How money is created

[Bonam]

What makes you believe we are in a recovery? stock markets are high?

Gains in the job market, stocks rebounded, GDP growth rather than contraction, expansion of capital investment and consumption.

[maple_leafs182]

think the stimulus might have something to do with that

What do you think will happen when the stimulus is gone?

The whole problem is America over consumes and under produces, nothing has changed.

They aren't producing more goods.

An economy that is based on %70 consumption cannot last forever.

[Jerry J. Fortin]

think the stimulus might have something to do with that

What do you think will happen when the stimulus is gone?

The whole problem is America over consumes and under produces, nothing has changed.

They aren't producing more goods.

An economy that is based on %70 consumption cannot last forever.

That is not the whole problem, it is only a symptom. The disease rages on.

[Michael Hardner]

Michael Hardner, money is circulated and can be used in a savings account to gain interest. This is because it is just being loaned out again. While the money is in your savings account, someone is getting deeper in debt.

The problem with this system is recessions and depressions. I'm not saying everyone in this system is in debt. By using this system, it is only a matter of time before another great depression hits. Some believe it will make the dirty thirties look like easy times. This is why it needs to change.

I hardly keep any of my money in the bank, though. Practically all of my savings is in RRSPs, invested in Canadian companies. And, again, who cares if money originally came from King Charles ? He got his investment back, and what's left went to the person who earned it through enterprise or labour.

Let's leave the explanations of why the system causes recessions and depressions until later. Many on this thread still aren't convinced of the premise that all money is created through debt.

[M.Dancer]

Ok a couple posts back I meant 1=1+A not 1+1A. Sorry for the typo. I think even M.Dancer is starting to get it.

Even? I still think you are off base.

Except that taxes and bonds are all means of extanging money and not creating it.

Never said they create money...they raise money, negating your assertion the the BofC lends Canada money.

Think about it, if you never created the money how and people pay for taxes? How would Canada pay for the bonds to which it's earning its currancy?

The above makes no sense.

At the point money becomes available to the private and public sectors, it is loaned to them (All of it). This is where the equation 1=1+A comes from. From there you can make the system as confusing as you would like but this will always ensure the bank is owed more money then what actually exist.

Banks fail. Mainly because they owe more than they earn. Your premise is flawed.

Michael Hardner, money is circulated and can be used in a savings account to gain interest. This is because it is just being loaned out again. While the money is in your savings account, someone is getting deeper in debt.

So if I withdraw my savings...someone will rise out of debt?

The problem with this system is recessions and depressions. I'm not saying everyone in this system is in debt. By using this system, it is only a matter of time before another great depression hits. Some believe it will make the dirty thirties look like easy times. This is why it needs to change.

Why...depression are execellent money making opportunities....the dpression BTW, had nothing on the potato famine...

[bush_cheney2004]

...The whole problem is America over consumes and under produces, nothing has changed.

They aren't producing more goods.

And if it does change, the whole problem will be for Canada. Be careful what you wish for.

[M.Dancer]

Yes, but where did the first Canadian Dollar come from?

Silver, then gold, but mainly Spanish specie.

You might be aware that the first pape money, called bank notes, were issued as a convience for their customers. Most of the banks issued their own notes, and again, to their own customers. Customer who has say, 10,000 pounds on account could ask the bank to issue him "bank notes" of various denominations. They were not always accepted and their reliability was only as good as the banks. If someone did accept it, they could use it somewhere else (if they accepted it) or redeem it at the issuing bank. In either case, bank notes had to be used within a specified time frame, because their worth was based on the assets of the customer.

[M.Dancer]

none of these mean the poorer are richer now then they were 100 years ago.

I get it, technology has evolved, we don't live the same lifestyles as 100 years ago, that still doesn't mean the poor are any richer now.

Really? Do you here of meany people in Canada starving because they have no money for food? Or freezing to death because they can't afford fuel...how about ricketts, or scurvy?

Now ask yourself, when would you prefer to live if you had no income, now or in 1757?

[Pliny]

Silver, then gold, but mainly Spanish specie.

You might be aware that the first pape money, called bank notes, were issued as a convience for their customers. Most of the banks issued their own notes, and again, to their own customers. Customer who has say, 10,000 pounds on account could ask the bank to issue him "bank notes" of various denominations. They were not always accepted and their reliability was only as good as the banks. If someone did accept it, they could use it somewhere else (if they accepted it) or redeem it at the issuing bank. In either case, bank notes had to be used within a specified time frame, because their worth was based on the assets of the customer.

The first paper "money" appeared when the gold standard was dropped.

Bank notes were issued as a record of deposits. They were never the "money". The "money" was the deposit of gold or silver specie.

I think what needs to be clarified on this thread is that "money", in the full concept of the word, is no longer created at all by the central banks. What is created, is a token or just an electronic entry on a balance sheet that you can use as a claim on production.

At best, it is a currency. But being a claim against production means it is a debt that needs to be paid. Gold and silver were not simply a claim on production. As a commodity they held their own value. A trade in gold or silver was an exchange of actual wealth and there was no further claim on production.

It must be understood that most people did not have any use for holding gold or silver except for the purpose of exchange and the very important purpose of it being a store of wealth. They could be 99% assured of being able to trade their gold and silver for future production. This is one of the criteria that "money" must have. Our dollar today does have this to a degree but it depends greatly upon the fiscal and monetary policy of someone in a central bank or government, the stability of the government and other factors of human behavior,

Just think how the stability of the currency of a third world country is and you can understand why an unstable currency printed by a dictator may have hard to resolve economic problems or why the USSR's ruble never traded on the currency markets. In most first world countries there is some stability in the currencies because of the confidence of the people in their security of person and property and the fiat guarantee of the currencies claim on future production, although with a fiscal policy of inflation some value is eroded.

Gold and silver in the hands of the public used as money was never vulnerable to the whimsical nature of government fiscal and monetary policy and provided more economic stability than a dictator could.

Poor countries have a greater chance of improving their economic condition if they have sound money. Guarantees of sound money are greater if a commodity such as gold is used instead of tokens from a dictator.

Edited April 6, 2010 by Pliny

[Pliny]

Really? Do you here of meany people in Canada starving because they have no money for food? Or freezing to death because they can't afford fuel...how about ricketts, or scurvy?

Now ask yourself, when would you prefer to live if you had no income, now or in 1757?

You would probably have had a lesser necessity for an income in 1757 than today.

The NDP will tell you a great percentage of children are sent to school hungry because of poverty.

Health wise 1757 would have definitely been a worse time to live.

[Jerry J. Fortin]

The first paper "money" appeared when the gold standard was dropped.

Bank notes were issued as a record of deposits. They were never the "money". The "money" was the deposit of gold or silver specie.

I think what needs to be clarified on this thread is that "money", in the full concept of the word, is no longer created at all by the central banks. What is created, is a token or just an electronic entry on a balance sheet that you can use as a claim on production.

At best, it is a currency. But being a claim against production means it is a debt that needs to be paid. Gold and silver were not simply a claim on production. As a commodity they held their own value. A trade in gold or silver was an exchange of actual wealth and there was no further claim on production.

It must be understood that most people did not have any use for holding gold or silver except for the purpose of exchange and the very important purpose of it being a store of wealth. They could be 99% assured of being able to trade their gold and silver for future production. This is one of the criteria that "money" must have. Our dollar today does have this to a degree but it depends greatly upon the fiscal and monetary policy of someone in a central bank or government, the stability of the government and other factors of human behavior,

Just think how the stability of the currency of a third world country is and you can understand why an unstable currency printed by a dictator may have hard to resolve economic problems or why the USSR's ruble never traded on the currency markets. In most first world countries there is some stability in the currencies because of the confidence of the people in their security of person and property and the fiat guarantee of the currencies claim on future production, although with a fiscal policy of inflation some value is eroded.

Gold and silver in the hands of the public used as money was never vulnerable to the whimsical nature of government fiscal and monetary policy and provided more economic stability than a dictator could.

Poor countries have a greater chance of improving their economic condition if they have sound money. Guarantees of sound money are greater if a commodity such as gold is used instead of tokens from a dictator.

No matter how you look at the problem, the value of money becomes questionable. In todays media there are two interesting stories;

1.) Canadian Trade Deficit

2.)Canadian Dollar Parity

[M.Dancer]

You would probably have had a lesser necessity for an income in 1757 than today.

True if you didn't mind being indentured, working in the poor house or if you were male, enlisting in the army or worse, the navy.

The NDP will tell you a great percentage of children are sent to school hungry because of poverty.

Hungry and starvation are two different things. In the 18th century, half the population were hungry all the time.

Health wise 1757 would have definitely been a worse time to live.

Far far worse.

[M.Dancer]

The first paper "money" appeared when the gold standard was dropped.

Incorrect. Paper money existed while the gold standard was used, or in the UK, while the silver standard was used, hence, pound sterling.

[GostHacked]

Paper money is essentially worthless. There is nothing backing up most countries monetary systems. And now the paper is replaced by a digital sequence on a computer. Even more worthless.

[M.Dancer]

Paper money is essentially worthless. There is nothing backing up most countries monetary systems.

Gold was inherintly flawed in that the value of commodities was greater than the amount of gold in reserves. Now ouyr currencies are valued on a number of factors, our GDP being foremost. In other words, hypostheticaly, while an entity may have 100,000 pounds of gold in reserve, the economy may generate 1,000,000 pounds...there would be a severe economic dysfuntion if the money was based on gold..so money based on economic output makes far more sense.

[Pliny]

No matter how you look at the problem, the value of money becomes questionable. In todays media there are two interesting stories;

The value of "money" or currencies?

So what are you saying, Jerry? Currencies should have fixed rates and values?

The value of currencies are subject to government monetary and fiscal policy more than anything. The current strength of the loonie will be bolstered if the central bank raises the interest rates. I don't know if they want to do that. Australia has raised it's rates I suspect to counter inflation but doing that also makes your currency more in demand and increases it's exchange value.

I also noticed that the Euro was losing ground to the US dollar. So it is sinking faster than the US dollar.

Actually, if the Canadian government wished to keep the loonie rising they don't need to do anything. The American dollar has been inflated so much it can't help but make the loonie look good. Increases in foreign currencies obviously make prices of imported goods rise. Americans will soon be made well aware of inflation.

[Pliny]

Incorrect. Paper money existed while the gold standard was used, or in the UK, while the silver standard was used, hence, pound sterling.

You will probably note that the "paper money" you are talking about from that bygone era had some things printed on it like "redeemable" in gold or silver. If the gold standard was extant then gold itself was the "money" and the "paper money" you are talking about were bank notes. Today's bank notes say no such thing as "redeemable". Today's "paper money" is entirely a token.

These things printed on the bank notes gradually disappeared. It disappeared from American bank notes entirely in 1963.

So a retraction of "incorrect" would be in order.

[M.Dancer]

The first paper "money" appeared when the gold standard was dropped.

Incorrect. Paper money existed while the gold standard was used, or in the UK, while the silver standard was used, hence, pound sterling.

You will probably note that the "paper money" you are talking about from that bygone era had some things printed on it like "redeemable" in gold or silver. If the gold standard was extant then gold itself was the "money" and the "paper money" you are talking about were bank notes. Today's bank notes say no such thing as "redeemable". Today's "paper money" is entirely a token.

These things printed on the bank notes gradually disappeared. It disappeared from American bank notes entirely in 1963.

So a retraction of "incorrect" would be in order.

Gosh no...

The term gold standard is often erroneously thought to refer to a currency where notes were fully backed by and redeemable in an equivalent amount of gold. The British pound was the strongest, most stable currency of the 19th Century and often considered the closest equivalent to pure gold, yet at the height of the gold standard there was only sufficient gold in the British treasury to redeem a small fraction of the currency then in circulation. In 1880, US government gold stock was equivalent in value to only 16% of currency and demand deposits in commercial banks. By 1970, it was about 0.5%. The gold standard was only a system for exchange of value between national currencies, never an agreement to redeem all paper notes for gold.

The only banknotes that could actually be redeemed fopr gold were the notes issued by private banks....which sometimes failed.

http://en.wikipedia.org/wiki/History_of_money#Gold-backed_banknotes

[Pliny]

Paper money is essentially worthless. There is nothing backing up most countries monetary systems. And now the paper is replaced by a digital sequence on a computer. Even more worthless.

Paper money worthless? A Digital on a computer even more worthless?

As long as it is by government fiat a legal tender it is a claim on goods and services.

People, by law, have to take it in trade. Even though, in and of itself it is worthless to everyone. There will most likely be at least some people who could use gold and silver so it will always have a value. And that value is a part of the total wealth of a nation. Should the government make a claim on production with paper tokens or electronic entries? It could very well claim ownership to all the production of the country!

I think a commodity used as money promotes a more stable economy in the long run. The people then hold a percentage of the nations wealth in the form of their stored wealth which circulates among themselves.

[M.Dancer]

The value of currencies are subject to government monetary and fiscal policy more than anything.

The BofC can do somethings, like as you said, changing the interest rates or selling a very large chunk on the currency market (to drive price down)...but in the end it is the international cuurency traders who do the most to set the value.

If they feel that the CDN$ is undervalued they will buy it and it will rise..

[GostHacked]

Gold was inherintly flawed in that the value of commodities was greater than the amount of gold in reserves. Now ouyr currencies are valued on a number of factors, our GDP being foremost. In other words, hypostheticaly, while an entity may have 100,000 pounds of gold in reserve, the economy may generate 1,000,000 pounds...there would be a severe economic dysfuntion if the money was based on gold..so money based on economic output makes far more sense.

But when it is economy based, you are making the assumption that the economy will always grow. That will not always be the case. This banking system was in place when the Great Depression hit. And since it's based on economic output, the US was in trouble along with many other countries. Time for war.

With fractional reserve banking, it gives the banks to lend out more money than they can back up. A good reason we saw the financial crisis of last year. If your economy does not grow, no money/wealth is created. It's simply a numbers game.

If people invest in a bank to gain interest on money they loaned, and if for whatever reason they decide to pull their investment out of the bank, the bank then needs to have that in reserves to pay back. When many do this, it's a run on the bank, and we have yet another problem.

The system is broken, but it's the only one we have in place.

[M.Dancer]

But when it is economy based, you are making the assumption that the economy will always grow.

No, why would you say that? Our dollar now is at parity with the US. Where was it during the recession?

[Pliny]

Gosh no...

The only banknotes that could actually be redeemed fopr gold were the notes issued by private banks....which sometimes failed.

http://en.wikipedia.org/wiki/History_of_money#Gold-backed_banknotes

The notes from the US treasury and the federal reserve had printed upon them a "promise to pay to the bearer on demand" the dollar amount specified on the note in gold or silver. As you know, the US Treasury is not a private bank and the Federal Reserve, although privately owned, is not a commercial bank but a central bank.

The fact that banks printed more notes than gold they had on deposit was called fractional reserve banking. It was a calculated risk that banks took. Of course, the most stable bank would be the one that only issued notes for the amounts it had on deposit but that would make it more of a warehouse than a bank and was not very profitable. The banker didn't want to see all this gold and silver just laying there doing nothing so he decided that he would loan it out, in the form of bank credit and make some interest. He did it with the knowledge of the depositor and they split the interest with the larger share going to the manager of the account.

Wikipedia is not wrong stating the banks printed notes of a quantity exceeding the gold and silver they had on deposit. It was common practice and the reason for bank failures if a bank overextended itself or was poorly managed.

But the salient point is that if there is a gold standard then gold is the "money" not the bank notes that represent it. The notes are a claim on the banks deposits and are not the deposits themselves.

[bush_cheney2004]

....The system is broken, but it's the only one we have in place.

Not sure I follow....you can't blame fiat currency for the boom and bust of nations' economies, which is the underlying issue. That's just shooting the messenger. Even worse is the unbalanced dependence on one or two nations to keep the ball rolling. The Canadian dollar has nearly reached parity with the US dollar, and it has nothing to do with paper money, which is only a currency.

As for paper money itself...I am quite fond of it. When I was a kid I would imagine all the places the money had traveled, people who had touched it, or even snorted coke with it. I liked to smell it too....very distinctive smell. You can play poker with it, test your fridge's air seal with it, or even use it to roll a joint!

[Pliny]

The BofC can do somethings, like as you said, changing the interest rates or selling a very large chunk on the currency market (to drive price down)...but in the end it is the international cuurency traders who do the most to set the value.

If they feel that the CDN$ is undervalued they will buy it and it will rise..

How does China keep it's currency undervalued?

How did Canada keep it's currency pegged at 92.5 cents for so long.

The market responds to what the governments do. The internatinal currency traders are guessing what is going to happen. Their actions in buying and selling only reflect the economic state of a country's currency. Large traders can certainly effect some changes through speculation but they are in the market to make money and they take risks which means they do not have control over the value of a currency. If they did it wouldn't be a market and there would be no risk they would always make money on their transactions.