How money is created

[Yesterday]

Your right.

I don't know what you mean by removed by circulation, the money isn't removed out of circulation.

Hi, thanks for answering me...

I was under the impression that as dollars are collected at the bank for loan re-payment they are in effect canceled. Since all dollars are released/collected solely from banks fractionated and with interest. 100 dollars goes out, 1200 dollars comes back with interest, only 100 was actually created. A bank borrows (sort of) the right to lend an amount of money, it then disburses multiple times this amount of money out in loans at interest. As each dollar comes back, it is levied against the banks original lending total thus achieving the needed cancellation which perhaps in itself is not an issue until the fractional scenario and interest are applied?

How important is it to have proper cancellation policies regarding the creation and circulation of dollars? Perhaps to avoid the scenario of wheelbarrows full of money to simply buy a loaf of bread? I know this is complicated, I appreciate the opportunity to ask these questions.

[Yesterday]

There is debt associated with all paper money because without debt, paper money does not have value. Money without debt can exist in the form of coins valued by instrinsic metal content.

When a bank lends out money in the “present debt-driven system”, more than just “numbers on a computer” is involved. Non-central banks do not simply create money out of thin air because some real asset is required as collateral. Money is created against the collateral, as a debt claim on some real asset. Non-central banks do not create M0 money (coins and central bank notes) but they do create M1, M2, and M3 money.

The “present debt-driven system” does not require any particular “physical material used to represent cash money”. The different money system using different banking laws would require some specific “physical material" for at least some coins. Do you know of any money system presently in use that requires some specific “physical material” for at least some coins?

Could you rephrase "present debt-driven system" with "cancellation policy". Does debt provide the cancellation vehicle? Thus perhaps the value is in the cancellation not the debt?

[Jerry J. Fortin]

More than 90 percent of the current money supply is brought into being as interest bearing debt. Sure they (the banks) say that as those monies are repaid the debt is canceled and the money supply is reduced by the same amount. What they do not say is how those funds are applied into the system itself. The fractional reserve system uses newly created leveraged dollars to generate interest income which is both paid for and paid out as real dollars, or if you prefer hard currency defined as coinage within the financial industry.

The disconnect that exists is found within the central banking system. That system does not in fact lend out money at all, and the "overnight rate" supposedly set by these institutions is not imposed upon the banks in this country at all. In other words the Bank of Canada doesn't really set rates, and it doesn't really loan out money, so this begs the question of "what function does it serve?"

The central banks of the world serve as the political wing of the financial world, nothing more. The are a rubber stamp and little else. But to return to the original point, money is created by financial institutions as a means of generating interest bearing income from its customers. That is how fiat currencies operate. Over the course of time we have replaced the concept of the dollar having a defined value backed by some means of tangible assets to the fiat currency we now have. Money has no value and is back by no security method in any nation. Henceforth the problem of "PIGS" now found in Europe. Where assets are devalued through the course of currently accepted financial calculations, the "value" of currencies is adversely impacted when interest is applied. It is a house of cards that is finally collapsing. The only way for the system to sustain itself is through leveraged growth that provides the means of eliminating the created increase of money supply. Where growth is slowed the money supply is also decreased and that forces devaluation of assets. It is a system designed to transfer wealth from governments to private interests, and it has been exposed.

If countries want to resolve the issues to any extent at all, they will have to rethink the central banking system as a whole.

[cybercoma]

Ok here it is. The way the supply of Canadian currency expands is through loans **(See www.bankofcanada.ca/en/backgrounders/bg-m2). I can see that there are many people that think this system is not flawed. I mean some of the people who had argued against this are intelligent people. If ALL money is loaned to the public and private sectors, the amount in circulation will never be enough to pay the loans (due to money to pay interest does not exist). If M = all the money existing and M was loaned out at some point with I = interest . Then M would equal M+I or M=M+I. Thus creating recessions and depressions as a byproduct of this system.

**Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money.

Interested paid in gets paid back out as interest on savings and profits for the banks. The equation is balanced.

[Yesterday]

Interested paid in gets paid back out as interest on savings and profits for the banks. The equation is balanced.

Hi, this system does not show a balance except perhaps in theory? I do not see it myself, even in theory. I am inclined to see the glaring faults like Jerry J. Fortin and this message from Allen which I thank you for re-posting. For instance the 170 million dollar a day interest bill we Canadians pay with our tax money. I am saddened to think maybe I do understand.

How about taxes, could they if far removed from interest payments and fractional banking be considered effective cancellation policies? First time mortgages could be effective, putting too much money to count into the economy but allowing for cancellation through repayment without interest if government issued versus bank issued. Perhaps a Canadian mortgage center for first time buyers.

Dollar for dollar, what is a reasonable ratio of cancellation. Would 100% of all dollars created need to be cancelled or is there a comfortable margin of expansion not from fractional banking and interest but from savings and foreign investment/movement.

[Yesterday]

More than 90 percent of the current money supply is brought into being as interest bearing debt. Sure they (the banks) say that as those monies are repaid the debt is canceled and the money supply is reduced by the same amount. What they do not say is how those funds are applied into the system itself. The fractional reserve system uses newly created leveraged dollars to generate interest income which is both paid for and paid out as real dollars, or if you prefer hard currency defined as coinage within the financial industry.

The disconnect that exists is found within the central banking system. That system does not in fact lend out money at all, and the "overnight rate" supposedly set by these institutions is not imposed upon the banks in this country at all. In other words the Bank of Canada doesn't really set rates, and it doesn't really loan out money, so this begs the question of "what function does it serve?"

The central banks of the world serve as the political wing of the financial world, nothing more. The are a rubber stamp and little else. But to return to the original point, money is created by financial institutions as a means of generating interest bearing income from its customers. That is how fiat currencies operate. Over the course of time we have replaced the concept of the dollar having a defined value backed by some means of tangible assets to the fiat currency we now have. Money has no value and is back by no security method in any nation. Henceforth the problem of "PIGS" now found in Europe. Where assets are devalued through the course of currently accepted financial calculations, the "value" of currencies is adversely impacted when interest is applied. It is a house of cards that is finally collapsing. The only way for the system to sustain itself is through leveraged growth that provides the means of eliminating the created increase of money supply. Where growth is slowed the money supply is also decreased and that forces devaluation of assets. It is a system designed to transfer wealth from governments to private interests, and it has been exposed.

If countries want to resolve the issues to any extent at all, they will have to rethink the central banking system as a whole.

Wow, yes I agree with you. Just the other day I found some interesting articles on a website called mondaq.com, of particular interest is one named Global Settlements written by a UK firm Peters and Peters which covers the realities of dealing with this global banking and stock fraud and the various different juristictions and laws from country to country, not easy at all to negotiate with so many factions wanting their own version of justice. Quite enlightening.

PIGS?

Edited June 4, 2010 by Yesterday

[Yesterday]

The object would be to amass the figures related to bank profits/losses in the private first time mortgage sector. If the combined amount of both columns generates a figure that fits within the total loss column of the entire private mortgage sector, would it stand to reason that a separation of private first time mortgages could happen without reducing bank profits? Would it also stand to reason that any money a government creates if accompanied with a proper cancellation policy could ultimately have no effect on inflation? example: Let in a first time mortgage with no down payment and no interest, the repayment is a perfect cancellation policy. Money goes out clean, money comes back clean.

The way I view the risk is this...since there is no borrowing to lend as in the banks situation the risk is low. In terms of default, banks lose because they are forced to sell off the default at whatever price they can get because they have credit deadlines to meet thus incurring substantial loss. The mortgage center on the other hand, has no loss and no credit/payment deadlines to meet.

I wonder if the amount of money not canceled out of circulation by default within this fist time mortgage concept would be a small enough figure to not itself cause inflation. Perhaps a cap of 200,00-230,00(very flexible figure) thousand per mortgage, anything above let at 1% interest to help offset defaults if needed.

I wonder if the not canceled money through default would just simply be a small but honest contribution to stabilizing us as a country internally, socially. As long as it did not effect inflation.

Basically if you can get a first time mortgage from a bank you would be eligible for a government first time mortgage.

I do not have a political or financial background and would like to know if this could make sense. Your opinions, challenges and expansions of this concept are extremely welcome.

[dpwozney]

Could you rephrase "present debt-driven system" with "cancellation policy". Does debt provide the cancellation vehicle? Thus perhaps the value is in the cancellation not the debt?

I am not sure what you exactly mean by “cancellation policy”, “cancellation vehicle” and “cancellation” in context with your above questions.

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

“When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.”

http://www.nationmaster.com/encyclopedia/Monetary

“It is critical that we understand that when a bank makes a loan, that is new money and when a loan is paid off that money is destroyed.”

http://www.hansard.act.gov.au/hansard/1990/pdfs/19900920.pdf

“The Right Honourable Reginald McKenna, one-time Chancellor of the Exchequer and Chairman of the Midland Bank in the United Kingdom, addressing a meeting of the shareholders of the bank on 25 January 1924, stated:

‘I am afraid the ordinary citizen will not like to be told that the banks can, and do, create and destroy money. The amount of money in existence varies only with the action of the banks increasing or decreasing deposits and bank purchases. We know how this is effected. Every loan, overdraft or bank purchase creates a deposit, and every repayment of a loan, overdraft or bank sale destroys a deposit.’

That came from Post-War Banking by Reginald McKenna.”

[Yesterday]

I am not sure what you exactly mean by “cancellation policy”, “cancellation vehicle” and “cancellation” in context with your above questions.

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

“When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.”

http://www.nationmaster.com/encyclopedia/Monetary

“It is critical that we understand that when a bank makes a loan, that is new money and when a loan is paid off that money is destroyed.”

http://www.hansard.act.gov.au/hansard/1990/pdfs/19900920.pdf

“The Right Honourable Reginald McKenna, one-time Chancellor of the Exchequer and Chairman of the Midland Bank in the United Kingdom, addressing a meeting of the shareholders of the bank on 25 January 1924, stated:

‘I am afraid the ordinary citizen will not like to be told that the banks can, and do, create and destroy money. The amount of money in existence varies only with the action of the banks increasing or decreasing deposits and bank purchases. We know how this is effected. Every loan, overdraft or bank purchase creates a deposit, and every repayment of a loan, overdraft or bank sale destroys a deposit.’

That came from Post-War Banking by Reginald McKenna.”

Hi, yes this is what I meant, the money is gone, canceled. No I didn't like to find this out. This whole banking fiasco is just a huge creation/cancellation policy gone awry. I just wasn't sure whether I got it, however rudimentary my understanding. Thanks.

[Yesterday]

Just trying to come to terms with some things...

Look at the US...good case in point. We both, the US and Canada, use the same kind of banking/debt scenario. Could you not see how if we had a population of 230 million or more that we would be just as bad off. Our banks sold bad CDOs and the like, even had charges levied which stuck against the RBC. I believe the operative statements levied from politician's regarding this are ones that refer to the bank's lack of access nothing more. The lack of cohesion in our finance minister's statements concerning the banks are enough of a tell in my opinion that we are not getting the truth whatever that may be. If we can't achieve transparency and accountability in our government with a small reasonable population like ours, well, just use your imagination and multiply this absurdity a few million times. To do this gives me nightmares.

It seriously saddens me to see how so many Canadian's are willing to fight over scraps of debt tossed down from the overladen table of the falsely entitled. (hypothetical example)How willing we are to accept one tax when four are presented regardless of how absurd all the taxes are. To fight this senseless fight leaves us feeling as if we have made headway, won an issue by deciding which tax gets applied when in reality since we ended up getting taxed again as was the governments agenda in the first place, we accomplished not much eh. Taxes, mmm, the cost of all those fatty, almost protein-less scraps of debt. All this fat and we wonder why us Canadian's have a systemic weight problem. Why are we so entrenched in this debt system? I don't understand this at all. Especially when looking at early political views about money and banks. How did we let this happen and what can we do about it?

One thing that really worries me is the fact that the Auditor General does her audit after the fact. Imagine, in this scenario, our Canadian government having access to the amount of revenue generated by a population of 230 million. You think all we would have to complain about is a fake lake in downtown Toronto? Seriously!

Edited June 8, 2010 by Yesterday

[Yesterday]

Another group of sad facts about money creation for anyone who is interested...

http://www.basicincome.com/basic_gendata.htm

[Yesterday]

This is American but as I look down the pipe at our future this is the kind of BS I see headed straight at us.

WASHINGTON Capital is the body fat of banking: too much is debilitating, too little is fatal. During the financial crisis, as large banks burned through their capital reserves, governments were forced to add padding at public expense. They were only forced because of a desire to maintain fractional reserve banking, a reset amongst other concepts were more desirable to many.

Jonathan Alcorn/Bloomberg News

Howard Atkins of Wells Fargo criticized the proposals.

Related

Times Topics: Financial Regulatory Reform | Group of 20

Stephen Crowley/The New York Times

Michael Barr of the Treasury said the proposals were crucial to reform.

Now one of the most consequential decisions about new restraints on the banking industry how much more capital banks should hold in their rainy day reserves is being decided not on Capitol Hill but far from Washington, by a committee based in Basel, Switzerland.

The Obama administration is pursuing an international agreement to make banks hold significantly larger reserves, which it regards as essential to increase the stability of the global financial system. It wants to complete the negotiations, which are being coordinated by the Basel Committee on Banking Supervision, by the end of the year.

The worlds largest banks have responded with consternation, arguing that the proposed standards would tie up too much money that otherwise could be used for lending, a loss that would curtail economic growth. I can't believe this is accepted as truth.

The debate between regulators and banks is about the proper balance between growth and safety, but the implications are much broader. In fixing reserve requirements, governments are deciding how much horsepower belongs under the hood of the global economy.

We need them to get the balance right, said Douglas J. Elliott, a Brookings Institution expert who has studied the Basel proposals. More safety will make loans more expensive. We dont want to buy so much safety that the economy suffers. Why would we/they/anybody have to buy fiscal honesty?

There is tremendous political pressure to decide quickly. With the Senates passage of financial overhaul legislation, administration officials said that increasing capital and liquidity reserve requirements was the critical remaining piece in their efforts to overhaul financial regulation.

Of course it must be fast, any opposing group should not have the time to get a good head of steam about them while the world is still in turmoil over the fraudulent banking practices of the last 60 years or so. Do we really want to be here in the not so far away future? Same tactic as the health care bill passed in the US just recently.

The Group of 20 nations affirmed the year-end deadline at its April meetings in Washington, notwithstanding divisions between the United States and some European nations on a range of banking issues.

Reform is multifaceted, but at its core must be stronger capital standards, the group wrote in its communiqué. We recommitted to developing by end-2010 internationally agreed rules to improve both the quality and quantity of bank capital and to discourage excessive leverage. IE: we'll be regrouped by then and have the next 1000 years of debt insured by our reforms, has anybody read the Framework Convention on Climate Change? Sounds sort of like a production dividend collected from developed countries and used to indebt underdeveloped countries and a pitch to control resource developement. Go G20!

The rules governing capital are dry and technical, a subject that even bankers leave to specialists, but they have become the single most important tool that governments use to restrain and preserve financial institutions.

Banks are required to set aside capital in proportion to loans and investments. The rules shape behavior because banks must hold more capital against assets or loans that regulators consider more likely to lose value. Unlike here in Canada where they need not have anything but speculation, doesn't this bode well.

Capital is so important that the United States has pushed for international agreements on reserve requirements so as not to place American banks at a disadvantage. As a result, the financial bills passed by the House and Senate leave the issue largely untouched.

The first international agreement, known as Basel I, was reached in 1988. Work began almost immediately on a revision, but the standards known as Basel II were not completed until 2004. Now officials are racing to overhaul that framework in little more than a year.

Were going to be pushing through this year to make sure that happens. Thats an absolutely critical part of reform, said Michael S. Barr, assistant Treasury secretary for financial institutions.

The industry mostly is reconciled to an increase many bankers regard it as necessary but in comment letters to the Basel committee made public in mid-April, large banks from across the world linked arms to argue that the initial proposals went much too far.

For instance, analysts for JPMorgan Chase estimated that banks would need to raise prices by 33 percent to maintain profits. They also predicted that the Basel proposals would reduce the gross domestic product of the United States by a multiple of $30 billion. 33% Who are they trying to kid, if you can't stun them with brilliance baffel them with bullshit.

Banks also warned that governments were piling on proposals to tax and constrain the beleaguered industry.

The cumulative financial impact represents a level of conservatism so extreme that it will harm the banking sector, banking customers and national economies, Wells Fargos chief financial officer, Howard I. Atkins, wrote in a letter to the committee.

ONLY because of fractional reserve banking!

Most large banks held more capital than regulators required in the fall of 2008. But they did not hold enough to survive the financial crisis. As borrowers defaulted and the value of investments fell sharply, many banks failed or were fortified with public money. The United States distributed more than $165 billion to nine of the largest American banks.

The Basel committee is still discussing how much to increase the minimum capital requirement. The amount will depend in part on the results of a study estimating the impact of the proposals on banks, scheduled for discussion at the next meeting of the G-20 in June.

Already on the table, however, are an overhaul of the risk-weightings, and a tighter definition of capital, closing loopholes that allowed banks to count borrowed money and projected profits as part of their reserves. This all constitutes jailable offences, remember this in 50/100 years when we are subjected to the same amount of injustice.

Separately, the proposals would create a new reserve requirement, mandating that banks keep enough cash on hand or assets sold easily for cash to pay their bills for 30 days. Some banks ran out of cash during the crisis as depositors withdrew, investors fled and the borrowing markets shut down. The new rule, called a liquidity requirement, is intended to ensure that banks can survive such a financing drought.

A central point of international disagreement is whether banks should be allowed to hold smaller reserves because it is understood that central banks will provide loans during times of crisis. This sends shivers down my spine.

Financial analysts say that some nations, including France, are reluctant to make banks duplicate the safety net that the government provides already.

Trying to get global buy-in is going to be hard to achieve, said Frederick Cannon, a banking analyst at Keefe, Bruyette and Woods.

Banks argue more broadly that the initial Basel proposals are based on the extremes of recent experience, and that the cost of preparing for such extremes is too high in terms of lost lending and growth. ONLY because our respective governments refuse to step up to the plate and assert montary control again. I don't want this, no one should. What can we do about it.

The liquidity standard, for example, directs banks to prepare for the loss of 15 percent of deposits. A study of 121 recent bank failures by the American Bankers Association found the average institution lost 2.1 percent of its deposits. Only one bank lost more than 15 percent. 2.1 % and they cost that much to bail-out? Smells fishy, smells like fraud settlement to me.

A version of this article appeared in print on May 26, 2010, on page B3 of the New York edition.

Why?

Edited June 8, 2010 by Yesterday

[Saipan]

Money is created by being diligent.

To be idle is a short road to death and to be diligent is a way of life;

foolish people are idle, wise people are diligent.

--Buddha (B.C.E. 568-488)

[bush_cheney2004]

Why?

Why? Why what? It's American.

[hitops]

Wow thread revival. I'm still interested in how money is created, anyone wants to make a summary?