Hi Roberto,
This is [was going to be] off list because though interesting, it's
not a sustainable ag topic, strictly speaking.
Thursday, December 30, 1999, 10:03:15 AM, you wrote:
RV> commercial banks create money, that is how they make so much of
RV> it.
OK, Roberto, let's go over this again. You are making a claim that I
can neither refute nor confirm at this time. For discussion's sake,
let's say banks *do* actually do this. But I don't feel you've
explained the mechanism by which it's accomplished.
I have to assume that any credit made by a bank is backed by money
that has to reside somewhere other than the banks own books.
Therefore: I understand you to be saying that banks issue credits that
*aren't* backed by money, just as governments can create money that
isn't backed by reserves of foreign currency, gold or something
external.
(This is a dangerous thing for a government to do, btw - it's
inflationary and can result in the devaluation of the country's
currency, if a lack of confidence results from it, as often occurs. To
get away with it even occasionally, a country would have to have a
strong, productive economy in other respects. I live in Mexico where
this was once done on a major scale and believe me, the results
require a heavy sacrifice in order to finally be corrected).
RV> I've posed this question so many times, even to economists, and
RV> have almost always gotten the wrong answer: ASSUMING A RESERVE
RV> REQUIREMENT OF 10%, HOW MUCH ADDITIONAL MONEY CAN THE BANKING
RV> SYSTEM LEND, IF YOU DEPOSIT 100 DOLLARS IN YOUR BANK?
Once again: You are saying that the credit system is generated by the
banks themselves and that this is in accordance with the legal
structure in most economically strong countries?
RV> If your answer is 90, which is what I also thought a year ago, you
RV> -- like almost everyone else -- are underestimating the power of
RV> banks.
RV> The correct answer is 900. Please read that again: from your 100
RV> dollar deposit, the banking system can lend a maximum of 900, not 90,
RV> dollars.
RV> If the reserve requirement is 1% instead of 10%, then the banking
RV> system can lend from your 100-dollar deposit and total of $9,900. (And
RV> not $99, which is the most common answer.)
OK, the amount of money a bank can lend is related to the percentage
they are required to hold in reserve. What I want to know is, *HOW*
can they lend money they don't have? Where do they "get" it? Do they
themselves get credit with a central bank? If this is the case, there
are undoubted criteria that the bank has to meet in order to qualify,
which does not exclude the possibility of that a "bankers club" exists
(but that is true in most fields, as well as on sanet). Please be as
explicit as possible, including the country you're referring to in any
example you give.
Banks have to deliver some kind of documentation to whoever receives a
credit. You are saying that banks are "licensed" to issue documents
that aren't backed by anything except the percentage of reserves then
in effect. I know there is an element of trust involved, but am not
ready to suppose that the world's "major" currencies are no better
than a stock market, where expectations (and rumors) drive
investments.
The fact that foreign currencies are generally involved in the
reserves of a given country, and the fact that banking standards
backed by experience are taking effect in more and more countries;
would seem to lend some degree of solidity to the cloth of the worlds
banking system, at least where major "Prime Banks" are concerned, even
if the gold standard is past history and admittedly, none of this
guarantees social justice.
Please explain exactly how what you describe is done within the
European Community and the U.S. economies (which are still setting the
pace in finance, for now).
Douglas Hinds
I am going to post this after all, just in case someone on sanet has a
background in finance. But if it isn't taken up, it might be better to
answer me off list.
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