How money is created

Michael Hardner · April 8, 2010

If I understand your statement the "created money", once it's debt is satisfied, ceases to exist. This was true in the past if the "money" (not a debt) is a "money substitute" (a debt). The "money substitute" disappears upon it's redemption for the money. Today, the money substitutes have become the money, so they do not disappear, the same as you would expect money not to disappear. They are just entered as a credit on the debtors account.

Let's go step-by-step. I deposit $100 in a 0% interest account. The bank can now loan out $1000 - which it does, and is paid back $1000 plus $50 interest. But the original $1000 is no longer in circulation. The bank can lend out another $1000 but it's no longer in circulation.

Pliny · April 8, 2010

Let's go step-by-step. I deposit $100 in a 0% interest account. The bank can now loan out $1000 - which it does, and is paid back $1000 plus $50 interest. But the original $1000 is no longer in circulation. The bank can lend out another $1000 but it's no longer in circulation.

The original thousand dollars is still in circulation.

The loan was given for a reason. The person wants to buy or pay for something. He takes the loan and pays for the product he wants. The person who receives payment now has the thousand dollars and spends it on what he wants to buy and deposits, say $100 dollars in his bank for savings. His bank can now loan another $1000 based upon the deposit of the $100 from the original loan. He has the thousand dollars until he spends it.

The person paying back the loan is paying it back out of his labour and the production of new wealth in the form of goods and services. He is not paying back the original $1000 he borrowed.

Michael Hardner · April 8, 2010

The original thousand dollars is still in circulation.

The loan was given for a reason. The person wants to buy or pay for something. He takes the loan and pays for the product he wants. The person who receives payment now has the thousand dollars and spends it on what he wants to buy and deposits, say $100 dollars in his bank for savings. His bank can now loan another $1000 based upon the deposit of the $100 from the original loan. He has the thousand dollars until he spends it.

The person paying back the loan is paying it back out of his labour and the production of new wealth in the form of goods and services. He is not paying back the original $1000 he borrowed.

:huh: That makes sense. I like the idea of the 'IOU'. That's an easy way to think of it.

Allen · April 8, 2010

I think you are basically saying that there should be the same amount of money in circulation as the value of goods and services produced. It is not really a possiblity because value is a personal consideration, and as well, supply and demand will affect value. Do we just create and destroy money when someone values a good above or below what another would value it? Or is the price determined by the cost of production and personal need entirely disregarded?

Don't be so quick to discourage new ideas. That would be what I am saying but there are plenty of ways to use supply and demand. We can let people rip eachother off. Kind of how scalpers work. Or we can lag the payment say by a month (or a year). Meaning you get paid on sales from last year or month. Yes to be fair this would mean you go without payment until later. At least once your done you will get paid for not working. In other words, it will come back. Or what I would like to see is this "profit" be used to help the greater good. Not saying there will not be taxes but to go beyond the social programs we have now. Let me be clear though, this is all just my opinion. This is not the only ways of handling this. How do you think this should be solved?

Allen · April 8, 2010

Michael I started this forum to find people interested in talking about a solution. Not to have someone convince me the current monitary system is flawless. I know there is a lot to understand and if you want to prove me wrong, look up how Canadian money is put into circulation. Don't take my word for it. If you don't care enough to put in this effort then you are defending a system that you do not understand and should stop. Ask yourself, if you want brand new money, how are you going to get it?

M.Dancer · April 8, 2010

Michael I started this forum to find people interested in talking about a solution. Not to have someone convince me the current monitary system is flawless. I know there is a lot to understand and if you want to prove me wrong, look up how Canadian money is put into circulation. Don't take my word for it. If you don't care enough to put in this effort then you are defending a system that you do not understand and should stop. Ask yourself, if you want brand new money, how are you going to get it?

Before anyone should bother to prove you wrong, you should prove yourself right. I would suggest a post secondary economics programme would help, so far you merely come off as another tinfoil hat conspiracy theorist. Not that there is anything worng with that...

Pliny · April 8, 2010

Don't be so quick to discourage new ideas. That would be what I am saying but there are plenty of ways to use supply and demand. We can let people rip eachother off. Kind of how scalpers work. Or we can lag the payment say by a month (or a year). Meaning you get paid on sales from last year or month. Yes to be fair this would mean you go without payment until later. At least once your done you will get paid for not working. In other words, it will come back. Or what I would like to see is this "profit" be used to help the greater good. Not saying there will not be taxes but to go beyond the social programs we have now. Let me be clear though, this is all just my opinion. This is not the only ways of handling this. How do you think this should be solved?

Well, what I understand from what you have said is that you see a problem regarding the distribution of wealth. Some people have none and some people have too much.

Is this correct, so far?

Pliny · April 8, 2010

That makes sense. I like the idea of the 'IOU'. That's an easy way to think of it.

Something I said made sense? Yahoo!

So the loan created as a debit on your account is now in circulation. The person who received the credit on his account from your loan is now spending it again.

Not only does the loan take $1000 in future production to pay it back but there is also the $1000 in circulation that is a claim on goods and services. This inflation of the money supply means that the general price of goods and services will increase because the level of production will not have increased in that same amount. There is now more money in circulation making a claim on the same amount of goods and services.

This is unfair because the person who first gets the loan will spend it before there is a rise in prices, and the inflation erodes the purchasing power of those who, like Bonam, choose to wait before they buy.

Edited April 8, 2010 by Pliny

Bonam · April 9, 2010

and the inflation erodes the purchasing power of those who, like Bonam, choose to wait before they buy.

Except that my money is earning interest faster than inflation while I wait to buy stuff.

Pliny · April 9, 2010

Except that my money is earning interest faster than inflation while I wait to buy stuff.

Yeah, if you wait long enough you will be rich.

Edited April 9, 2010 by Pliny

Michael Hardner · April 9, 2010

Michael I started this forum to find people interested in talking about a solution. Not to have someone convince me the current monitary system is flawless. I know there is a lot to understand and if you want to prove me wrong, look up how Canadian money is put into circulation. Don't take my word for it. If you don't care enough to put in this effort then you are defending a system that you do not understand and should stop. Ask yourself, if you want brand new money, how are you going to get it?

I want to know what the problem is before talking about a solution.

That's fine if you don't want to explain - I will follow the other discussions on here.

Bonam · April 9, 2010

Yeah, if you wait long enough you will be rich.

The point isn't that I'll get rich (obviously that doesn't happen from the fraction of a percent difference) but that my savings are not being devalued over time.

Michael Hardner · April 9, 2010

Something I said made sense? Yahoo!

So the loan created as a debit on your account is now in circulation. The person who received the credit on his account from your loan is now spending it again.

Not only does the loan take $1000 in future production to pay it back but there is also the $1000 in circulation that is a claim on goods and services. This inflation of the money supply means that the general price of goods and services will increase because the level of production will not have increased in that same amount. There is now more money in circulation making a claim on the same amount of goods and services.

This is unfair because the person who first gets the loan will spend it before there is a rise in prices, and the inflation erodes the purchasing power of those who, like Bonam, choose to wait before they buy.

So is this the money that is referred to when the term 'money supply' is used ? What measures determine how much of the money in circulation is loaned versus... whatever the opposite is ?

I'm still trying to determine if we can tell how much money in circulation comes from a bank loan versus other sources.

Pliny · April 9, 2010

The point isn't that I'll get rich (obviously that doesn't happen from the fraction of a percent difference) but that my savings are not being devalued over time.

Over the short term, which may be your entire lifespan or two generations even, your savings may not be devalued over time. Over the long term with a fiat currency, look at what the following generation after that has to face. It isn't nice. It's a big Ponzi scheme where the first in make benefits and the last in lose everything. Remember, we have only had a fiat currency not backed by gold or silver for a mere 50 years. I pity the younger generation of today. They are paying to support OAS, GIS, the next generations education and the baby boomers aging increase in health care demands. Will those benefits be there for the current generation? It is beginning to look like they won't but they are committed by the previous generations. Isn't that nice. Not a pretty scenario.

This is interesting.

As of 4 November 2009 the federal reserve reported that the U.S. dollar monetary base is $1,999,897,000,000. This is an increase of 142% in 2 years.[24] The monetary base is only one component of money supply, however. M2, the broadest measure of money supply, has increased from approximately $7.41 trillion to $8.36 trillion from November 2007 to October 2009, the latest month-data available. This is a 2-year increase in U.S. M2 of approximately 12.9%.[25]

That's from the webpage cited on my next post.

Edited April 9, 2010 by Pliny

Pliny · April 9, 2010

So is this the money that is referred to when the term 'money supply' is used ? What measures determine how much of the money in circulation is loaned versus... whatever the opposite is ?

I'm still trying to determine if we can tell how much money in circulation comes from a bank loan versus other sources.

There are classifications for the kinds of monetary creation there is. It is graphed as M0, M1, M2 and M3 and a few others. Here is a basic description of theMoney supply that is understandable. I find you have to be an economist to wade through statistical data on any central banks website.

Edited April 9, 2010 by Pliny

M.Dancer · April 9, 2010

I just created $14,000. Sure it's on paper at the moment, but soon it will be in an account ready for transfer or to withdraw.

Michael Hardner · April 9, 2010

I just created $14,000. Sure it's on paper at the moment, but soon it will be in an account ready for transfer or to withdraw.

Are you a bank ? If not then the money you withdrew (for... what it could be... the mind reels) or borrowed wasn't created by you. It was created by debt, unless you printed - which you likely did.

GostHacked · April 9, 2010

Are you a bank ? If not then the money you withdrew (for... what it could be... the mind reels) or borrowed wasn't created by you. It was created by debt, unless you printed - which you likely did.

It's not 'legal tender' anyways correct?

M.Dancer · April 9, 2010

Are you a bank ? If not then the money you withdrew (for... what it could be... the mind reels) or borrowed wasn't created by you. It was created by debt, unless you printed - which you likely did.

It was created by a venture where none existed before, offered to client who took the opportunity to use it. Completely transactional. No loans. Simply entrprenuerialism.

maple_leafs182 · April 9, 2010

Before anyone should bother to prove you wrong, you should prove yourself right. I would suggest a post secondary economics programme would help, so far you merely come off as another tinfoil hat conspiracy theorist. Not that there is anything worng with that...

Eventually you will realize the conspiracies are more then just theories.

M.Dancer · April 9, 2010

Eventually you will realize the conspiracies are more then just theories.

I have already found out that too many nuts gives you diarrhea.

Michael Hardner · April 9, 2010

Eventually you will realize the conspiracies are more then just theories.

Conspiracy theories don't seem to acknowledge the fact that huge debacles take place every day in plain sight and don't require being hidden because people shrug their shoulders. So, the world of finance may indeed be one of these examples - pushing resources and wealth to where the mob mentality indicates that it should be - but there doesn't seem to be anything indicating that it's a secret, or that anyone in particular is behind it, nor that there's a better way to run things.

I understand how the open market works, and how central planning works - and the trade offs between decentralizing and centralizing. But some of the ideas in this thread seem to step around all these questions and to say we 'need to improve the system', citing abstractions about how money is backed up via gold, banking processes.

As far as I can see, this isn't a conspiracy theory because it's all in the open, and also because no one can articulate what the conspiracy even is.

Pliny · April 10, 2010

Eventually you will realize the conspiracies are more then just theories.

There is no "grand" conspiracy. The Illuminati, the Rosicrucians, the Knights Templar, the Freemasons, etc. are all distractions. That men will conspire is a given. There is an elite that rule and for the most part their "management organization" keeps them at arms distance from the public. The management organization is basically the banking and governmental organizations that are extant in the world and are entirely accessible by anyone. There is no need to find hidden symbology, inner sanctums of Satanic exaltation or Alien reptilian influences.

Because you present the issue of "conspiracy theory" as valid you discredit yourself.

One could say there is a conspiracy and be correct. The conspiracy however is to maintain the status quo of the heirarchical structure and nothing more.

I believe that several experiments of the governance of civilization and the populaces of the world have been made and it has been found that a central authority is not the best form of governance. However, governance, by it's very definition, is the directing of society and there cannot be a total abandonment of governance to the individual. Some balance must be found. The size of the populace of the world along with the perceived limited non-renewable resources make the subject of governance of the utmost importance but we have found that dictatorial governance is not the best method to achieve the goals of the "conspiracists", who are concerned that "their" natural resources are being depleted and there are too many people in the world. From those two simplistic concepts - too many people, not enough resources - we can see the whole reason for the policies and programs of governments. The whole carbon tax or carbon credit scheme is all about the depletion of resources and the control of development. The whole promotion of procreation is about curtailing population growth through, abortion, contraception, homosexuality and whatever will encourage it's curtailment. That these two areas appear to be the prime concern of governments is not odd. Among the myriad of issues, most relate back to the concerns of population growth and resource depletion.

Governments should not be concerned about such things and it is odd that they are. They attempt to make the concerns of the "elite" the concerns of the general populace. This way it looks as though it is what the public wants and not what is being dictated by the ruling elites who must appear to be at arms length of government.

Edited April 10, 2010 by Pliny

Pliny · April 10, 2010

As far as I can see, this isn't a conspiracy theory because it's all in the open, and also because no one can articulate what the conspiracy even is.

I hope I have opened your eyes with my last post. Maybe not, it's Friday and after Happy Hour!

Edited April 10, 2010 by Pliny

August1991 · April 10, 2010

Barack Obama was also a Nobel Prize winner.
...

I like Friedman but he is a monetarist, there are two things missing in his story and one is, any commercial value for the stones of Yap. Certainly, gold sitting in a vault seems as ridiculous as large wheels of limestone sitting in someone's yard. But if money were a commodity as gold is it would hold some real value.

...

His babysitting co-op is supposed to illustrate how not enough money in society is a real economic problem. His answer - inflate the "money" supply and create a central bank that can create credit at will. The true socialist economist.

Sorry for the Nobel Prize winner citation. I too agree that a Nobel Prize generally means little more than a glance, to see if there is something more. In the case of Friedman and Krugman, I think so. Both are/were intelligent men who understand economic theory well.

---

Commercial value for stones/gold? What do you mean by "commercial value"? The commercial value of gold (assuming it exists) does not support a price of $1000/ounce. The price of gold is based on the belief of millions of people, if not billions, that by holding gold, they have a guarantee of a claim on real assets that they may need in the future.

Trade naturally leads to saving.

----

Babysitting coop? Well, what happens when people suddenly believe that their gold has no claim on anything? (As I asked previously, what would happen if some country suddenly discovered/announced that it had a new huge gold mine?)

IOW, what happens when many people simultaneously decide to shift one form of saving into another?

Edited April 10, 2010 by August1991