Money creation: who creates money?

HAMISH_MCTAVISH

DannyRadclif wrote: »

Its not the banks who create the currency out of thin air its the person.

Every time someone buys something with a credit card, or borrows any currency at all (mortgage) the currency springs into existence the moment you swipe your card. That currency did not come from anywhere, it was just created by the person who swiped their card and the bank gets to charge you interest on the currency you just created and added to the supply.

Wrong.

The thing is with outstanding revolving credit, when the person receiving the currency just created on the credit card puts into into their bank account, this new bank can not tell the difference between base money and the outstanding revolving credit supply.

Partially wrong.

Please tell me if this is wrong

It's wrong.

and which bit

You've got it completely back to front.

Money must first be deposited before it can be loaned out.

It doesn't work the other way around, ie, banks can't just make up money to loan out. If they could, there would never be a problem with bank solvency, and banks would never have to compete for funds to lend.

When a bank lends money, it must first have that money on deposit, and it must then withhold a fraction, and lend the balance.

In so doing, it creates two claims on the same money. So far, so good.

However if that loan is then spent, (as it will be) and redeposited in a bank, (as it will probably be), and then loaned again, then effectively money has been created as now there are more than two claims on the same money.

Money is only created because money is impossible to track. So multiple claims are made on the same money.

Banks cannot just make money up to lend out.

and I will be happy to admit it if it is wrong,

I await your admission.

it does take a bit to get your head round where each unit of currency around the world comes from.

But at least you got that bit right....

DannyRadclif

HAMISH_MCTAVISH wrote: »

Wrong.



Partially wrong.



It's wrong.



You've got it completely back to front.

Money must first be deposited before it can be loaned out.

It doesn't work the other way around, ie, banks can't just make up money to loan out. If they could, there would never be a problem with bank solvency, and banks would never have to compete for funds to lend.

When a bank lends money, it must first have that money on deposit, and it must then withhold a fraction, and lend the balance.

In so doing, it creates two claims on the same money. So far, so good.

However if that loan is then spent, (as it will be) and redeposited in a bank, (as it will probably be), and then loaned again, then effectively money has been created as now there are more than two claims on the same money.

Money is only created because money is impossible to track. So multiple claims are made on the same money.

Banks cannot just make money up to lend out.



I await your admission.



But at least you got that bit right....

You have a very limited view of the worlds monetary system.

What about the first every currency since this new monetary system started in 1971? You talk as if there is a set amount of currency in the world then this get fractionally reserved and only this amount gets loaned out upon.

You do not realise that the money deposited is probably from the outstanding revolving credit supply and that was from someone buying something on credit and that currency was created by someone borrowing it, and so on.

It has to keep expanding, if not the system starts to collapse. That it what is happening at the moment, we have a debt collapse going on.

So I repeat if anyone can explain where I am wrong then I will admit it, but Hamish certainly does not understand the title of this thread where does money come from and who creates currency.

jamesd

DannyRadclif wrote: »

You do not realise that the money deposited is probably from the outstanding revolving credit supply and that was from someone buying something on credit and that currency was created by someone borrowing it, and so on. ... So I repeat if anyone can explain where I am wrong then I will admit it

Most people don't go around taking out a personal loan just to deposit the proceeds in a term deposit account. They use it to buy goods. But those goods have a supply chain and it takes time to make the raw materials and goods and get them shipped to market and sold. During that time the value of the goods is locked up, to be freed only once the goods are consumed. This is part of why an increase in money supply is expected as a normal consequence of economic growth: more goods in work mean more money tied up in them.

DannyRadclif wrote: »

Every time someone buys something with a credit card, or borrows any currency at all (mortgage) the currency springs into existence the moment you swipe your card.

Where did the bank get the money to lend? The answer is that it was in one of the accounts held with the bank already, either the bank's own account or a consumer account or against the level of permitted amount of the bank's borrowing facilities from the national bank or money markets. The money was already allocated before the consumer did anything.

Norfolk_Jim

most money is fictional. It isn't someone elses money on deposit loaned out again for a slight mark up. The bank only holds a fraction of all the credits it creates to cover withdrawals and the everyday ebb and flow of actual cash money, hence even a fairly limited run on a bank creates an enormous problem for it as even with fiat currency and fractional reserve banking there has to be some sort of deposit to be the fraction, once thats gone the other fictional money can not be repaid by the bank in actual for real cash and the whole thing comes tumbling down.

Norfolk_Jim

The world of banking does not want the world to know that the pound you lend them at 1% is not loaned out to someone else at 4%, earning them 3p a year on your pound minus expences, it's loaned to 9 other people at 4%.
Do the math - the banks cant make the profit they do by a small mark up on the deposits they actually have in the vault

in 2009 Barclays had 81.5 billion of actual cash deposits in their valut from the likes of you and me and their profit was 11.65 billion. ok not all that was interest from loans, some was trading in other stuff but you get the idea about deposits and profits not lining up

HAMISH_MCTAVISH

DannyRadclif wrote: »

You have a very limited view of the worlds monetary system.

No, I have an accurate view of the monetary system.

You talk as if there is a set amount of currency in the world then this get fractionally reserved and only this amount gets loaned out upon.

You don't understand what I'm saying, if that's what you think.

You do not realise that the money deposited is probably from the outstanding revolving credit supply and that was from someone buying something on credit and that currency was created by someone borrowing it, and so on.

Your terminology is poor, and your understanding limited, but you're half right there so I'll let it go this time.

It has to keep expanding, if not the system starts to collapse. That it what is happening at the moment, we have a debt collapse going on.

And with that you're more right than wrong, but not for the reasons you think.

So I repeat if anyone can explain where I am wrong then I will admit it, but Hamish certainly does not understand the title of this thread where does money come from and who creates currency.

*sigh*

I'm going to explain this very simply, in the hope you can understand.

Take £100 of central bank created base money, and deposit it in a retail bank.

The retail bank then withholds a fraction, and lends the rest.

That money will then be spent, and redeposited, and a fraction reserved, and the balance loaned again.

This process repeats until there is no more money to lend, because all the fractions have been reserved.

All those youtube videos you've seen which claim a bank can lend £1900 for every £100 on deposit are false. With a fractional reserve of 10%, a bank can only lend £90 for every £100 they have on deposit.

The only way they can lend more is if the £90 is then redeposited, in which case they must withhold the 10% fraction and can then lend the remaining £81 again. Rinse and repeat in smaller increments until eventually there is nothing left to lend.

Or to put it another way, if you deposit £100 in a bank, and I then borrow £90, and instead of spending it set it on fire and use it to light my cigar, no more money can be created. The chain stops the moment money is not redeposited.

HAMISH_MCTAVISH

Norfolk_Jim wrote: »

most money is fictional.

Under a 10% fractional reserve, £100 of base money can theoretically generate an additional £1900 of credit money.

Under a 20% reserve, £100 of base money can only generate £400 of credit money.

But this only happens when money is redeposited with banks....

If it's placed under a mattress and never spent, the chain stops there and no further money is created.

So this does not mean a bank can lend £1900 for every £100 on deposit. A bank can only lend £90 for every £100 on deposit with a 10% fractional reserve. They require the money to be redeposited if they are to lend a fraction of it again.

Conrad

Norfolk_Jim wrote: »

hence even a fairly limited run on a bank creates an enormous problem

Your perception is unbalanced.

We in general have good times, even booms, and yes the occasional downturn, so what?

You cannot expect life to be nothing but a one way ticket without the odd bend in the road.

In the round most people do ok in the long run, that fact they sometimes face harder times is just part n parcel of life.

The Banking system is not perfect and it did get unbalanced, and now we're making adjustments (tough lending crieteria), so what, thats life. You cant have endless good times.

debtcutter

We don't have a 10% reserve requirement in the UK though.

Generali

debtcutter wrote: »

We don't have a 10% reserve requirement in the UK though.

You will have > 10% reserve requirement once Basle III comes in properly.