Another discussion about banks and printing money

Wow - great discussion point. I say yes, this would be an excellent thing to do .

I agree. I have just put up a proposal that the Private Banks should not be allowed to print our money supply. These two proposals go hand in hand, so I hope it succeeds.

@dennisdorney Private banks do not print our money. The reserve bank does. Private banks 'create' money, by relending existing money. When they do this, they increase their own debt.

Every time we have a serious discussion about the banking system, someone raises this issue. David , you are wrong. Don't take my word for it. Read the Bank of Englands Spring 2014 Bulletin, where they explain simply and clearly that banks do create our money supply. They are the experts. They created this game. If that is not enough, read Martin Wolf, lead writer on the highly regarded "Financial Times" or Mervyn King, past Governor of the B of E, or Benes and Kumhoff, research economists with the IMF. I can fill this page with references of economics experts. I can understand you not agreeing with me, we are both amateurs but these people are professionals. Do some research or you are simply wasting our time.

Good topic @terangikaiwhiriake Instead of trying to overhaul a draconian banking system perhaps the discussion should be about alternative local currencies that is reflective of any given region.

I don't see any positive outcome using the private banking cartel to trade between ourselves and to fund local projects. In the US hundreds of alternative currencies are being used successfully.

Perhaps a peer-peer-cpytro/hard currency combination.
https://en.wikipedia.org/wiki/Alternative_currency

@dennisdorney Thanks for the pointer to BoE document, that's very useful.

So yes, a bank can essentially create debt before they've been given that money to lend out. However, when that debt is spent at another bank or withdrawn as cash, then the lending bank still needs to settle its accounts.

This particular debate already has been fleshed out in the capped interest rates thread. I am not saying it shouldn't continue here, I just think it might be better to be condensed into one discussion thread.

@davidjohnston you are making the same mistakes nearly everyone makes. Money is not physical...it is simply a concept created by numbers. Currency, on the other hand, is physical. It is CASH and COIN. Private banks do not lend out currency...they lend out MONEY, which is simply entries in their accounts. There are TWO kinds of money...that which IS currency, and that which is NOT. Only a very small percentage (about 3%) of the money in circulation is actually currency (notes/coins) printed by the central bank. This is called NARROW MONEY. The other 93%, which is called BROAD MONEY, is created as deposits in private commercial banks by the bank simply creating balances in accounts. When you get that mortgage, the bank transmits an electronic transfer of electronic money to the seller's bank account for the price of the house. The bank also opens a loan account for you, and puts a matching DEBIT entry in there for the same amount. The amount of actual currency that the bank has to have in it's vaults is determined by the bank's assessment of risk, and the level of liquidity they believe they need. This will be somewhere between 3% and 10%. If the bank falls short of their target, they merely borrow some more currency from the central bank.

Another way of seeing this is, the money you have in your bank account is considered an "Accounts Payable" by the bank...an I.O.U. to you for that amount. Any loan account you have is considered an "Accounts Receivable" by the bank, money owned to them. Because those amounts satisfy the 3 requirements for money, namely 1) unit of accounting, 2) medium of exchange, and 3) storage of value, commercial bank deposits (checking and saving) are considered to be MONEY, and ARE included in the country's total money supply accounting.

This is how it works, regardless of what other incorrect explanation has been given by books or others.

@kennethkopelson Yes when a bank creates a debt for me, (say in the form of an overdraft), they haven't created any hard cash. However, there is a promise of cash, if I want/need it. I can turn that $1000 'virtual debt', in to real money if I want. At which time the bank needs to front up with the cash and get it from somewhere.

@davidjohnston You almost had it correct...it's all about using the right terminology, which will make the concepts crystal clear.

Let's say you walk into the bank with $1000 in fresh new bills. You say you want to deposit it to a new account. They take possession of your currency, and technically it becomes their property. They then convert that CURRENCY-MONEY into COMMERCIAL-BANK-MONEY. It's not virtual money, it IS real money, since the term money does NOT only include physical things like cash. Even that cash you walked in with represents debt...it's the debt that the private banks have to the central bank, since THEY borrow that cash from the private bank when it first comes into circulation. So, here is how you could say your statement, and be 100% correct:

"Yes, when a bank creates a debt TO me, (say anytime I deposit money into an account), they haven't created any cash (all cash is hard). However, there is a promise of cash if I want/need it. I can turn that $1000 debt they owe me, into real CASH/CURRENCY if I want it. At which time the needs to front up with the cash, which they will get from their vaults."

Their experience teaches them that they don't need to keep more than %3 percent cash to cover their needs for cash. Why should they keep more than that when it COSTS them money to do so? It's not free to them, since they have to BORROW it, and pay interest on it? They are all about minimising cost to themselves. Make sense?