I disagree. The following paragraph leads the reader to infer that the depositor's money has been lent out in a loan.



Bank loans are not the result of lending other depositor's money out. Bank deposits are only used in a loan to provide the FED reserve requirement of 10% and limit the amount of money that can be created, above and beyond the bank's actual deposits.

The depositor's money is still in the bank and is never lent out. You cannot expand the money supply if you just re-lend out money already created, as the FED notes in the paragraph I quoted.

Most people think banks lend out the money deposited therein; they do not.

They lend out money they create based upon the rules of fractional reserve banking.

I'm sorry to say Montequest that this sounds like you have a profound misunderstanding of how fractional reserve banking works. The only way I can interpret the above passage is to mean that the deposits in checking accounts are equivalent to the bank's reserves. This is just not how it works.

The deposits of an individual bank do not limit their lending power. their lending power is limited by their excess reserves. For a $10,000 deposit assuming 10% reserve requirement $9000 is excess reserves that may be lent out. when it is lent out, more likely than not the borrower does not take it in cash. if he did there would be no net creation of money. Instead the borrower has it credited to his account in the bank increasing the amount of deposits in the bank. This deposit is new money created by the fractional reserve banking system.

This has been explained many times before in this thread, what is more, it is essentially what the Fed was saying in the passage that you took your excerpt from:

No, I didn't mean that. I meant what you just wrote. The $9000 is excess reserves that sets the limit of how much new money can be created from a $10,000 deposit with 10% reserve requirement.

The $10,000 deposit stays where it is and $9000 of new money is created to loan.

As...

If tomorrow Capitol Hill is blown up, the Internet is gone, all bank records are erased and all banks closed, the coins left in people's pockets will still allow a functioning monetary system. The only way the money supply would shrink from there is if someone burnt his banknotes.

Money printed by a previous government often continue to circulate in this way after the collapse of the government, before a new government steps in and issues an accepted new currency.

Heck, if you can imagine that every dollar in the bank is to be backed up by real banknotes, all the problems you are imagining now wouldn't exist.

The $100 I put in the bank was originally a $100 note. The bank didn't burn it.

When the bank loans $1,000,000 to somebody, it prints $1,000,000 in banknotes--even if that somebody just credits the money to a bank account.

And so on. The reality is not so different: all deposits and accounts carry with them to promise to physicalize the money in banknotes if you so desire. If you ask for a cash withdrawal from your bank account, the only two reasons the bank may not be able to give it to you are
1. it has run out of reserves
2. it has run out of banknotes (in which case it can just print more)

Can you point out a point in the money cycle where, if the money were physicalized in banknotes, one would require the money to be burnt? If not, you have failed to prove that the money would 'disappear'.

phew, good.



The excess reserves stay where they are until the borrower draws on their line of credit to purchase something. When the borrower takes money out of the bank, the bank's reserves decrease. The original deposit then is just a number in a ledger that is accepted as money and is backed by a fraction of the original deposit and by the banks promise to pay the full amount back on demand.

You are showing an extreme lack of knowledge of how our money system works. As the principal on a loan is repaid, the money disappears back into the thin air from which it was created.

If everyone paid their debts, no paper fiat money would exist without new loans being made.

And if we just had coins left, the deflation would be horrendous with all those goods chasing so few dollars.

Not talking about "physical" money. When you pay your loan payment, the principal amount is subtracted from a ledger entry and is no longer in existance.

Loaned money only exists while it is owed.

What, and the bank's reserve does not increase as a result of the payback?



Why do you insist on talking about non-physical money, when the electronic banking systems may well collapse post-peak?

What if I pay my loan in cash?

Joe,

When MQ talks about the hypothetical case where all the loans are repaid. That includes all the government debt held by the central bank. If the government bought back the ir security with cash the cash would return to the central bank at which point it is no longer in circulation and would not be considered money. The central bank might indeed burn the cash if they wanted to.

Of course there is no reason on God's green earth why the government would ever completely pay off their debts held by the central bank.

Joe, even banks can’t be allowed to create money out of thin air and then simply keep it.

As loan principal is paid off, that money disappears from circulation.

To put that amount of money back into circulation, a new loan must be taken out.

As the interest paid comes from money already in circulation, this means that the economy has to grow if the ratio of the money supply to the volume of exchange is to stay constant. The required increase in sales value can come about in either, or both, of two ways: inflation and expansion.

Since, in a post-peakoil world, the economy may not expand, it will have to inflate as nero points out.

This analysis means that, due to the way money is put into circulation, we have an economic system that needs to grow or inflate constantly.

As Hubbert noted:



This is the fundamental reason why a debt-based money system is incompatible with hydrocarbon depletion.

The economic growth required for a stable debt-based money system will not be achievable, while the demand for repayment of trillions of dollars of already incurred debt will not cease.

JB's question brought up a good point. The banking definition of money (m1) doesn't count the reserves held in banks. In other words when you do pay off your loan in cash, you are indeed destroying money, because when the cash reenters the bank's vault it is no longer considered money!



The layman's definition of money is much closer to the monetary base. The monetary base does count the currency held in the bank vault as well as that held by individuals but it doesn't count demand deposits in banks. You have to count one or the other but not both.

Nero, I think you just contradicted yourself. Earlier you said:

Your last post said:

The contradictory implication being that if you take a loan in cash form, you are not creating money, but that when you repay a loan with cash, you are destroying money. Both cannot be true.

If I take a loan out in cash form, money is being created.

If X deposits $1000 with Bank A, $100 are kept as reserve, $900 are considered excess loanable reserves.

I then borrow $900 from Bank A, and ask for it in cash.

I now have $900 in cash to spend. X still has a bank deposit of $1000.

M1 has increased by $900.

This resolves the seeming contradiction. It is irrelevant that Bank A has just lost $900 of reserves. As Nero pointed out, bank reserves are not considered part of M1, because to do so would be to double count a bank asset (reserve) and a bank liability (the deposit backed by this reserve).

You are confusing the "medium" of exchange with the creation of money.

When you take out a loan, new money (dollar bills) that already exist, are put into circulation.

New money is created whether it sits in the bank or you take it out in cash.

Maybe I'm being sloppy with my language. I didn't mean that new dollar bills were created, rather that the money supply (as defined by M1) is increasing.

Yes, that's exactly what I was trying to say.