Posted by: graemebird | August 20, 2007

Condensed Money-Creation Example.

This is condensed from two earlier threads to show how money is NOT created by the banks under 100% backing and how it is arbitrarily created by the banks under fractional reserve:

Imagine we don’t have any financial products exept for term loans and demand deposits.

This like a planet of the apes world where we have a mixture of modern and medieval technology.

We have an isolated Island capitalist monarchy and there are five individuals and five banks that we are considering as being representative.

The banks are banks A B C D and E………
The Individuals are individuals V W X Y and Z.

Our starting point is a situation where the King has decreed that when you put money in the bank it has to be a clear-cut thing. It has to be either ON-CALL or it has to be A TERM LOAN.

This has been the way of things for about the last 50 years.

The King takes a survey of the TOTAL MONEY SUPPLY OF THE ISLAND.

What he found with our representative individuals and banks is this:
Individuals V W X Yand Z each had $5000 in cash around the house. And they each had $5000 deposited with the banks (A B C D and E)
So when the king added up the total money supply he took it that it was (for this representative survey.)

And in the survey he asked HOW MUCH MONEY DO YOU HAVE ON HAND?

V sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

W sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

X sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

Y sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

Z sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

So the King concluded that the money supply for his representative set was FIFTY THOUSAND DOLLARS ($50 000).

NOW SOMETHING HAPPENS.
INDIVIDUAL V wants to spend $15000 on some capital equipment to make his business grow.

He is ready to put up $3000 of his own from his house-cash-stash. And he puts about expressions of interest around the banks to see if they can raise the money.
So the banks advertise that they will pay an interest rate if people are willing to lock their money away for a time period.

Individuals W and X each take $3000 dollars out of both their home-cash-stash and their bank-cash-stash and the two of them get to bank A first and give bank A the $12000.

Now Individual V takes his $3000 and the $12000 borrowed from Bank A and he buys some CAPITAL EQUIPMENT which costs him $15000 (a motor for his fishing boat and some nets, some fishing boat refurbishment) from individual Y.

And individual Y takes that $15000 and he puts $10,000 in the house-cash-stash and $5000 in the bank-cash-stash…….

NOW HOW MUCH MONEY DO YOU HAVE ON HAND asks the King again?
V sez: $2000 cash at home PLUS $5000 cash at the bank EQUALS $7,000 dollars of MONEY.

W sez: $2000 cash at home PLUS $2000 cash at the bank EQUALS $4,000 dollars of MONEY.

X sez: $2000 cash at home PLUS $2000 cash at the bank EQUALS $4,000 dollars of MONEY.

Y sez: $15000 cash at home PLUS $10,000 cash at the bank EQUALS $25,000 dollars of MONEY.

Z sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

So the King concluded that the money supply for his representative set was STILL fifty thousand dollars ($50 000).

Now on this basis we can say that NO NEW MONEY has been created. And the reason why no new money has been created is that there is a clear seperation between ON-CALL MONEY and TERM LOANS.

So long as two things hold there is no creation of money:

There is a clear distinction between TERM LOANS and ON-CALL MONEY and
The banks line it up that they always get the money THEY LEND back prior to WHEN the money THEY (the banks) borrow FALLS DUE.

So in other words if they act the way the rest of us are supposed to act and ARE STOPPED FROM BEING TEMPTED from dipping into that GREAT POOL of short-term money that their sort of business tends to find gathering amidst itself……..

………So what we are saying is if we can get the banks to resist the temptations of the proffesion and act like the rest of us we have a situation where MONEY isn’t arbitrarily created.

>>>>>>>>>>>>>>>>>>>>>>>>>

Part II MONEY IS CREATED

So now we return to the status quo ante. And there is an announcement by the King that from here on in they practice fractional reserve. He tells them that Fractional Reserve is a good thing. That all that Gold is just sitting there doing nothing. And we want the Gold “working hard for the people”.

Anyhow we will repeat the same situation as before. This time with four of the banks amalgamating into one big bank.

V takes $3000 of his own money and borrows $12000 from the peoples bank.

Individual V then buys $15000 worth of capital equipment from individual Y.

Individual Y takes the $15 000. But this time he puts $10 000 into the Co-operative bank and only $5000 is added to his house-cash-stash. Because the Co-operative bank is now not charging fees.

The King now takes another survey.

He asks the people

NOW HOW MUCH MONEY DO YOU HAVE ON HAND?

V sez: $2000 cash at home PLUS $5000 cash at the bank EQUALS $7,000 dollars of MONEY.

W sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

X sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

Y sez: $10 000 cash at home PLUS $15000 cash at the bank EQUALS $25,000 dollars of MONEY.

Z sez: $5000 cash at home PLUS $5000 cash at the bank EQUALS $10,000 dollars of MONEY.

So the King concludes that the money supply for his representative set was SIXTY TWO THOUSAND DOLLARS ($62 000).

$12 000 has been created by the banking system out of thin air.

Now note that its not a one transaction deal to create the extra money out of thin air. It requires

A loan
A purchase
The depositing of the cash by the seller into another bank.

And most of the time it won’t be in the same bank as the one that made the loan.

And its this triple-step and the seperation in time between the crime committed and the new money created which has turned this into a sort of magicians sleight of hand, that has made it difficult to see that new money has been created out of thin air.

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Responses

  1. When I wrote this, Mark Hill objected to it. He thought it was an unfair question. “How much money do you have?”. It was evident that he didn’t understand money creation. This was back in 2007. But as we have seen Joseph Cambria doesn’t understand money creation even now. Thankfully, the reserve bank compiles the figures for the money supply (i.e. M1) and so people can see that the money supply is different from notes and coins.

  2. notes and coins comprise part of M1.

    YES YOU RETARD. NOTES AND COINS, IN THE HANDS OF THE PUBLIC, COMPRISE PART OF M1. CONTRARY TO YOUR LYING YOU WOP CUNT, I’VE NEVER SAID ANYTHING DIFFERENT.

  3. Are you actually brain damaged Joseph Cambria? Are you in fact coming clean about some level of brain damage?

  4. Now are you going to come to grips with the money creation process, as described above, or are you going to continue to make an ignorant cunt of yourself the entire time? Its one thing to be mentally incapable of understanding these matters. Its quite another thing to go around posing as an expert when you are carrying this incapacity.

  5. Graeme, the supply of M3 varies as market confidence changes.

    • Attempt to stay relevant you ignoramus. M3 isn’t money. M3 is what money buys. That is the precise reason, why M3 correlates better, with spending, then other bank product aggregations, since M3 doesn’t even begin to be money. Its what money buys.

      • NO NO. THE LOGIC IS VERY CLEAR. JUST BECAUSE THEY CALL M3 MONEY JUST NOT MAKE IT SO. M3 IS SOME!!!! BANKER PRODUCTS. M3 IS A PARCEL OF ITEMS THAT MONEY BUYS. THIS IS IN NO WAY THE SAME THING AS BEING MONEY.

  6. All that time I could not understand why Cambria was muddying the waters. Now I realise the answer was simple. Cambria is a Jew. It’s just what Jews do.

  7. what about mark hill? Hill sounds more anglo-celtic than jewish

  8. Right but he is simpleminded.

  9. Right but he is simpleminded. So he has absorbed the Hebe atmosphere.


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