in terms of the medium of exchange function."

Here is the document again:
http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008mar71_1.pdf

@marcwhinery Having an incentive to start using the new system might make sense. Still...all the employees would want the business to use it, since it would save them a HEAP of money. Also, customers would want to use it, since they would not have to pay GST. So, I think you are minimising the power that both employees and customers can have on a business. Plus, the only way that businesses pay very little in tax is by doing extensive tax filing every year, and that would basically be done away with, so it would save a lot of headache and hassle for businesses.

@kennethkopelson I think your flogging a dead horse Ken. Marc is in a serious case of denial..also known as Cognitive Dissonance. I guess I would be too, if I owned a house, I wouldn't want to believe that the money the bank lent me to buy it was created out of thin air. Besides, if he learned economics in the States, well aren't they 16 Trillion dollars in debt? Yeah..that's some real good economics there.lol
Unfortunately NZ is heading the same way as the States, thats why I want to do something about it before it gets worse, and we end up with a healthcare system like the USA, where pregnant and sick people get turned away at the hospital doors because they don't have the right insurance. Sounds more like something that would happen in the Nazi Germany we were lied to about in School

@kennethkopelson I have said many times I consider that the effect is a "multiplier".

Try answering this question:

If the RBNZ doesn't create any money (or make any loans), can a bank "make" money (presuming they are already at maximum lending)?

The answer to that question is the answer to whether banks can "make" money, or merely amplify/multiply money "made" elsewhere,

And I hadn't understood from your previous descriptions that GST and income tax will persist on M2, but be abolished on M0. So the government will tax M2 in perpetuity, but M0 will be untaxed and exchangeable for M2, but people would want M0 because it's tax-free.

@marcwhinery I will attempt to answer this one more time. I would HIGHLY suggest you read the article on Money Supply that is in wikipedia, as it seems quite accurate based on what I've studied in the past.

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

"If the RBNZ doesn’t create any money (or make any loans), can a bank “make” money (presuming they are already at maximum lending)?"

You said I should try to answer this question. This question is super easy to answer, and is explained not only in the document you referenced from the RBNZ, but also in the wikipedia article. There are two kinds of money Marc. That has been stated numerous times here. There is "CENTRAL BANK MONEY" and there is "COMMERCIAL BANK MONEY". The central bank creates money by PRINTING currency (which is M0 and MB generally), and they create credit entries in their books for member banks, since they are lending this central bank money to the commercial banks. The key to M0/MB is that it is LIQUID or easily converted to LIQUIDITY.

The commercial banks CREATE money (not currency), which IS DEFINITELY, WITHOUT QUESTION considered to be money, and which does not exist prior to the commercial banks creating that money. This is M1-M3 money, which only exists in bank accounts as entries, and is done through the lending mechanism. While there is no limit to how much of this money a bank can create, there is a requirement that the bank borrow more reserve currency from the central bank as they make more loans, if their total reserve amounts go below the required levels. In NZ, depending on the loan types, this is typically 0%, 3% and 10%, according to official government information. This means they only need a FRACTION of central bank currency/coin in their vaults, compared to the amount of COMMERCIAL BANK MONEY they create.

So Marc, once again you MISQUOTE and MISCHARACTERISE what is presented at great length to you. Why don't you reference the excellent document you posted? Why don't you quote something from there, where it says EVERYWHERE that commercial banks create money (not currency)?

@marcwhinery In VBE there is no more M1-M3 money. There is only M0 created by the electronic mint run by the government. We are effectively taking back the power to create money from the banks and putting it SOLELY in the hands of the government. The government will NOT, however, be able to decide directly how much money to create, since this will occur as a side-effect of the services and projects the government undertakes. The private sector can still lend money, but THEN it must be money that already exists. No bank will be able to lend money they don't have from prior deposits.

In VBE there are NO taxes at all...under any circumstances. I have NO IDEA where you got that idea from, since I made no mention at all of any taxes being charged under VBE, except during transition when both the old system and VBE coexist. In that case, the old money system will still have that concept, but once that system is completely supplanted by the new, it will be a thing of the past, like spinning wheels, horse carriages, outhouses, and acoustic-couplers.

@marcwhinery One more thing I noticed in your statement, where you said:

"The answer to that question is the answer to whether banks can “make” money, or merely amplify/multiply money “made” elsewhere,"

That phrase "merely amplify/multiply money 'made' elsewhere"...elsewhere? What elsewhere? It isn't made in the central bank, so what elsewhere? The ONLY elsewhere is commercial banks.

Multiply money? So, if I have $20 and I then multiply it by 10 (through a simple computer calculation), I suddenly get $200...that is CREATING $180 Marc. It's like you are trifling over terms. I'm saying the bank has dozen eggs, and you're arguing that they have 12 eggs, but not a dozen.

Marc, here is a direct quote from the document you referenced from the RBNZ:

"As this process continues, the ultimate outcome is that
the initial $1,000 in deposits can be used to create new
deposits (money) and credit (loans) to the value of $9,000.
This new money is generally termed ‘inside’ money to reflect that it has been generated by the private bank ‘inside’ this economy"

MARC...ANSWER THIS IF YOU DARE...why does this document say that "new money is generally termed 'inside' money to reflect that is has been generated by the private bank"? Money was GENERATED by the private bank! You want to trifle about the term "generated", then ANSWER THIS...why does this document say "the ultimate outcome is that the initial $1,000 in deposits can be used to create new deposits (money) and credit (loans) to the value of $9,000." Notice that little term "CREATE NEW DEPOSITS (MONEY)", where they had an initial $1000 and were able to create an ADDITIONAL $9000 of NEW MONEY.

I think you are so bent on NOT BEING WRONG here, that you are either just being super stubborn (and ridiculous), or you are truly suffering from cognitive dissonance, like people who are trapped in a cult.

@kennethkopelson " Money was GENERATED by the private bank!" Yes it was. But the private banks can't make new money. It multiplies money according to strict rules. They don't "create" it, they multiply it according to strict guide lines.

A bank that is at their minimum reserve can't make generate money. They only generate it with the "permission" of the central bank.

The effect is, the central bank creates $900 for every $100 they print/create. And the private banks just multiply the central bank money for the central bank, as a feature of the rules set up by the central bank.

The private banks can't make a penny without permission.

Thus, they don't "create" anything. They loan out from their own reserves.

The same would happen if a non-bank loaned another non-bank money. But, in practice it doesn't because such loans don't have the legal recognition of bank loans. In practice, they end up being purchase-hire agreements or other such shared ownerships, but if private people loaned each other money, it would have the exact same effect as you describe. If you give someone else $10 cash to buy lunch, expecting he'll pay you back tomorrow, did you just "generate" money?

@kennethkopelson "ANSWER THIS…why does this document say “the ultimate outcome is that the initial $1,000 in deposits can be used to create new deposits (money) and credit (loans) to the value of $9,000.” Notice that little term “CREATE NEW DEPOSITS (MONEY)”, where they had an initial $1000 and were able to create an ADDITIONAL $9000 of NEW MONEY."

Because they are trying to simplify it. If you looked at the chart I mentioned, they "prove" there is no "new money" created by the bank. The bank gets a deposit of $1000, then loans out $900 against it. that $900 is deposited. Then the bank loans out $810 against that $900, then $729 against the $810, and $656.10 against the $729, and so on.

They never "make" new money. But they are allowed to lend against deposits other than central bank money. This has a multiplicative effect.

Take the $10 you loan someone for lunch. They lend it to a different person for them to buy lunch, and so on. After 10 times, your $10 is now $100. There aren't 10 people all spending $10. But there are 10 people that "own" that $10.

Banks manage P2P lending, clipping the ticket at every step. The money is as much made by your neighbor as the bank.

I borrow $400,000 to buy a house. That $500,000 goes to someone who sold the house. They buy a new car in cash, and pay down debts. The new car cash goes from the dealer to pay the distributor, the distributor to the importer, the importer to the exporter, the exporter to the maker, each one clipping the ticket and putting the profits in the bank.

Regardless of how it gets distributed, it ends up at some bank somewhere. They can then lend against that deposit, or make a new loan against whatever's paid down.

You aren't borrowing bank money, but borrowing your neighbor's money (that happens to be in the bank at that moment).

The bank's "value" is in verifying reasonable loans and providing cash handling. But the money they loan isn't theirs, it's your neighbor's (mostly your neighbor's, some the central bank's). The bank allows you to borrow from your neighbors without having to deal with your neighbors. Clipping the ticket as much as they can along the way.

@marcwhinery I think you have really lost it man. Let's follow your statement here:

"Take the $10 you loan someone for lunch. They lend it to a different person for them to buy lunch, and so on. After 10 times, your $10 is now $100. There aren’t 10 people all spending $10. But there are 10 people that “own” that $10."

I give you $10 for lunch. You can EITHER spend it on lunch, or lend it to somebody else. You can't do both. If you spend it on lunch, you can't lend it out. If you lend it out, you can't buy lunch. If you lend it out, you don't have it any more, and you DO NOT own it either. The total money in existence is $10, not $100 as you say. Your words just make no sense.

Banks, on the other hand, CAN do both. Gosh, after reading your explanation, and how absolutely WRONG it is, I'm completely frustrated with you. You seem to have a totally warped view of how things work.

Then, when I asked you why the very official documents STATE emphatically that private banks CREATE money, you just say "they are trying to make it simple"? That is BULLSHIT to the highest order. That is just you trying to justify your totally ignorant ideas on this.

You also said "If you looked at the chart I mentioned, they “prove” there is no “new money” created by the bank. The bank gets a deposit of $1000, then loans out $900 against it. that $900 is deposited. Then the bank loans out $810 against that $900, then $729 against the $810, and $656.10 against the $729, and so on.?"

The bank gets a deposit of $1000, having a total balance of $1000. They then loan out $900 against it, which gets deposited. So, what is their balance then? If you are right, it would be $100 + $900 = $1000 = no created money. If I am correct, the balance would be $1000 + $900 = $1900 = $900 in new created money.

You say the money gets EXPANDED or MULTIPLIED, and I say (along with ALL other documents from anyone) that those terms are EXACTLY SYNONYMOUS with CREATED, MADE, GENERATED, etc., etc., etc., etc., etc.

Stop being so dense, and simply admit that you are as wrong as wrong could be about this. Shall I find you non-simplified, very complicated writings from recognised economists who flatly say that private banks CREATE money? I can certainly do that, if you will agree to STOP all your wrong statements, and agree with the experts I will quote and refer to.

@marcwhinery said:

"You aren’t borrowing bank money, but borrowing your neighbour’s money (that happens to be in the bank at that moment)."

You couldn't be more wrong!

Here is part of a speech given by Michael Riddell, head of financial markets at the RBNZ, where he affirms that nearly ALL of the money in circulation is created by private banks, not the central bank:

"The organisers have asked me to affirm ‘that private banks should create almost all of New Zealand’s money supply’. Can I make three points:

First, the views I express this evening are my own, and may not necessarily be shared by all my senior colleagues at the Reserve Bank,
Second, some advertising I’ve seen for this event - notably a poster in Unity Books - has me affirming that foreign banks should create our money supply. Can I stress that I am entirely indifferent whether banks operating in New Zealand are locally-owned or foreign-owned. I suspect that Mr Rowbotham would agree that the real points at issue have nothing much to do with the nationality of the owner of the banks. The credit-creating banks in the UK, for example, are predominantly British-owned.
Third, as I shall aim to make clear, my own view would be better expressed in the proposition that “bank credit creation probably does quite a bit of good, and has nothing like the baleful consequences that Mr Rowbotham asserts”.
But to turn to the substance of the matter. It is suggested that there is something very wrong about the fact that most of our money supply is bank-created. Clearly, I disagree.

Note that I’m not disagreeing that “money” is bank-created: a bank loan does typically leads to a new bank deposit, and those bank deposits do make up the bulk of our statistical measures of the “money supply”. It isn’t always so – if I buy your house, my mortgage will probably go up and yours will presumably go down, but in aggregate it is of course true. If there was less borrowing from banks, our measures of the money supply would be lower."

Notice how he is an advocate of the private banks creating nearly all the money in circulation, and is giving his reasons why he thinks people who are against this are not correct. Clearly, if things were as you have described, nobody would be objecting to anything, and his comments would make no sense.

The entire speech is found here:
http://www.rbnz.govt.nz/research_and_publications/speeches/2001/0108922.html

@marcwhinery And if all that I have said were not enough, here is the ultimate proof of what I am saying:

http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity

@marcwhinery And here is the official document from the Bank of England, explaining all that I have said with much clarity:

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

@marcwhinery Case Closed!

@marcwhinery Once you can accept that your neoclassical views of banking and money creation have been wrong, and that whatever you learned about this in your economics training was wrong (as the paper from the Bank of England says), I'll be happy to continue discussing how we can make a new and better system. It's crucial that those who seek to fix the current system actually understand how the current system works. This should go without saying.

@marcwhinery In case you are tempted to NOT look at the document by the Bank of England, let me quote here the very first lines:

• This article explains how the majority of money in the modern economy is created by commercial
banks making loans.

• Money creation in practice differs from some popular misconceptions — banks do not act simply
as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’
central bank money to create new loans and deposits.

@kennethkopelson " It’s crucial that those who seek to fix the current system actually understand how the current system works. This should go without saying."

I agree.

"You can EITHER spend it on lunch, or lend it to somebody else. You can’t do both.

Banks, on the other hand, CAN do both."

No they can't. Once they lend it out, they don't have it any more. They don't lend it and spend it.

You seem so intent on vilifying the current system that you refuse to understand it. I get that you work for a bank. I've worked for a bank too.

"The bank gets a deposit of $1000, having a total balance of $1000. They then loan out $900 against it, which gets deposited. So, what is their balance then? If you are right, it would be $100 + $900 = $1000 = no created money. If I am correct, the balance would be $1000 + $900 = $1900 = $900 in new created money."

Wow, you so don't get it. The bank has $1000 in cash, printed by the Central Bank. Someone borrows $900 in cash from the bank. They deposit it back as $900. At that point, the bank has $1000 in cash, and loans/debts of $900 Then the next guy comes in and borrows $810 in cash. They then deposit $810 in cash. The next borrow is $729 cash. This continues until $9000 has been loaned out on $1000 cash. The "cash" never changes. There is no "new money" created, just movement of money. If everyone tried to collect at the same time without having paid off their debts, then the system would collapse. Because the money isn't there. There is never more than $1000 in the system.

Same as if you lend $10 to someone that lends it to someone else. The $10 never changes, but it becomes $100 when ten people lend it out (by counting up all the numbers on books for money the people don't have). You are claiming that $10 becomes $100 when I lend a mate lunch money. I'm claiming that lending a $10 note to a friend, and he lends it on, there's still only $10. The $10 doesn't change when the money moves, but the count of it does.

You can't have it both ways, where the banks are wrong to lend, but I'm a good mate when I lend someone money.

I think you understand the lunch money example because it's a simple $10 transaction and doesn't involve evil banks. But it's the same as what banks do to "create" money. They don't "create" any money, they multiply it by letting multiple people use the same money at the same time (though you have voiced your objection to "use", but I don't understand how you think the bank can use it because they have no more use of it than any middle-man in my example).

If you condemn the banks for loaning money, then you should also complain about the people. Those who borrow are doing the double-bookkeeping too. They deposit borrowed money. They are as complicit in the problem as the banks.

All borrowing will have the same effect. You can't lend money without duplicating it. Your economy doesn't change this, and the money will be multiplied by the banks unless that's made illegal, and you've not mentioned that.

So you obviously don't understand how your own proposal would work in practice. You can lead a horse to water, but you can't make him think. If you don't make it illegal to lend your M0, you will have the same problem. Though you tend to imply that borrowing will be limited to M2. Will your currency be limited (thus useless) or will you allow the banks to multiply your M0, as is done today?

"Case Closed!"

I feel the same way. You don't understand, but are so certain in your misunderstanding that there's nothing to say. Lending makes money appear on multiple balance sheets at the same time, but doesn't "create" money. You've never said anything that contradicts that, but have argued the point.

Try arguing the facts. You've cited others trying to explain it (over-simplifying to the point of being incorrect), but haven't tackled it yourself. I don't think you understand money, and as you've said, one should understand the old system before trying to fix it.

Case closed.

@marcwhinery You want FACTS? You keep confusing CASH, MONEY, and CURRENCY. These are not the same thing. Creating money is creating anything that contributes to the money supply, and that includes types of money other than CASH/COIN. I understand the money system perfectly well, just all the people I have quoted do...experts who work for the very central banks.

Read this comment carefully, made by the Bank of England itself, and not in some "over-simplified" manner:

• Money creation in practice differs from some popular misconceptions — banks do not act simply
as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’
central bank money to create new loans and deposits.

This statement directly contradicts what you are saying! Read carefully...NOR DO THEY 'MULTIPLY UP' CENTRAL BANK MONEY TO CREATE NEW LOANS.

You are saying that banks operate as intermediaries, simply loaning out the money that comes from outside the bank. You are also saying that they somehow "multiply" the MONEY, without CREATING MONEY. I know they don't create cash, and never said they did. I don't confuse cash with money, but you seem to consistently do that. I am not using those terms interchangeably, but am being very exact in my usage of those terms.

COMMERCIAL BANKS DO NOT CREATE CASH!

COMMERCIAL BANKS DO CREATE M1-M3 MONEY through lending.

In your comments before, you said if everyone tried to take out their loaned money in cash, the system would collapse. Well, the banks would have to order more cash from the central bank, but yes, in general that is true. That is because the RESERVES ARE the cash the banks have. So, the banks only have at most 10% cash, and the REST OF THEIR MONEY is electronic, existing in their computer systems.

MONEY is MORE than cash/coin...you should understand that completely if you worked at a bank. You seem to give no credence to the FACT that there are different kinds of money, and only M0 and MB include CURRENCY, CASH, COIN. Money includes M0, MB, M1, M2, M3...you have even said that.

So, who creates M1, M2, and M3? Private banks do. This is established by everyone who works in the banking industry. It is well established truth as I talk with all levels of people at ASB bank. The money supply is EXPANDED at least 90% by the private banks as they CREATE inside money for lending, which is categorised for purposes of money supply accounting as M1, M2, or M3 (sometimes M4).

@marcwhinery You said:

"Lending makes money appear on multiple balance sheets at the same time, but doesn’t “create” money."

You say "lending makes money appear"....MONEY APPEARS. Making something appear is the same as creating it. The money that appears is created. If I make a car appear, I have created it. That money that appears is added to the banks deposits, and is also counted in the overall counting of money in the economy. I will agree that NO CASH is created, and never said it did. Once again, cash does not equal money.

@marcwhinery The key point to prove that banks create money is as follows:

Banks don't lend out money based on how much cash they have in reserves. Banks obtain a proper amount of cash reserves to support the amount of money they have on loan. They use the current cash they happen to have, and only order additional cash from the central bank if they have a shortage in their vaults.

A bank can lend out $10,000 in money, and only be required to keep 10% of that in cash, or $1,000. The cash they keep is obtained by them from the central bank. This is based on the idea that people DO NOT take out cash for all their loans, as you supposed. This is a risk the banks take, and is a well established risk of fractional reserve banking.

The situation you painted, where the bank lends out all this cash, is just not how it works. When I got my mortgage, there was no cash at all...ever. They did not lend other people's money to me. They created that money as an entry in their computers....NOT CASH...MONEY! Then, that money was given to the house seller, put into her account at her bank...more transactions in computers. She now pays her bills through checks and direct payments, or through EFTPOS transactions. The only cash that exists anywhere for this loan is around $45,000 in their vaults that came from the central bank. All the other money was simply created by Westpac bank as entries in their computers/books. I spoke with some people at ASB (while at work) who deal specifically with bank lending policies, and banking regulations. They confirmed absolutely that this is how it works, and they also said that most people do not understand how it works. They confirmed that historically universities have not taught modern banking practices correctly. Now, you can try and maintain your incorrect position in this, discounting all my excellent resources, which ARE THE FACTS, but that will only continue to make you look foolish. I have firsthand daily contact with the very people who are doing these practices, and I have specifically verified all my understanding with them about this. In fact, we had a good laugh about the fact that so many "experts" have no real idea of how banking really works, specifically those who teach economics. Of course, there are those who do tell the truth, and it is especially great that The Bank of England finally came clean on this, and revealed the truth in the document I referenced. Just the fact the BOE put this document out, citing that MANY misunderstand how it works, shows that your views on this are incorrect.

@marcwhinery I said clearly that there is no more M2. Banks can lend money, but they can't expand the money supply. The only currency in the economy is that which comes through services and projects done by the society as a whole. If banks want to create credit and lend at interest they can, but that will not be considered to be money, and will not be taken into account when determining total money. If money is lent by anyone, they can charge interest as long as they are truly lending money such that they would not have use of it any more. Nothing would prohibit private currencies, but when it comes to the official currency/money, that can't be "expanded" through lending. That can only be "expanded" through value creation at the societal level.

The reason for this is so that a demand for more money/currency can only be satisfied if real societal value is created. This will put pressure on getting things done, fixing problems, progressing humanity, making the world a better place. In VBE, currency and money ARE the same thing, since nobody else can create money. The reason for this is because money/currency is ALWAYS available for goods and services that truly benefit the society to some degree.

@marcwhinery Really, I'm not sure yet about private currencies. Generally, we should be preventing vulture mentality, where people try to get rich by not providing any true value. If somebody serves as a true intermediary, for example, providing a valuable service, that would have value. So, there are a lot of jobs and products which can truly be considered valuable. There are some, however, that seem very pointless and not valuable.

Ken is right. Economics is purposely designed to confuse the issue. Thats how banks get away with it, because the majority of people don't realize whats going on..or don't want to realize, in Marc's case.
Think about it..who funds the Government, and Universities who teach economics? Banks! Banks control everything.
And if I had a monopoly on creating money like that, i'd probably be doing everything in my power to make sure it stayed that way. Including making economics over-complicated and confusing, so that the majority of people don't realize whats going on.

@marcwhinery said:

"No they can’t. Once they lend it out, they don’t have it any more. They don’t lend it and spend it."

So, if I deposit $1000 in my account, and then the bank lends out $900 to Bob, where Bob opens an account and has the $900 deposited, you are saying that both Bob and I can't spend our money? Can only $1000 be spent, or can $1900 be spent?

Let's break it down once more:

The bank has $1000 from me. They lend out $900 to you. When I look at my balance, I have $1000. When you look at your balance, you have $900. I can go out and buy a new table for $1000. You can go out and buy a couch for $900. So, what just happened?

The bank loaned $900. You spent that $900 that they loaned to you. When you did, it did not reduce the $1000 that I have at all, since that can be spent also.

You said that banks let multiple people use the money at the same time, but somehow you don't see that THAT very act IS creating money. This obviously CAN'T be done with cash. If there is a $10 bill on the table, both YOU and I can't use that $10. In order for the bank to do that, they MUST create more electronic money. It's true that some will have to pay that money back later because there is credit attached to it, but that is a separate issue. The fact is, we can both spend the money in our accounts even though only one of the accounts does not require repayment. So, in essence, the money the bank creates for you to pay you the loan, is a credit against the money you will make later to repay it. As you repay the loan, the money that was created for the loan is then destroyed, being replaced by the money you get from your employer.

The reason that money IS indeed created and destroyed by private banks is because the actual currency created by the central bank is only a small percentage of all the money in circulation. Money swapped between bank accounts has all the attributes of fiat money, even though there is no cash or coin dealt with.

@marcwhinery This is directly from the Bank of England document:

As with the relationship between deposits and
loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England.

@marcwhinery

As explained in ‘Money in the modern economy: an
introduction’, broad money is a measure of the total amount
of money held by households and companies in the economy.
Broad money is made up of bank deposits — which are
essentially IOUs from commercial banks to households and
companies — and currency — mostly IOUs from the central bank.(4)(5) Of the two types of broad money, bank deposits make up the vast majority — 97% of the amount currently in circulation.(6) And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

@marcwhinery I looked at the chart you asked me to look at on page 27 of the document you referenced.

Please do likewise, and study the diagram on page 19 of the following document:

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

@marcwhinery The conclusion of that document is very clear, and does not need any "interpretation" by you or anyone else. It is not just a "simplified" document for neophytes, but rather, it is a clarifying document for people who have a misconception of how the banking system works. Please read this conclusion from that document:

This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation.
This in turn affects the prices and quantities of a range of
assets in the economy, including money.

@kennethkopelson

I give up. You are winning through volume, but you don't understand what you are saying.

"You say “lending makes money appear”….MONEY APPEARS. Making something appear is the same as creating it."

So if my wife says she needs a trailer to move a sofa, if I go hire one from the petrol station, I just "created" a trailer? Oh wait, the petrol station "created" it, as they "own" it, but let me use it. When I let the wife use it, I've created it again because she's using it.

That's how money moves. Did I "create" a trailer by borrowing one or create it by lending it to my wife? No? Then banks don't "create" money. If I did "create" a trailer by presenting one to my wife when she asks, then the issue is the definition of "create".

Either way, there's nothing I can say to make you understand. And you are saying so much, I don't have time to go through it all and explain all the fallacies in your statements.

The trailer is an asset on the petrol station's books, and an asset and debt on mine and a debt on my wife's books. It's an asset on 2 and a debt on 2, so it's been "created" just like banks "create" money. On the books, there are 2 (or 4) trailers. But it's the same trailer. It's only ever usable by one person, but it is on the books of many. Just like money.

When you can apply your money statements to physical items and it works and makes sense, you might figure it out. But you've made up your mind so well, you've closed it. You are suffering from the same problem you accuse others of.

@marcwhinery Okay, I'm going to focus on a single point in your argument. You said that the trailer is only ever usable by one person. This is not how it works, and here is why:

1) Let's assume the bank is empty with no reserves or other accounts. This will illustrate the point.

2) I deposit $1000 cash in my account. The bank now has $1000 in cash assets. $100 of that is required reserves, and $900 is excess reserves that can be loaned out.

3) You get a loan from the bank for $900. The bank puts $900 in your account recording it as a bank asset, and also $900 in your loan account as a liability.

So, I have $1000 available to spend, and you have $900 to spend. This is precisely the case where we are BOTH using the money at the same time. So, UNLIKE the trailer, we BOTH have the money recorded in our accounts, and WE CAN BOTH spend it. It is NOT like the trailer example at all. The only difference is, YOU have to pay that money back at a later time with interest, and I don't.

Okay, now go ahead and respond to this. This is a nice single issue.

So, you have $1000 in your account. I have $900 in mine. I take out $900 from the bank. You take out $1000. You then spend your $1000 on socks.

Wait, will the bank give you $1000 if I take out my $900?

Nope, the money isn't there. You can't spend more than $100 of your $1000, because the amount of money never increases beyond $1000.

Does this clear up that one issue for you?

What would happen if say 100 people applying for a house loan, all passing the credit criteria, stated that they wished to pay for their houses in cash?

@kennethkopelson The confusing point is that in reality, you'd get to withdrawal your $1000 because the bank has much much more money than any single account holder, and if they were insolvent (your single account holder example), they'd borrow from the Central Bank to cover any shortfall, so you'd never see they were out, but they'd have $1900 to hand out. If you don't let them do that for the example, then they'd hand you your $100, and put up a "closed" sign. Because the money will never be "created". It's just shared.

There's no functional difference than if I borrowed $900 directly from you. You can only use $100 of you money. Of course, when that happens, the bank pays you 1% of $1000 per year, and charges me 7% of $900 (pays you $10 and charges me $63). It'd be better for both of us if You just lent it directly to me at 3% or 4% interest. Though the bank gives the "service" of making you think you still have $1000, so long as I don't use it first.

That thought was the reason behind my P2P banking idea. Eliminate the middle-man and we keep more of our money. A good P2P marketplace will give us the liquidity the banks provide.

There are hundreds of years of statistical multiplexing coming up with the 8% or 10% or 20% or whatever is used (it varies based on the economy and faith in the banks, 20%+ is usually only used when there is a very real risk of runs on the bank).

@terangikaiwhiriake "What would happen if say 100 people applying for a house loan, all passing the credit criteria, stated that they wished to pay for their houses in cash?"

Then, presuming they had the cash, they'd buy a house with cash (unless it's a rental, in which case it's financially beneficial to finance it even if you can pay cash, another reason housing prices are high).

Why are they getting pre-approved if they aren't going to borrow anything?

In practice, the banks would issue the pre-approvals and when the loans funded (if they funded) would borrow from other banks or the central bank in order to cover the reserve.

The confusing thing about the system is that once it's running and funded, it becomes very unclear what comes from where. It operates as a system that "creates" money because the numbers were picked to make it seem such, and a bank that runs out of cash can borrow it from other banks (including the central one) to hide how things work from those observing it. The point of the system is to encourage faith and confidence.

@marcwhinery "Why are they getting pre-approved if they aren’t going to borrow anything?"

I meant, ask the banks to give them the money in cash in order for them to make the payment to the seller in cash.

@terangikaiwhiriake It's plausible that one of the conditions of a mortgage, is that you're not allowed to withdraw it as cash. The bank is allowed to make conditions on what you spend the money they're loaning you on.

But to answer the question anyway - the bank will need to borrow that hard cash from somewhere, other banks, depositors, or the reserve bank.

@terangikaiwhiriake The banks wouldn't do it because the SOP (standard operating procedure) is to guarantee the funds with the real estate being purchased. And the way they do that is that the bank buys the property for you and puts your name down as one of the owners (their name listed as the ones that "own" it without paying rates on it, and they pull their name off if you ever pay it off).

They don't trust everyone to not borrow the money and move to China or something. If they gave you the cash, then how could they be sure you get the paperwork done in the way they require? Coming up with the cash isn't their primary reason for refusing, but would be on the list.

They wouldn't do it for 1 or 100.

@marcwhinery I'm sorry...I have checked with the top people here at ASB, and you are completely wrong in all this. You are totally forgetting the various kinds of money...remember those M0/MB (currency/coin from the central bank), and M1-M3 (non-currency money created by private commercial banks)? Anyhow, you think you are smarter than the people at the Bank of England, the RBNZ, and the lending managers at ASB central headquarters...not to mention me. No matter what proof I present, from whatever authority, you continue to hold on to your wrong ideas. You probably think that M1-M3 is also made by the central bank, which could not be further from the truth. Marc, WHAT is Commercial Bank money, otherwise known as Demand Deposits? Please, just explain that. What is it, and who creates it?

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

And here is a VERY short video from the Bank of England, where a representative is standing in a room full of gold, basically stating exactly what I've been saying. The video is very short:

https://www.youtube.com/watch?v=iFU2F8Efu4M

@kennethkopelson We are in agreement that you think I'm wrong. We are in disagreement as to what I did wrong. You can't point to any error.

Care to try again, or is it all abuse and insults?

I think your wasting your time here @kennethkopelson . Even if you took Marc to the head of ASB Bank and HE explained it to him, Marc still wouldn't believe it. Hes like an extremely religious person who can't let go of their long held beliefs.
Better off focusing your energy on the VBE..and moving forward :)

@marcwhinery I will make it very short and clear to where your error is. You say that private banks do not create money, but you are incorrect. They create M1, M2, and M3 money. They do not create M0 currency, however. All your examples of contradiction end up talking about currency, using the term money instead. I fully agree that banks do not make currency, anything physical. My claim, is that banks create MONEY...electronic money and other financial instruments. These non-currency creations of private banks ARE considered to be money, and that is something you have refused to acknowledge.

@ryansimmiss Okay, you could be right...I guess I'm just hopeful that with enough patience, we will come to agreement. I really don't think we're far off. All he needs to do is agree that the vast majority of money is broad money, not physical, not currency, and is brought into existence by private commercial banks.

I think his input to the new system would be valuable, and I'd hate to lose that all because of a fairly simple issue to correct.

@ryansimmiss
I find that comment offenseive. I've been giving logical fact-based examples. You can't argue the point, so you attack the person.

It's too bad that the forums don't allow me to block users so I don't have to see your offensive personal attacks.

@kennethkopelson "I will make it very short and clear to where your error is. You say that private banks do not create money,"

You can't explain where my error is within the context of an example you gave.

When the bank has $100 and you try to spend $1000 from an account in that bank, how does that work?

The answer is, unless you change the rules, the bank goes out of business. Money is currency.

M1, M2, M3 aren't "money" they are representations of balance sheets to reflect how many people claim the same money. The banks lie and call them "money" to bolster confidence.

The BoE makes it clear (from your own cites) that there isn't enough money in the system to work, so they lie to the people, and the system only works because people have "confidence" that the system has enough "money" to work. It doesn't. By design.

At least that's what your cites told me. But I'm sure you'll come up with more excuses how the Bank of England is wrong, and some guy you talked to at ASB is right. I've talked to guys at ASB as well. And yes, I've worked at a bank. So your argument from authority won't work.

How do you spend money without currency? Even you recognize that they are linked, and if you spend enough, the bank will have to move currency around to cover the movement of money. Though that does break down some in NZ because the government "prints" M0 without MB. In the USA in the first half of the 1900s, the reason the regional reserve banks existed is that reserve must be MB. At the end of the day, the banks would go to their vaults in the regional reserve and count their money. If they didn't have enough MB for their reserve, they'd walk down the hallway to another bank, and borrow what they needed. They'd walk it 10m or so back to their vaults.

Every night, millions of dollars would roll back and forth in a federal bank to make sure everyone's books balanced. These days, it's done electronically. between now and the money rolling, they'd have a shared vault and move money on a ledger.

And NZ "issues" M0 that's not MB, so there's not enough currency in the system to support M0. Perhaps that's the point your ASB friends are focusing on. That's creation of non-physical currency. It's legally indistinguishable from "currency" but has no physical representation. But taking M0 as "currency" (whether it's physical or not) is what I've done, as in your examples, you've always used MB=M0. So I didn't think that was the point of your confusion, but a separate confusion.

Go ask your ASB friends how NZ has M0 without MB.

Also, ask your friends what happens if every ASB customer comes in and withdraws all their funds. ASB would run out of "money" and collapse. If they asked for cash, ASB would run out of "currency" and be insolvent. If they asked for bank cheques, then ASB would be insolvent, but could borrow the money back from the banks the former customers deposited it in (one of the main reasons banks settle at midnight, when the banks are closed,so they can settle all customer transactions hours before their own books need to be settled).

That, and given your rabid disagreement, you are looking for confirmation from your ASB friends, not showing them my own words and asking them "true or false". Though, I wouldn't trust you to pick a valid sample from my posts, so that wouldn't matter either. From my experience, the answer would be "True, but...."

You are suffering from some serious confirmation bias.

Any system that allows lending will have the same multiplication issues. That's why it matters for your system. Otherwise I'd have dropped it long ago. You don't understand how your own system would work. You only understand how you'd like it to work. There's a difference.

@marcwhinery Why do you keep arguing the obvious facts? Are you from another party or movement, trying to infiltrate the Internet party?
'The greatest trick that the devil ever pulled..was to convince the world that he didn't exist'. No, there's no fractional reserve banking..move along folks, nothing to see here.haha ;)

@ryansimmiss "No, there’s no fractional reserve banking..move along folks, nothing to see here.haha ;)"

I never said anything like that. Why do you feel the need to lie to make me look bad? Why not address my comments directly, rather than throw insults and abuse?

@marcwhinery You said:

"Go ask your ASB friends how NZ has M0 without MB."

Not sure what you mean by that statement. M0 never includes MB since MB is a larger number that includes all of M0.

The following chart is VERY illustrative, showing that M0 is the main "money as medium of exchange", and M3 is the main "money as a store of value".

http://snbchf.snbchfcom.netdna-cdn.com/wp-content/uploads/2012/08/monetary_aggregates.png

MB includes all of M0, just like M1 includes all of M0, just like M2 includes all of M1, etc. These measurements are somewhat cumulative.

M0:= currency in circulation + travelers checks + cash held by banks/thrift institutions.

MB:= M0 + commercial bank reserves held in central bank accounts.

M1:= M0 + demand deposits held in commercial bank accounts (checking and demand-savings).

@marcwhinery You said:

"We are in disagreement as to what I did wrong. You can’t point to any error.

Care to try again, or is it all abuse and insults?"

A) I have pointed to several areas where you are wrong, the most fundamental being that you think banks are LYING to people, and that MONEY means the same things as CURRENCY. That is patently wrong, so please do not say that I have not pointed out where you are wrong. Okay? There it is. You say banks are lying, so where is your evidence of this? I have provided all kinds of evidence for what I have said.

B) I have provided a tremendous amount of content here, and if anyone were actually looking at this, they would certainly conclude that I have more than adequately provided proof. Also, I have not insulted you at all, and on the contrary, have endeavored every manner of logical reasoning and source quoting to get you to abandon this "the banks are lying" angle of yours. First, you blame the economists, saying they are "making" money. Then you blame the banks saying they are lying to everyone, just to make people feel good, and believe in something that is not true.

Really? What IS your game Marc?

Very interesting article on what some are proposing in the UK...sounds closer to what I envision for VBE:

http://www.theguardian.com/business/economics-blog/2014/feb/06/change-uk-money-system-solve-long-term-economic-problems

Just add in the ability for the central bank to create the electronic money as direct payment for government sponsored projects and services, and you're even closer!

@kennethkopelson " I have pointed to several areas where you are wrong,"

You've pointed out that you disagree. You have NEVER answered any direct question.

You obviously don't understand what you are talking about.

I think you answer in your head, realize it proves you wrong, then find excuses for not answering.

"how many trailers are there" is answered with "that's not how money works". You made multiple leaps, realized it proved you wrong, so you refused to answer it, changing the subject yet again.

Do you need me to repeat the questions for you?

You can stop making this about me not knowing anything, as you are the only one here that refuses to answer any questions.

How many trailers are there?
How do you spend $1000 in your transaction account, when the bank has $100 currency?

@kennethkopelson "M0 never includes MB since MB is a larger number that includes all of M0."

MB = monetary base (total currency, including money not in circulation).

"M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the monetary base, or narrow money." from http://en.wikipedia.org/wiki/Money_supply

So MB = monetary base, and M0 = monetary base. http://en.wikipedia.org/wiki/Monetary_base

And some places include reserves as M0 or MB, others don't. The definitions aren't static. That's why before I used only Mx, and didn't refer to MB. My question was about N being one of the few places where reserves aren't always backed by currency (as was the standard world-wide until recently).

You've never managed to explain how any lending system would work without multiplying money. The multiplication isn't caused by the banks doing anything, but by lending. The money is counted multiple times. It doesn't exist. It can't be spent. But it shows up in your account and my account, so we both think we have it. And as you point out in your non-sequitur refusal to answer how you spend $1000 when you have $100, the bank will borrow money before you know they are bankrupt. That doesn't mean your money exists. I'd take it as proof your money doesn't exist. Otherwise, they wouldn't need to borrow to let you use it.

Your words prove me right, yet you argue so strongly. I don't understand how you can think you are disagreeing when you continually prove my points.

@marcwhinery Please stop lying. Here, I will do it again:

1) There is one physical trailer.
2) You spend $900 in money by using EFTPOS or some other electronic mechanism.

Previously there was no reason to answer how many trailers there were in your contrived example, because it was obvious. That example was contrived, because when I and the rest of the financial industry speaks of money, we are not talking about anything physical...trailers are physical, so the analogy you were attempting to make is invalid.

@marcwhinery you said:

Q: "You’ve never managed to explain how any lending system would work without multiplying money."

A: Money is not multiplied. It is merely created as an entry in an account, which is called a deposit. The so-called "money multiplier" is a myth perpetuated in senior high-school economics books.

Q: "The multiplication isn’t caused by the banks doing anything, but by lending."

A: Banks do not multiply money, as stated above. Lending IS what banks do. Debt IS money, and money IS debt. I have explained this earlier.

Q: The money is counted multiple times.

A: Incorrect. When the bank creates money in your account (notice I didn't say currency), that money is counted only once, either as a debt the bank owes you, or that you owe the bank.

Q: "It doesn’t exist. It can’t be spent.

A: Incorrect again. The MONEY does exist as a deposit in your account. That entry IS the money...non-physical, yet 100% real money. Because of that, it CAN be spent by using EFTPOS, bank check, credit card, or direct bank transfer.

Q: But it shows up in your account and my account, so we both think we have it."

A: That's because we both do.

Any other question/comment you think I have not answered or addressed?

Why money is debt:

Central bank prints the currency, then LENDS it to the private banks. This lending creates a debt that the private banks OWE to the central banks. That is precisely what that currency represents. A $10 note represents a $10 debt the private bank owes to the central bank, and that is why the private bank must pay interest on it.

Non-currency money is also debt because that is how it first comes into existence, by private bank lending. In our debt-based economy, no money comes into existence through any mechanism other than debt. So, at its very real and fundamental core, money IS debt...and the opposite is also true....recorded debt IS money. These are both conceptual ideas, which is somebody owing somebody else. Money is anything that helps manage that transaction by counting the amount of debt, storing the value of the debt, and transferring the debt value between people.

This is why a Value-based Economy is the very opposite. In that system, money does not equate to debt value...it equates to societal benefit value.

@kennethkopelson "Because of that, it CAN be spent by using EFTPOS, bank check, credit card, or direct bank transfer."

Then go through how you use an EFTPOS card to pay for $1000 of socks when I've taken out the $900. There's $100 left in the bank. What do they transfer to the merchant's bank?

They don't because they can't. They close and go out of business because they didn't "create" any money. They just multiplied it, and when it's pulled out, it ceases to exist.

@marcwhinery Its nothing personal man.
I'm just trying to support Ken. He's a good man with some great ideas :)

@marcwhinery You said:

Q: Then go through how you use an EFTPOS card to pay for $1000 of socks when I’ve taken out the $900.

A: In the original example, there was a $1000 cash deposit made in the bank. We then said that you came along and got a $900 loan, which the bank promptly entered into your account. I DID EXPLAIN this in one of my previous responses, but I'll do it again:
1) When the cash is put into the bank, the bank exchanges it for $1000 in electronic money which it then puts into the depositor's account. When you get the $900 loan, you also get $900 of electronic money put into your account. So, the bank has $1000 of currency, and $1900 of electronic MONEY it has created in our combined accounts. When you go to the store to buy something with EFTPOS, if both you and the merchant use the same bank, then a simple electronic transfer is made between accounts. If you have different banks, then a transfer is made by from your bank into its account at the central bank, who then makes the transfer to the merchant's account at the central bank, which then gets transferred to the merchant's account in his commercial bank.

Q: There’s $100 left in the bank. What do they transfer to the merchant’s bank?

A: There is not just $100 left in the bank, unless you take the $900 out in cash. If you do that, it's still fine, since the $1000 is enough to cover it. If I go and spend my $1000 using EFTPOS, there is still no issue. If I try to withdraw more than $100 in cash, then the commercial bank simply gets more from the central bank to cover the cash needs. In practice, the cash needs will not exceed 3% of all transactions, as I've explained prior.

Also, I NEVER said the central bank is not part of the equation, so DO NOT try to say I did. You are the one who may have assumed that, or is trying to force that assumption. I have always maintained the importance of the central bank as long as we still have physical money, e.g. physical currency. If we ever switch fully to electronic money, the need for the central bank becomes even less than it already is.

@marcwhinery Is there any hope at all of you coming to see what I'm talking about, and agreeing? If not, then I'm going to pull off of discussing this any further. My way of seeing things is in agreement with everyone else I know in the finance field, so that is good enough for me. If you and I can't see eye-to-eye then I'm sorry for that, since I think we could have had more good discussions about VBE.

Ultimately, I need to discourse with people who understand things in a similar way, since it will cause a great deal of angst otherwise, and no forward progress will happen. I have nothing against you personally. I have an economic agenda that I think will be very beneficial to everyone, and that is my main objective here. My next area of discussion is going to be the particular mechanisms of the capitalism part of VBE, and a big part of that is going to cover how banking will work in that context. I do not see how that will go well unless everyone agrees how banking now works. Sorry, but I just don't see it.

@marcwhinery Hi Marc, from what I can see the fundamental mistake you are making is (and this is a typical mistake) that when you borrow that $900, you are being lent the $900 from the $1000 of physical cash deposited by the other person.

This is incorrect.

When you borrow the $900, the bank merely adjusts the figures in your account to say that you have $900 more than before.

Lets see if I can explain it a bit better:

Electronic money, which controls everything, is a credit in a bank account.

Increasing credits in some bank accounts, while decreasing them in other accounts, is merely a transfer of electronic money. If the credits correspond to metal or paper money deposited in the bank, it is a change from pocket money to electronic money. But if the credits in bank accounts are increased without any decrease elsewhere, new electronic money, which increases the total volume of money available, is generated.

When I save and then deposit $1000 in the bank, the bank writes down $1000 to my credit. This gives me $1000 in electronic money. But it is not new money; it is merely money that has passed from my pocket to the bank, or from the account of someone to my own account. It is not the birth of new money; it is simply savings.

But, if instead of bringing my savings to the bank, I come to the bank to borrow a great deal of money, let us say $100,000, to enlarge my factory, what actually happens?

The bank manager has me sign some forms and pledges. The Bank simply writes $100,000 to my credit in my account.
I leave the bank without carrying any cash on me, but I have added $100,000 of electronic money to my credit, which I did not have upon entering. This allows me to pay, by cheques or EFTPOS, up to an amount of $100,000 for machines, materials, and workers.

Moreover, no other account in the bank was decreased to accomplish this. Not a cent was moved, whether from a drawer, a pocket, or an account. I have $100,000 more, yet no one has a cent less.

This $100,000 did not exist an hour ago, and yet here it is entered into my credit, into my bank account.

Where then does this money come from? This is new money which did not exist when I walked into the bank, which was neither in the pocket, nor in the account, of anyone, and yet it now exists in my account.

The banker actually created $100,000 of new money in the form of credit, in the form of electronic money, which is just as good as coins and paper money.

Hope this helps.
Cheers.

@wadevuglar Thank you wade for that excellent and clear description.

@kennethkopelson "If I try to withdraw more than $100 in cash, then the commercial bank simply gets more from the central bank to cover the cash needs. In practice, the cash needs will not exceed 3% of all transactions, as I’ve explained prior."

Yes, the bank is insolvent if you take out $101. The closed system of $1000 total in existance fails. You must violate your own rules to prove me wrong. There is $1000 in money. No more. No more than that can ever be "used". But I can use $100 a million times in a day and never have a problem because that $100 in money is moved around faster than I can spend it.

The system has a fixed $1000 of "money", and no more, but the speed that money moves confuses you. You are the guy that lost at a game of "find the ball under the cup". The cup moved so fast you got confused. Don't feel bad. The banks are professionals at it.

The Bank Of England videos you linked to stated it. They deliberately boost confidence, as confidence is more important than "value". The system is about convincing people money is as good as currency, or the system would fail.

You keep talking about talking to the bankers. You've certainly talked to them. Maybe too much. You've been taken in by their arguments that money is more than just a representation of currency.

It's ironic that I'm accused of having been convinced by the bankers by their lies, when it's @kennethkopelson who tells me he's repeating things told him by professional bankers, so I should listen to him.

Which is it? Oh wait, knowing this group, it's both at the same time when it's against me, and neither at the same time when it's @kennethkopelson .

@marcwhinery LOL...your vitriol is very childish. Out of all those Bank of England videos, THAT is the only think you can find to pull out of context? Of course MONEY is based on confidence in the money system.

In the following video...

https://www.youtube.com/watch?v=iFU2F8Efu4M

...the expert from BoE says flatly that:

"the banks create additional broad money whenever they make a long. While this is nothing new, it is sometimes overlooked as the main way that money is created. It runs contrary to the view that is sometimes put forward, that banks can only lend out deposits that they already have. In fact, loans CREATE deposits, not the other way around."

THIS is what you should have gotten from this video. Instead, you accuse this guy of lying, simply because he is not explaining things in your terms. You somehow believe that you are correct, but all banks are lying, I am wrong or lying, RBNZ is lying, Zeitgeist is lying...everyone is lying and wrong...except for @marcwhinery! HE ALONE IS CORRECT! LOL! RIIIIIIIGHT!

@marcwhinery This whole disagreement stems back to me and others saying that "commercial banks create money" and you taking violent exception to that statement. The entire world (except for people who know very little about money and economics) understand this fact. Sorry if you think you are smarter than all economists, bankers, and finance experts...but that just isn't so!

I suspect the difference between myself/Marc and Kenneth is largely semantic.

I think we all agree that banks can create loans without having having the money on hand to lend it out.

However, myself and Marc would argue that this loan doesn't negate the banks own obligation acquire the resources for that loan.

This is why banks got in trouble during the GFC. They lent a bunch of money out to risky lenders (in hope of making a quick short term profit), and when those lenders started defaulting on the loans, they had trouble coming up with the credit to cover their existing obligations.

If banks could create money without any obligation on their own part, it wouldn't matter if the people they lent the money to defaulted.

@davidjohnston this is precisely what I and many others ARE saying. In other countries that are not part of the UK family of countries, banks are required to carry a fraction of the amount loaned out. In New Zealand in particular, the reserve requirement is 0%, so no, banks here do NOT need to have any resources for making a loan. Banks DO indeed create all forms of money other than currency/coin. This is the big mistake that people make. They think that the only form of money is notes and coins, but that is just a huge fallacy people make.

In the following FAQ put out by the RBNZ, they address the issue of BitCoin. The question asks "Does the RBNZ regulate BitCoin?" What is very instructional is how they answer the question:

"No. The Reserve Bank of New Zealand Act prohibits the issuance of bank notes and coins by any party other than the Reserve Bank. However, the Reserve Bank has no direct power over any form of alternative payments medium.

Non-banks do not need our approval for schemes that involve the storage and/or transfer of value (such as ‘bitcoin’) - so long as they do not involve the issuance of physical circulating currency (notes and coins)."

The question is at the bottom of this webpage:
http://www.rbnz.govt.nz/notes_and_coins/0094941.html

The question was in context of BitCoin, so the answer was in relation to non-banks. What is valid for you and I (we can start our own "bank" as long it doesn't involve physical notes and coins), is also valid for banks themselves when it comes to non-currency money. Banks also have a scheme for storing and transferring value...it's called bank deposits. Please David...check with any banking authority and they will tell you precisely what I've told you.

By the way...even I can create money right now, so if I can do it, so can the banks. Here is how I will create some money: I will write down in a ledger that I'm loaning you $10,000 in Valars, which is the name I've given the money for my VBE system. I don't have a computer system yet to keep track of it, but I'll keep track of how much of this money you have in this physical ledger. So, I've made an entry in your name "David Johnston" now has $10,000 valars, and you also owe me $10,000 valars. I'm actually not going to charge you any interest as a special introductory offer, and you can pay it back as you're able.

So, that is one transaction that now exists, quite separate from any other transaction you can do. Now, until there is somebody out there who will accept valars as payment, the loan is not going to do you much good. What I will do is set up a wind-powered energy company that generates electricity, and I will only sell that electricity for valars. Once I have it up and going, you will be my only customer at first, until I get others on board. Also, I'm going to sell the electricity for a fixed price, let's say $100 NZV (New Zealand valars) per month. So, every month, I will deduct $100 from your "account"...I'll just make an entry in the ledger book.

The key to this working is that it starts with some product or service that can be provided without having to get any external resources. So, automated farms, energy production, waste disposal...these are good places to start trading in the currency.

Also, I'll be willing to do some software development work for you at $70 valar per hour. I can then take that money you pay me and buy electricity with it. For that matter, anyone can do the same thing. Once a number of people have valars in their account, they can begin selling their services and products for valar also.

In all of this, you can see that I, little old Ken Kopelson, have just showed how I can launch my own money system, fully legal, and without ANY need for NZ notes/coins. Banks do the exact same thing I have just described to you. They can create NZD just like I can create NZV...but neither of us can create NZ notes or coins...only the RBNZ can do that. Also, I have just showed you how an economy can run without needing any physical cash.

Now, if I wanted to, I could provide a transfer service, just like banks do. You could buy NZV from me, at let's say $1 NZD = $1 NZV. So, you decide that you really like these valars, but because your boss doesn't yet pay people with valars, you want to buy some more. You give me $1000 in NZD and I put $1000 more into your account. Because you paid me however, I don't increase your loan balance. So, I have you at $10,000 for your loan balance, and $11,000 for your valar balance - assuming you haven't bought any energy yet.

Because I now have $1000 NZD which you gave to me, I can just tuck that away in my Kiwibank account, and if somebody ever wants to trade valars for NZ dollars, I can do so up to $1000. I would just set a policy that I won't trade more cash than what I have on hand, because I don't want to borrow NZD at all. Also, my main business isn't trading valars for dollars so I'm not worried about it. Just like fish, I may have dollars on a given day, and I may not.

@davidjohnston you said:

"If banks could create money without any obligation on their own part, it wouldn’t matter if the people they lent the money to defaulted."

The thing that constrains banks from lending too much is a self-imposed goal to operate a profitable business, not some outside governmental obligation. In my valar scenario above, I am the person giving you the loan, and I'm also the guy generating the energy. If I wasn't the guy generating the energy, however, it would become much more critical that I operate on good business principles, because then the ONLY profits I made are on the repayment of the loan with interest. If you default, this means I'm losing profits from you. Now, if I happen to be paying off my building mortgage by using the profits I make from your interest, I will have a real problem if you default. In my valar scenario, as long as I keep the energy generation automated, not requiring anyone to work, and not requiring any payments to anyone, then you can default all day long, and it won't hurt me one bit. If I'm the one generating electricity, I make money when you use the electricity. If I'm just a lender of valar, I make money on the interest you pay me, and I use that to pay the employees at my little bank...people who mow the lawn, etc.

so no, banks here do NOT need to have any resources for making a loan.

The important distinction is, no they don't have to have the resources when they create the loan. But they do have the obligation to pay they money they lent out, when needed (ie. if that money gets transferred to another bank, or withdrawn as cash).

@davidjohnston pay the money they lent out? Can you explain that further please?

Scenario 1:

Bank A creates a loan to Person A. Fine so far, it's just numbers in books.

Person A then spends that money at person B's shop. Person B shops with Bank B.

So now we to increase the amount of money in Person Bs Bank B bank account.

Bank B isn't just going to increase the number on their books. They're either going so to bank A 'Yo, hand over the cash', or more likely Bank A and Bank B have an agreement, and now Bank A owes Bank B some money (which will later be repayed when there's a transaction going the other way).

Scenario 2:

Bank A creates a loan to Person A. Person A wants to withdraw this money as cash.

Bank A needs to get that cash from somewhere.

@davidjohnston Actually, David you may not be aware of this, but the way that money is transferred between ALL banks is as follows:

1) Each bank has an account at the RBNZ. Bank A transfers electronic money to their account at the RBNZ.

2) The money is transferred into the Bank B's account at the RBNZ.

3) The money is transferred from Bank B's account at the RBNZ, into the target account in their own bank computers.

This interbank transfer process occurs every night during the workweek. This is why it takes a day for interbank transfers to occur.

NEVER is cash used for any of this. I remind you that of all the money in New Zealand's money supply, only 3% is cash/coin. That is ONLY there for the convenience of people who still want to use cash. Bank's DO NOT like using cash because cash COSTS money...they have to borrow it at interest.

Now, please remember this also...the 3% cash in circulation is sufficient for the demand. What does that tell you? Your scenario B is VERY RARE, and is getting rarer all the time. I'll say it again...the cash is ONLY there for convenience. While it functions as money, it is by NO means the main source of money in the economy. 3% is a very small number.

@davidjohnston I'm sure you've noticed how banks were pushing for people to use "direct payroll deposit". Why do you think this is? Well, it's MUCH cheaper for them, since payroll was a major source of money exchange, and now, they don't need to bother with that pesky cash that costs them money. It transfers directly from bank to bank using the inter-bank transfer service of the RBNZ. No cash...no interest charged...all happy :)

@kennethkopelson Sure. But the point remains that Bank A is required to square up with the debt they created for person A. With creating a debt, they created also created an obligation for themselves. Do you agree?

@davidjohnston Also, do you know why Australia, NZ, Canada, UK, and Sweden have 0% reserve requirements? I don't know for sure, but I suspect it has a lot to do with the rollout of EFTPOS in all those countries, starting here in New Zealand. With EFTPOS, the banks have a small fee for the actual electronic transfer, but that is much cheaper than them borrowing all that cash from the central bank. The EFTPOS system truly allows banks to operate their own private money system.

It should be noted that if banks keep a balance in their Exchange Settlement Accounts, they do get charged interest on that balance, so this is also something they would prefer to avoid. So, for transacting business, a balance may sit in their ESA account for a short while.

I note there are a couple of other discussions with people in this discussion trying to come to consensus on this issue. Can you all do the rest of us a favour and try to keep this in the one place thanks.

@marcwhinery @kennethkopelson @davidjohnston @amandavickers
When you take out a loan from the bank, you must put up something of equal or greater value as security/collateral. I believe that these become the "resources for the loan".

@wadevuglar That simply isn't true.
For example, I have a bank overdraft, which I didn't any property as collateral for. I'm still legally obligated to repay the loan, meaning that I'd have to sell any personal property to pay the loan, before I went bankrupt.

@wadevuglar A credit card is a loan from the bank. I put up nothing against it.

Again, reality seems to disagree with your opinion. I think I'll side with reality.

@marcwhinery @davidjohnston
Good points guys. I didn't think of unsecured loans in my example.

I believe however that you will find that:

1) If you fail to meet your payment commitments or breach the contract in some other way, then the creditor can repossess goods that you purchased with the credit,

2) in the event of the bankruptcy of the borrower, the unsecured creditors will have a general claim on the assets of the borrower after the specific pledged assets have been assigned to the secured creditors.

3) If you didn't go bankrupt and just refused to pay, most creditors will just keep adding interest and fees to the account. At some point they will take you to court which can then force you to pay or force you to go bankrupt, then they will get back some or all of what you owe them, or

4) Some creditors will sell the debt to a professional debt collector who could use physical force to collect his money.

@marcwhinery , this doesn't invalidate the rest of what has been said around this discussion.

You say: "Again, reality seems to disagree with your opinion. I think I’ll side with reality."

I disagree. Reality clearly shows that I, and other who hold my position are correct and that you have a faulty understanding of the situation surround the creation of money.

What do you say about the direct quotes from the Reserve Bank of New Zealand making the same claim that the rest of us have been making.

Again I post a couple of them here:

"In practice, by far the largest share of money – 80 percent or more, depending on the measure (discussed below) – is created by private sector institutions. For simplicity, in what follows, we use “bank” to refer to any institution that creates money or credit."

"Banks...create money and credit at a volume depending on their customers’ own demand for money and credit."

http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008mar71_1lawrence.pdf

@wadevuglar What do you do for a living?

I work in IT. About 95% of what I hear in IT is a lie. It's a convenient lie that's functionally close enough, but taken out of context, and examined, 95% of what's said is simply false.

I've noticed that is true for many things. The "experts" assume you are too dumb to understand how it really works, so they dumb it down so you can understand it.

Banks don't create "money" as you know money. Banks create "money" as in M1, M2, and M3 money. And that's true, because M1, M2 and M3 don't exist. Banks create nothing. Banks move money from one person to another, and charge both of them for that service.

To economists, moving money is "creating" money.

Because that's not true for the lay-person's definition of "creating" or "money" means they have to lie when describing it, otherwise, nobody would understand.

You are repeating a lie that you don't recognize as a lie.

This would be an easier discussion in the S&L crisis in the US in 1980s. Back then, the US wasn't in bad enough shape to have started printing electronic money (as they do now, and NZ has done for some time). In that context, it's easier to see that "money" is currency, and nothing else. The ledgers in the bank aren't real. They are the lie. That, and the economists that claim M2 is "money". You can't buy anything with M2. M2 is an entry in a ledger (what others here insists is "money" created by the bank).

There is nothing created by the bank. The bank simply takes my $100 deposit and lends it to someone else, and there's never more than $100 in the system. The M2 of $1000 for $100 loaned out 10 times is the lie. There was never more than $100.

In networking, you can buy a 10 Gbps line and sell 100 Mbps to 1000 people. That adds up to 100 Gbps sold. So , is there 100 Gbps, or 10 Gbps for the people to use? There is only 10 Gbps, but that 90% of the people aren't using it at any given moment, the sum of total experience is 100 Gbps. So what's the reality? Is there 100 Gbps of bandwidth on the 10 Gbps line because the people who have been sold a shared 100 Mbps service don't experience a run on the bank, I mean bandwidth?

Money is oversold/oversubscribed, but it is no more "created" by banks than an ISP oversubscribing bandwidth "created" bandwidth by selling more.

So far nobody has looked at my logic. They just quote more lying bankers back at me. I understand your point. Quoting more lying bankers won't convince me of anything. Tell me how my bandwidth analogy is wrong. Tell me how $100 cash loaned 10 times is now $1000, and not still $100. Tell me how I'm wrong.

Nah, someone will just assert I'm wrong and quote another lying banker. That's all that'll happen, for the millionth time.

@marcwhinery

Banks don’t create “money” as you know money. Banks create “money” as in M1, M2, and M3 money. And that’s true, because M1, M2 and M3 don’t exist. Banks create nothing. Banks move money from one person to another, and charge both of them for that service.

No, banks create money. This has been proven to you time and time again - you just refuse to believe the evidence.

@colinengland I've seen no "evidence". My proof is the logical exercise of running a bank. You get $500 in deposits. You loan out $500. The people you loan it to deposit it in your bank. You have $500 in the bank, and $1000 in deposits. That's $500. Not $1000. But in M1/M2/M3 numbers, the bank is holding $1000. But there's only $500. There's only ever $500. The $1000 is a lie by the economists.

Nobody has ever proved that wrong. No number of quotes will convince me. The reality is there is only $500, and no money is "created" by a bank.

If I'm so wrong, it should be easy to prove it. Does the bank above have $1000 of $500?

@marcwhinery To be honest, I kind of think we are almost arguing semantics here.

With the numbers that the bank has put into my account, am I able to withdraw it as hard money?

Yes.

If I get a $1000 loan from the bank, my account is credited with the amount which I can then withdraw as hard currency.

With the credit that the bank has given me, am I able to electronically pay someone else with these figures that have been entered into my account?

Yes.

It is money not only because it can be withdrawn (as long as the banks are open), but it can be used for payment electronically.

You are adequately explaining fractional reserve banking and in as much it seems fairly correct. However, the figures in my account is "money" as long as the system is working and people accept the "money" in all its forms.

The funny money $1000 enters into the economy and enables people to purchase goods and services at their discretion. They can transfer it to other people who then can also use these electronic numbers to also purchase goods and services at their discretion.

It is as good as, if not better than physical money.

@marcwhinery I work in IT as well.

@wadevuglar Funny money is funny because you don't need money for long. How many people do you know that carry $1000 in cash around? Usually someone taking out that much is handing it quickly to someone else who deposits it. The money is used by multiple people at the same time. That's where the current system gets confusing.

You don't have $1000 in the bank, as it's been lent out. But the bank has a "pool" of money. They give you money from that pile. They know money goes somewhere, and it makes it back to them quickly enough.

The fact that "your" $1000 isn't there seems to be one of the confusing points. There's no need for "funny money" it's real enough. It just moves fast enough that nobody knows it wasn't there all along.

@wadevuglar

IT is full of lies. Do you know the definition of "broadband"? http://en.wikipedia.org/wiki/Broadband "Multi-Channel" So a single channel 100 Gbps service is baseband, and a dial-up modem was technically "broadband". But the definitions were lied about so long, "broadband" means "fast" without regard to the spectrum width, transmission media, or anything else.

The convenient lie is repeated, even by experts (so long as you aren't in a group of EEs discussing signal processing). That doesn't make it true, it just makes it what the "experts" say. Like bankers saying banks "create" money.

You have $500 in the bank, and $1000 in deposits. That’s $500. Not $1000.

No, it's actually $1000 because the original $500 can be withdrawn and so can the other $500. That means that there's $1000 in circulation and the bank created $500 of it.

In fact, economists use that exact same example to show how banks increase the amount of money in the system. Of course, the evidence shown to you and which you don't accept tells us that that teaching is wrong.

@colinengland Nope. In reality, if you take out your $500 and the other guy takes out his $500, the bank is bankrupt, and closes when you take out your $500. That's why they keep a reserve (larger when money moved slower, smaller now that money moves faster). So that they'll be less likely to run out of money, because there's only $500 and they've promised $1000.

And the reserve is far less than the total amount in circulation.

Banks create money - you just don't wish to believe that.

@colinengland The reserve is small because the amount of "money" needed is tiny, compared to the economy, but everything in the economy has a value represented in money. Depending on the structure of the holding of your house, your house counts as "money" when economists talk about money.

When your house is "money" then the definition of "money" is broken.

Granted, your house isn't likely "money" but places like Telecom's headquarters is "money" because it's an investment/lease/holding.

I don't wish to believe it because it isn't true. I don't wish to believe the world is flat, either.