How money is created

[bjre]

First year macroeconomics guys. Money is created by the banks. You give them your money, they lend it out with interest. They create money by lending out your savings. That's a huge oversimplification, but essentially what happens.

Thanks for education.

Question:

What is the total balance of the Canadian middle class in the saving account in banks?

What is the total balance of debt of the Canadian middle class in banks?

What is the balance of Canadian public debt?

If total debt is larger than total saving, where comes the money to be lent in banks?

What is the result of this? (Where is the huge amount of interest flowing to?)

Edited March 27, 2010 by bjre

[cybercoma]

Let me save the 4 pages of circles you want to endeavour upon. Long story short, the actual amount of printed money has nothing to do with creating money or more precisely making money available.

[maple_leafs182]

Thanks for education.

Question:

What is the total balance of the Canadian middle class in the saving account in banks?

What is the total balance of debt of the Canadian middle class in banks?

What is the balance of Canadian public debt?

If total debt is larger than total saving, where comes the money to be lent in banks?

What is the result of this? (Where is the huge amount of interest flowing to?)

Answer:

The total debt is larger then the total savings.

Banks lend out at a ratio of usually 9:1(varies bank to bank).

For every $100 they receive, they lend out $900.

They lend us money that they create out of thin air.

They then charge interest on it.

We then labor and pay them back with our hard earned money.

This is how new money is created.

Money is created out of debt.

You could call it fraudulent, I do.

Who cares where they print the dollars, that's irrelevant, all that matters is who controls the dollar.

Central banks.

I wish you guys would open your eyes, look at what is really happening in the States, not what the main stream media or Obama says is happening. They are headed into depression courtesy of the Federal Reserve.

Edited March 27, 2010 by maple_leafs182

[Michael Hardner]

I wasn't really talking about the extange of money. It's the source I'm interested in. No matter what, that source is our central bank (The Bank Of Canada). With the extange of of money you can repay your loan but that makes it impossible for another person or business to pay off theirs. It's simple math/accounting really.

Really. Then why don't I understand what you're saying ?

What is the "source" of money ? Was money exchanged in ancient Egypt still in exchange now ? If I repay my loan, how does that make it impossible for someone else to do so ?

[Michael Hardner]

I reckon that some people's obsession with money is akin to some women's desire for cosmetic surgery or to some men's desire to appear cool. At issue is not money in any economic sense - but something else.

You have at least provided some idea of why this topic is popular. I'm still at a loss to understand what these people are getting at. At best, they're damning corporations and banks for being greedy (duh) and at worst it's another crackpot Twilight Zone theory - like how JFK was going to solve all of our problems, but he was shot.

[Michael Hardner]

Answer:

The total debt is larger then the total savings.

Banks lend out at a ratio of usually 9:1(varies bank to bank).

For every $100 they receive, they lend out $900.

They lend us money that they create out of thin air.

They then charge interest on it.

We then labor and pay them back with our hard earned money.

This is how new money is created.

Money is created out of debt.

So this is what is meant by 'money is created out of debt' ? If so, it's not a good summary. Money is created by lending out 10 times what is deposited. But that amount must vary, right ? And if I don't pay them back they're on the hook for the whole amount.

You could call it fraudulent, I do.

Who cares where they print the dollars, that's irrelevant, all that matters is who controls the dollar.

Central banks.

The Central bank is concerned with making sure the supply of money in the economy is adequate.

I wish you guys would open your eyes, look at what is really happening in the States, not what the main stream media or Obama says is happening. They are headed into depression courtesy of the Federal Reserve.

...and with that last sentence... the disconnect happens again.

[Allen]

First year macroeconomics guys. Money is created by the banks. You give them your money, they lend it out with interest. They create money by lending out your savings. That's a huge oversimplification, but essentially what happens.

First year eh? So money is created by the banks. Then I give them my money? You missed a step Cybercoma. How the money got from the banks to me to deposit it.....And Michale Hardner that was like asking "If your so smart, why don't I understand you?". Sorry to get rude but I really don't want to repeat myself. One more time for the slow people.....Every legal tender (or bank note) in Canada comes from a Bank. The Bank then loans the money to people and business. Then the money is extanged through regular transactions. Because the money comes available to public on loan, interest is applied. The money to pay interest does not exist as every dollar outside the bank's assets or reserve was borrowed. FOr the last time....this is not a conspiricy. I am just stating how a system I myself have studied works. You people are getting confused with how money is extanged rather than the simple process of its origin. At this point is where the system is flawed. Why not fix it?

Look I really do not care if your scared or confused by how things work, don't waste my time on trying to explain it. If your not going to believe me anyways, look it up. Get educated. Then defend the current monitary system with hard facts. I look outside and feel safe in it's blanket as well. I mean things are good on my suburban street. That doesn't mean we cannot create and use a better system.

[cybercoma]

Remind me not to support you in an argument again. I was simply agreeing with your point that the banks create money, which appeared to have others confused or arguing without any actual knowledge on the subject.

[Michael Hardner]

First year eh? So money is created by the banks. Then I give them my money? You missed a step Cybercoma. How the money got from the banks to me to deposit it.....And Michale Hardner that was like asking "If your so smart, why don't I understand you?". Sorry to get rude but I really don't want to repeat myself. One more time for the slow people.....Every legal tender (or bank note) in Canada comes from a Bank.

Speaking for the slow people, please don't make an assertion like "all money comes from banks" as though it's so obvious that it doesn't require explanation.

Money comes from lots of places - investors, companies and so on. To claim "yes, but ORIGINALLY it came from banks" isn't obvious either. Money circulates so you could conceivably keep tracing it back, from before the banks - from the depositors, investors and so on to wherever that came from.

Look I really do not care if your scared or confused by how things work, don't waste my time on trying to explain it. If your not going to believe me anyways, look it up. Get educated. Then defend the current monitary system with hard facts. I look outside and feel safe in it's blanket as well. I mean things are good on my suburban street. That doesn't mean we cannot create and use a better system.

Well, it's your explanation, and your idea. It's up to you if you want to spend time convincing us or not. I'm nothing if not open-minded so I will follow your logic until it ceases to makes sense to me.

[Jerry J. Fortin]

Speaking for the slow people, please don't make an assertion like "all money comes from banks" as though it's so obvious that it doesn't require explanation.

Money comes from lots of places - investors, companies and so on. To claim "yes, but ORIGINALLY it came from banks" isn't obvious either. Money circulates so you could conceivably keep tracing it back, from before the banks - from the depositors, investors and so on to wherever that came from.

Well, it's your explanation, and your idea. It's up to you if you want to spend time convincing us or not. I'm nothing if not open-minded so I will follow your logic until it ceases to makes sense to me.

Money is a rather broad term. There is hard currency such as dollars and coins, then there is credit which is another rather broad term, which is often described as interest bearing debt. Of the entire money supply in the world, 90 percent is interest bearing debt, not dollar bills. That is a very important distinction.

The central banking system which the entire planet lives and works with is based on a fractional reserve system where only a small portion is preserved or protected in deposits within financial institutions. There is far more money supply then there is deposits. That is why there is so much confusion on how the system works, because the banks appear to be creating money out of thin air. Another source of confusion is the concept of central banks and their role in the operation of the financial system. Central banks are not really banks in the traditional sense or the way we think of banks. They do not take deposits from the public or loan money to the public. The theory is that they are the bank for other banks, but that is not very accurate either. Some central banks are privately owned and some are publicly owned. Some are a mixture of both public and private. The original central bank, the Bank of England was a private corporation for more than two hundred years. The central bank in the US is privately owned, but that is confusing too, given that the actual ownership of the US Federal Reserve Bank is in the hands of seven other "banks".

There is much reason for folks to be concerned with a system that is so key to our well being and so misunderstood. In my view the system needs much work, and I think that many folks would agree with me. To return to the point, I think that it is prudent to discuss "money" in terms people can understand, such as earned income or realized equity instead of simply dollars. The relevant thing in my view is that "money" is merely a medium of exchange. The only real value of money is that folks believe in it and trust that it has a defined worth.

[Allen]

Speaking for the slow people, please don't make an assertion like "all money comes from banks" as though it's so obvious that it doesn't require explanation.

Money comes from lots of places - investors, companies and so on. To claim "yes, but ORIGINALLY it came from banks" isn't obvious either. Money circulates so you could conceivably keep tracing it back, from before the banks - from the depositors, investors and so on to wherever that came from.

Well, it's your explanation, and your idea. It's up to you if you want to spend time convincing us or not. I'm nothing if not open-minded so I will follow your logic until it ceases to makes sense to me.

Money does not come from lots of places......Investors do not create money.....Companies do not create money. And so on does not create money. My logic comes from tracing it back. Think about it for a second. All money originally comes from banks. These banks circulate it using loans. Meaning all money in circulation is givin using the formula 1=1+A. Does that formula look correct or incorrect? Is there a flaw with the logic that I am using? If so explain how.

[Thomas Kwon]

.

Edited August 22, 2010 by Thomas Kwon

[Michael Hardner]

There is much reason for folks to be concerned with a system that is so key to our well being and so misunderstood. In my view the system needs much work, and I think that many folks would agree with me. To return to the point, I think that it is prudent to discuss "money" in terms people can understand, such as earned income or realized equity instead of simply dollars. The relevant thing in my view is that "money" is merely a medium of exchange. The only real value of money is that folks believe in it and trust that it has a defined worth.

Jerry - a heartfelt thank you for this illuminating post.

What you said about deposits makes sense, but certainly a significant part of the world`s wealth, if not a majority is not deposited in banks ? Other posters on this thread seem to be saying it all comes from banks, and by that I mean private banks not central banks.

[Michael Hardner]

Money does not come from lots of places......Investors do not create money.....Companies do not create money. And so on does not create money. My logic comes from tracing it back. Think about it for a second. All money originally comes from banks. These banks circulate it using loans. Meaning all money in circulation is givin using the formula 1=1+A. Does that formula look correct or incorrect? Is there a flaw with the logic that I am using? If so explain how.

Money has been in existence since before banks did. That would seem to indicate that all money doesn`t come from banks.

[cybercoma]

Money is created through lending.

You learn this as part of high school economics curriculum. Part of macroeconomics unit I believe.

Yeah. I mentioned that... people get mad at me.

[cybercoma]

Money has been in existence since before banks did. That would seem to indicate that all money doesn`t come from banks.

Exchange has predated banks, but money proper hasn't. Investors get their money from myriad sources, but let's say for example they get that money from a client. The client gets money from their place of employment. Let's say this person works in a widgit factory. The factory gets money from the the businesses that buy widgits from them to sell on the market. The businesses that sell the widgits get their money from consumers. The consumers get their money from their job (which is the same money that keeps circulating) or, as is the point of the OP, money is created when banks lend out money. The consumer (or business, or investor, or whatever) gets cash from the bank. That money is being used twice. When you deposit your money into the bank, you have that money; however, when the next person walks in and takes out a loan, they're walking away with that same amount of money, promising to pay back a little bit extra to use it. This is where Allen seems to think that there's an imbalance. Although technically correct, the idea is that the economy will continue to grow ad infinitum and the banks will consistently make more money available. Moreover, the banking system is paid back by foreign consumption with Canada (exports). Canadian banks don't loan out money to all of the foreign consumers. They get money from their own banks. Theoretically, if you look at it on an ultra-macro scale where all of the money that is created eventually came from a bank somewhere, then on a world scale, there's still an imbalance. Once again, you're back to the idea that the economy expands, when there's full employment they don't need to create money because all the resources are fully employed, and the loans are eventually paid back by bleeding money out of the system in times of full employment. There's a reason movies cost $10 now rather than $0.10 and it's not just because the technology to produce them is more expensive.

[Michael Hardner]

Exchange has predated banks, but money proper hasn't. Investors get their money from myriad sources, but let's say for example they get that money from a client. The client gets money from their place of employment. Let's say this person works in a widgit factory. The factory gets money from the the businesses that buy widgits from them to sell on the market. The businesses that sell the widgits get their money from consumers. The consumers get their money from their job (which is the same money that keeps circulating) or, as is the point of the OP, money is created when banks lend out money.

Ok, but bank loans don't constitute all finance. Wealth existed before lending did. Banks create money, in that they lend money that goes into circulation then is paid back, but investment also puts money into circulation. That investment may not have come from a bank.

That is why I have difficulty with the assertion that all money comes from banks.

[maple_leafs182]

Lesson on Money.

Group A gave their gold to Guy to store for them.

Guy then gave Group A certificates that they could redeem back to him for their gold.

Guy realized that people would just trade the certificates and not the physical gold.

Guy then had the idea of loaning the gold Group A gave to Guy to other people and charge interest on it.

Guy wouldn't actually have to loan the physical gold, he just gave certificates out.

Group A was concerned that Guy was loaning out their gold, but when they got their all their gold was still their. Instead of withdrawing their gold, they just made Guy pay them a small amount of interest.

Thus the 1st bank was created.

This worked good until their was a panic and everyone wanted their gold from Guy, but he gave out more certificates then he had gold.

Instead of England banning this practice, they legalized it and regulated it.

The system was good for funding and expanding infrastructure.

This money which use to represent a commodity like gold or silver, now represents nothing, the only thing that give currency value now is the residual trust that this paper is valuable. The market didn't decide currency should be backed by nothing, bankers and governments that supported them did.

Now Central banks can determine the purchasing power of our money simply by controlling the supply.

"People would rather have cigarettes then pieces of paper as money" - Ron Paul

Paper can't be money.

Money needs to be backed by something people want.

[bush_cheney2004]

....Paper can't be money.

Money needs to be backed by something people want.

People want money...maybe you don't?

Please send me all of your worthless money!

[maple_leafs182]

People want money...maybe you don't?

Only because we are forced to.

If you had a choice to have money backed by gold or money backed by nothing, which would you choose.

[Guest TrueMetis]

Only because we are forced to.

If you had a choice to have money backed by gold or money backed by nothing, which would you choose.

Why would you want your money to be backed up by the useless metal that is gold?

[bush_cheney2004]

Only because we are forced to.

If you had a choice to have money backed by gold or money backed by nothing, which would you choose.

I was alive when money was backed by gold....I'm sure you weren't....didn't make any difference.

Two years later (1973), an American R&B group had a monster Gamble/Huff hit called "For the Love of Money"....it was not "For the Love of Money Backed By Gold".

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

[maple_leafs182]

Why would you want your money to be backed up by the useless metal that is gold?

Truthfully, I agree with you.

I think gold and silver are both useless, I don't know why the world values those metals, but we do.

I am actually buying silver right now.

I don't even think we should continue with capitalism or free trade or have an economy for that matter, we should all just work together, but those ideas are too extreme for some people, that much change would frighten them.

The only reason we need our currencies backed by something is so central banks can't just print the hell out of currencies and inflate them. Similar to what the Fed is doing in the states.

That's the reason I'm buying silver, the US dollar will continue to fall.

Commodities will go up.

Edited March 28, 2010 by maple_leafs182

[bush_cheney2004]

The only reason we need our currencies backed by something is so central banks can't just print the hell out of currencies and inflate them. Similar to what the Fed is doing in the states.

That's the reason I'm buying silver, the US dollar will continue to fall.

Commodities will go up.

...and that's OK....you will still pay more than I do, mostly for reasons unrelated to currency valuations.

[Bonam]

Truthfully, I agree with you.

I think gold and silver are both useless, I don't know why the world values those metals, but we do.

Gold is far from useless. It has extensive applications in both jewelery and advanced industrial processes and technologies. Silver, similarly, has many applications.

I am actually buying silver right now.

It is unwise to buy something you believe is useless.

I don't even think we should continue with capitalism or free trade or have an economy for that matter, we should all just work together

Yeah that'd work... LOL