We should all agree with this!

[Toddsterpatriot]

Ok. I apologize to whoever started this thread for going on a bit of a tangent.

This is just a rough description from wikipedia:
"In most legal systems, a bank deposit is not a bailment. In other words, the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank's books and on its balance sheet. Because the bank is authorized by law to create credit up to an amount equal to a multiple of the amount of its reserves, the bank's reserves on hand to satisfy payment of deposit liabilities amount to only a fraction of the total amount which the bank is obligated to pay in satisfaction of its demand deposits."

The bolded portion is what matters. Banks do not accept a $100 deposit and then loan out $90 of those dollars. They accept a $100 deposit then create a deposit account for the customer (saying he can withdraw the cash at any time, or reduce his deposit account balance through debit/credit/checking without ever touching the cash).

The bank does not then lend out $90 in cash to someone else and call it a day. The bank expands credit, and can make loans of up to $900. Again, these loans are made not through cash but by giving lenders accounts at the bank with a claim to the cash value of the loan. The bank then has $90 in cash on reserve, and $1000 in claims to that cash in the form of demand deposits and loans. That $90 in cash satisfies the 10% reserve requirement. The result is that we have $100 in a demand deposits financing $900 in loans and a $100 demand deposit. Hence, savings and credit are not aligned, which can cause serious problems.


Demand deposits would have a 100% reserve requirement. Banks could not lend that money, and depositors would always have access to it for spending.

Time deposits would of course have a 0% reserve requirement, but depositors would not be able to withdraw the money to spend it for a certain time period. That is the whole point of a time deposit. You are essentially lending the bank your money so they can loan it to people. Often times you will get paid a portion of the interest the bank makes from the loans in return, which is what encourages people to use time deposits rather than purely demand deposits. This ensures available credit is always in line with savings.

Because the bank is authorized by law to create credit up to an amount equal to a multiple of the amount of its reserves,

And with the $100 deposit, $10 in reserves, they can create credit up to $90, 9 times their reserves.

Banks do not accept a $100 deposit and then loan out $90 of those dollars. They accept a $100 deposit then create a deposit account for the customer (saying he can withdraw the cash at any time, or reduce his deposit account balance through debit/credit/checking without ever touching the cash).

When the customer takes the $90 out of the "deposit account", how is that different from the bank accepting a $100 deposit and loaning out $90?
I'll save you the trouble, it isn't different at all.

The bank expands credit, and can make loans of up to $900.

That is incorrect. A bank with $100 in deposits that makes $900 in loans would quickly be shut down, its officers thrown in jail.

Again, these loans are made not through cash but by giving lenders accounts at the bank with a claim to the cash value of the loan.

Again, a bank with $100 in deposits that gives out $900 in claims (loans) shuts down very quickly. Borrowers tend not to leave their loan in an account at the bank they borrowed from. The money is withdrawn to pay for the house, car etc.

The result is that we have $100 in a demand deposits financing $900 in loans

No, every loan is fully funded. No money from thin air. Sorry.

Sorry, you are incorrect. If you will not acknowledge that banks create money through the expansion of credit, there is really no point in discussing anything with you. This is simply a fundamental reality of our banking system.

Here are some sources to prove my point.
Banks Don't Lend Out Reserves - Forbes
Learning Markets - Investing education and trading ideas

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits. All you have to do is to look at the U.S. money supply to verify this.

If you will not acknowledge that banks create money through the expansion of credit

But of course they do. A $100 deposit which allows a $90 loan has just expanded the money supply by $90. What banks cannot do is take a $100 deposit and magically loan out more than $100.

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits.

Sorry, you're just plain wrong.
A new bank opens and receives its one and only deposit of 100 $1 bills.
They hold 10 $1s in reserve, please explain how they lend more than $90.

Assume every borrower takes out cash to buy something. Go!!!

 

[Nemo]

That's why there cannot be unregulated banking. The reason is simply because the money you deposit in a bank is not your money, and it’s not in the bank. When you open a bank account and make a deposit, you surrender legal title to the money deposited. The money deposited becomes an asset of the bank, and the depositor’s account is held as a liability of the bank. At best, the depositor has an unsecured contract claim against the bank for the funds deposited. Hence the need for insured deposits to maintain stability and confidence in the banking system. For the same reason, banks should be prohibited from speculating on high-risk securities on the financial markets. Without a regulated banking system, there can be no security for commerce, and, ultimately, financial collapse and economic chaos.

 

[Toddsterpatriot]

That's why there cannot be unregulated banking. The reason is simply because the money you deposit in a bank is not your money, and it’s not in the bank. When you open a bank account and make a deposit, you surrender legal title to the money deposited. The money deposited becomes an asset of the bank, and the depositor’s account is held as a liability of the bank. At best, the depositor has an unsecured contract claim against the bank for the funds deposited. Hence the need for insured deposits to maintain stability and confidence in the banking system. For the same reason, banks should be prohibited from speculating on high-risk securities on the financial markets. Without a regulated banking system, there can be no security for commerce, and, ultimately, financial collapse and economic chaos.

The reason is simply because the money you deposit in a bank is not your money, and it’s not in the bank. When you open a bank account and make a deposit, you surrender legal title to the money deposited.

That was a great scene in "It's a Wonderful Life"

For the same reason, banks should be prohibited from speculating on high-risk securities on the financial markets.

They should stick to safe securities, like mortgages?

 

[ShackledNation]

Because the bank is authorized by law to create credit up to an amount equal to a multiple of the amount of its reserves,

And with the $100 deposit, $10 in reserves, they can create credit up to $90, 9 times their reserves.

Banks do not accept a $100 deposit and then loan out $90 of those dollars. They accept a $100 deposit then create a deposit account for the customer (saying he can withdraw the cash at any time, or reduce his deposit account balance through debit/credit/checking without ever touching the cash).

When the customer takes the $90 out of the "deposit account", how is that different from the bank accepting a $100 deposit and loaning out $90?
I'll save you the trouble, it isn't different at all.

The bank expands credit, and can make loans of up to $900.

That is incorrect. A bank with $100 in deposits that makes $900 in loans would quickly be shut down, its officers thrown in jail.

Again, these loans are made not through cash but by giving lenders accounts at the bank with a claim to the cash value of the loan.

Again, a bank with $100 in deposits that gives out $900 in claims (loans) shuts down very quickly. Borrowers tend not to leave their loan in an account at the bank they borrowed from. The money is withdrawn to pay for the house, car etc.

The result is that we have $100 in a demand deposits financing $900 in loans

No, every loan is fully funded. No money from thin air. Sorry.

Sorry, you are incorrect. If you will not acknowledge that banks create money through the expansion of credit, there is really no point in discussing anything with you. This is simply a fundamental reality of our banking system.

Here are some sources to prove my point.
Banks Don't Lend Out Reserves - Forbes
Learning Markets - Investing education and trading ideas

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits. All you have to do is to look at the U.S. money supply to verify this.

If you will not acknowledge that banks create money through the expansion of credit

But of course they do. A $100 deposit which allows a $90 loan has just expanded the money supply by $90. What banks cannot do is take a $100 deposit and magically loan out more than $100.

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits.

Sorry, you're just plain wrong.
A new bank opens and receives its one and only deposit of 100 $1 bills.
They hold 10 $1s in reserve, please explain how they lend more than $90.

Assume every borrower takes out cash to buy something. Go!!!

Virtually every economics textbook lays this out.

Here is the most simplistic example:

How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic ? YES! Magazine

Do you at least agree with that?

That is a simplistic textbook example, but now how banks operate in practice. Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort" (hence the name). Either way, whether you follow the textbook example or the reality of what happens in banks today, the end result is the same. Far more than $90 is created.

Even the bankers admit it.

“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
http://www.bostonfed.org/economic/conf/conf1/conf1i.pdf
Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

The reserve requirement only requires banks to have cash on reserve representing 10% of all their liabilities (demand deposits). When someone deposits $100 cash, the bank creates a demand deposit to that cash for the customer (essentially an IOU from the bank). The result is this:

Assets
$100 cash

Liabilities
$100 demand deposit

Reserve ratio: 100%

The reserve requirement does not say the bank can only lend 10% of cash. It states that whatever the value of deposit liabilities the bank has, 10% of that must be held in cash. If the bank creates demand deposits (in the form of loans) totalling $900, it is operating fully within the law, as illustrated below:

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Reserve ratio: 10%

Never did the bank violate the law by having a reserve ratio lower than 10%.

 

[Toddsterpatriot]

Sorry, you are incorrect. If you will not acknowledge that banks create money through the expansion of credit, there is really no point in discussing anything with you. This is simply a fundamental reality of our banking system.

Here are some sources to prove my point.
Banks Don't Lend Out Reserves - Forbes
Learning Markets - Investing education and trading ideas

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits. All you have to do is to look at the U.S. money supply to verify this.

If you will not acknowledge that banks create money through the expansion of credit

But of course they do. A $100 deposit which allows a $90 loan has just expanded the money supply by $90. What banks cannot do is take a $100 deposit and magically loan out more than $100.

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits.

Sorry, you're just plain wrong.
A new bank opens and receives its one and only deposit of 100 $1 bills.
They hold 10 $1s in reserve, please explain how they lend more than $90.

Assume every borrower takes out cash to buy something. Go!!!

Virtually every economics textbook lays this out.

Here is the most simplistic example:

How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic ? YES! Magazine

That is a simplistic textbook example, but now how banks operate in practice. Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort" (hence the name). Either way, whether you follow the textbook example or the reality of what happens in banks today, the end result is the same. Far more than $90 is created.

Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort"

Banks borrow from other banks or the Fed, when they can create money out of thin air?
You must be joking.

Check out the simple chart on Wikipedia. Deposits are larger than loans.
Because they can't create money out of thin air. They borrow, from depositors, other banks or the Fed, more than they lend.
Can't make it any simpler for you.


Fractional reserve banking - Wikipedia, the free encyclopedia

 

[ShackledNation]

If you will not acknowledge that banks create money through the expansion of credit

But of course they do. A $100 deposit which allows a $90 loan has just expanded the money supply by $90. What banks cannot do is take a $100 deposit and magically loan out more than $100.

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits.

Sorry, you're just plain wrong.
A new bank opens and receives its one and only deposit of 100 $1 bills.
They hold 10 $1s in reserve, please explain how they lend more than $90.

Assume every borrower takes out cash to buy something. Go!!!

Virtually every economics textbook lays this out.

Here is the most simplistic example:

How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic ? YES! Magazine

That is a simplistic textbook example, but now how banks operate in practice. Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort" (hence the name). Either way, whether you follow the textbook example or the reality of what happens in banks today, the end result is the same. Far more than $90 is created.

Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort"

Banks borrow from other banks or the Fed, when they can create money out of thin air?
You must be joking.

No. Banks create money by lending, but they must meet the reserve requirement of 10%. If they are below that, they will borrow cash from the Fed or other banks to make up the difference. What about the link I gave you explaining how banks create money the textbook way? Do you agree with that?

Check out the simple chart on Wikipedia. Deposits are larger than loans.
Because they can't create money out of thin air. They borrow, from depositors, other banks or the Fed, more than they lend.
Can't make it any simpler for you.


Fractional reserve banking - Wikipedia, the free encyclopedia

You are misreading the chart. The original $100 cash deposit resulted in the creation of $714.10. The chart is identical to the textbook example article I gave you, but with a higher reserve ratio. You should read the paragraphs above that chart.

If you believe a $100 deposit ultimately expands the money supply by $90, you are alone in that opinion. Show me one credible source that has that analysis.

 

[Toddsterpatriot]

Sorry, you are incorrect. If you will not acknowledge that banks create money through the expansion of credit, there is really no point in discussing anything with you. This is simply a fundamental reality of our banking system.

Here are some sources to prove my point.
Banks Don't Lend Out Reserves - Forbes
Learning Markets - Investing education and trading ideas

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits. All you have to do is to look at the U.S. money supply to verify this.

If you will not acknowledge that banks create money through the expansion of credit

But of course they do. A $100 deposit which allows a $90 loan has just expanded the money supply by $90. What banks cannot do is take a $100 deposit and magically loan out more than $100.

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits.

Sorry, you're just plain wrong.
A new bank opens and receives its one and only deposit of 100 $1 bills.
They hold 10 $1s in reserve, please explain how they lend more than $90.

Assume every borrower takes out cash to buy something. Go!!!

Virtually every economics textbook lays this out.

Here is the most simplistic example:

How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic ? YES! Magazine

Do you at least agree with that?

That is a simplistic textbook example, but now how banks operate in practice. Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort" (hence the name). Either way, whether you follow the textbook example or the reality of what happens in banks today, the end result is the same. Far more than $90 is created.

Even the bankers admit it.

“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
http://www.bostonfed.org/economic/conf/conf1/conf1i.pdf
Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

The reserve requirement only requires banks to have cash on reserve representing 10% of all their liabilities (demand deposits). When someone deposits $100 cash, the bank creates a demand deposit to that cash for the customer (essentially an IOU from the bank). The result is this:

Assets
$100 cash

Liabilities
$100 demand deposit

Reserve ratio: 100%

The reserve requirement does not say the bank can only lend 10% of cash. It states that whatever the value of deposit liabilities the bank has, 10% of that must be held in cash. If the bank creates demand deposits (in the form of loans) totalling $900, it is operating fully within the law, as illustrated below:

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Reserve ratio: 10%

Never did the bank violate the law by having a reserve ratio lower than 10%.

The reserve requirement does not say the bank can only lend 10% of cash.

Of course not, they can lend 90% of deposits.

If the bank creates demand deposits (in the form of loans) totalling $900, it is operating fully within the law, as illustrated below:

Of course. In that case, they didn't limit themselves to the $100 deposit that I wanted you to use as an example.
Here, they have $1000 in deposits and only $900 in loans.
As I previously said, every loan is fully funded.

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Don't forget, assets of $900 in loans.
Assets and liabilities have to balance.

 

[Toddsterpatriot]

Virtually every economics textbook lays this out.

Here is the most simplistic example:

How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic ? YES! Magazine

That is a simplistic textbook example, but now how banks operate in practice. Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort" (hence the name). Either way, whether you follow the textbook example or the reality of what happens in banks today, the end result is the same. Far more than $90 is created.

Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort"

Banks borrow from other banks or the Fed, when they can create money out of thin air?
You must be joking.

No. Banks create money by lending, but they must meet the reserve requirement of 10%. If they are below that, they will borrow cash from the Fed or other banks to make up the difference.

Check out the simple chart on Wikipedia. Deposits are larger than loans.
Because they can't create money out of thin air. They borrow, from depositors, other banks or the Fed, more than they lend.
Can't make it any simpler for you.


Fractional reserve banking - Wikipedia, the free encyclopedia

That deposits are larger than loans has nothing to do with anything I was saying. It only proves that banks are not loaning money. Everything I said is true--you haven't refuted any of it.

If you believe a $100 deposit ultimately expands the money supply by $90, you are alone in that opinion. Show me one credible source that has that analysis.

That deposits are larger than loans has nothing to do with anything I was saying.

You said that a bank with $100 in deposits could make $900 in loans.
Creating money out of thin air.

If you're changing your claim to, a bank with $100 in deposits that also borrows $900 from another bank, or the Fed, can now make loans of $900, welcome to the real world.
Glad I could help clear up your confusion.

If you believe a $100 deposit ultimately expands the money supply by $90

Sorry, a deposit alone has no impact on money supply.
The $90 loan that it supports is what expands the money supply.

 

[ShackledNation]

If you will not acknowledge that banks create money through the expansion of credit

But of course they do. A $100 deposit which allows a $90 loan has just expanded the money supply by $90. What banks cannot do is take a $100 deposit and magically loan out more than $100.

Under 10% reserves, banks ultimatley loan out 9 times the amount of deposits.

Sorry, you're just plain wrong.
A new bank opens and receives its one and only deposit of 100 $1 bills.
They hold 10 $1s in reserve, please explain how they lend more than $90.

Assume every borrower takes out cash to buy something. Go!!!

Virtually every economics textbook lays this out.

Here is the most simplistic example:

How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic ? YES! Magazine

Do you at least agree with that?

That is a simplistic textbook example, but now how banks operate in practice. Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort" (hence the name). Either way, whether you follow the textbook example or the reality of what happens in banks today, the end result is the same. Far more than $90 is created.

Even the bankers admit it.

“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
http://www.bostonfed.org/economic/conf/conf1/conf1i.pdf
Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

The reserve requirement only requires banks to have cash on reserve representing 10% of all their liabilities (demand deposits). When someone deposits $100 cash, the bank creates a demand deposit to that cash for the customer (essentially an IOU from the bank). The result is this:

Assets
$100 cash

Liabilities
$100 demand deposit

Reserve ratio: 100%

The reserve requirement does not say the bank can only lend 10% of cash. It states that whatever the value of deposit liabilities the bank has, 10% of that must be held in cash. If the bank creates demand deposits (in the form of loans) totalling $900, it is operating fully within the law, as illustrated below:

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Reserve ratio: 10%

Never did the bank violate the law by having a reserve ratio lower than 10%.

The reserve requirement does not say the bank can only lend 10% of cash.

Of course not, they can lend 90% of deposits.

Not quite. Banks must have cash on reserve that backs of 10% of their net transaction account liabilities.
http://www.federalreserve.gov/monetarypolicy/reservereq.htm#fn1

If the bank creates demand deposits (in the form of loans) totalling $900, it is operating fully within the law, as illustrated below:

Of course. In that case, they didn't limit themselves to the $100 deposit that I wanted you to use as an example.
Here, they have $1000 in deposits and only $900 in loans.
As I previously said, every loan is fully funded.

False. As I illustrated, they had only the $100 initial deposit.

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Don't forget, assets of $900 in loans.
Assets and liabilities have to balance.

Correct, my mistake.

My conclusion remains true. The initial $100 can create $900 worth of loans, expanding the money supply 10 fold.

 

[ShackledNation]

Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort"

Banks borrow from other banks or the Fed, when they can create money out of thin air?
You must be joking.

No. Banks create money by lending, but they must meet the reserve requirement of 10%. If they are below that, they will borrow cash from the Fed or other banks to make up the difference.

Check out the simple chart on Wikipedia. Deposits are larger than loans.
Because they can't create money out of thin air. They borrow, from depositors, other banks or the Fed, more than they lend.
Can't make it any simpler for you.


Fractional reserve banking - Wikipedia, the free encyclopedia

That deposits are larger than loans has nothing to do with anything I was saying. It only proves that banks are not loaning money. Everything I said is true--you haven't refuted any of it.

If you believe a $100 deposit ultimately expands the money supply by $90, you are alone in that opinion. Show me one credible source that has that analysis.

That deposits are larger than loans has nothing to do with anything I was saying.

You said that a bank with $100 in deposits could make $900 in loans.
Creating money out of thin air.

You responded while I was still editing my post. You misread the chart on Wikipedia--it actually supported my claim.

If you're changing your claim to, a bank with $100 in deposits that also borrows $900 from another bank, or the Fed, can now make loans of $900, welcome to the real world.
Glad I could help clear up your confusion.

I'm not. An initial cash deposit of $100 can finance $900 worth of loans and expand the money supply by that amount.

If you believe a $100 deposit ultimately expands the money supply by $90

Sorry, a deposit alone has no impact on money supply.
The $90 loan that it supports is what expands the money supply.

If you believe a $100 deposit will support only a $90 loan and expand the money supply by only $90 you are wrong. Again, please provide one reliable source that supports your claim.

 

[Toddsterpatriot]

Virtually every economics textbook lays this out.

Here is the most simplistic example:

How Banks Make Money :: Creating Money Out of Thin Air :: See How Money is Made, a YES! Magazine infographic ? YES! Magazine

Do you at least agree with that?

That is a simplistic textbook example, but now how banks operate in practice. Banks don't wait for deposits to make loans like that. They just make loans. If they have a shortfall in reserves, they will just loan from other banks, or the Federal Reserve, the "lender of last resort" (hence the name). Either way, whether you follow the textbook example or the reality of what happens in banks today, the end result is the same. Far more than $90 is created.

Even the bankers admit it.

“In the real world, banks extend credit, creating deposits in the process , and look for the reserves later.”
http://www.bostonfed.org/economic/conf/conf1/conf1i.pdf
Alan Holmes, then Senior Vice President, Federal Reserve Bank of New York (1969)

The reserve requirement only requires banks to have cash on reserve representing 10% of all their liabilities (demand deposits). When someone deposits $100 cash, the bank creates a demand deposit to that cash for the customer (essentially an IOU from the bank). The result is this:

Assets
$100 cash

Liabilities
$100 demand deposit

Reserve ratio: 100%

The reserve requirement does not say the bank can only lend 10% of cash. It states that whatever the value of deposit liabilities the bank has, 10% of that must be held in cash. If the bank creates demand deposits (in the form of loans) totalling $900, it is operating fully within the law, as illustrated below:

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Reserve ratio: 10%

Never did the bank violate the law by having a reserve ratio lower than 10%.

The reserve requirement does not say the bank can only lend 10% of cash.

Of course not, they can lend 90% of deposits.

Not quite. Banks must have cash on reserve that backs of 10% of their net transaction account liabilities.
FRB: Reserve Requirements

If the bank creates demand deposits (in the form of loans) totalling $900, it is operating fully within the law, as illustrated below:

Of course. In that case, they didn't limit themselves to the $100 deposit that I wanted you to use as an example.
Here, they have $1000 in deposits and only $900 in loans.
As I previously said, every loan is fully funded.

False. As I illustrated, they had only the $100 initial deposit.

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Don't forget, assets of $900 in loans.
Assets and liabilities have to balance.

Correct, my mistake.

My conclusion remains true. The initial $100 can create $900 worth of loans, expanding the money supply 10 fold.

False. As I illustrated, they had only the $100 initial deposit.

And then they had loans and new deposits of $900 each.
$900 demand deposits created as loans <-----see, you said it yourself
So at the end, they have $1000 in deposits and $900 in loans and $100 in reserves.
Deposits are more than loans and every loan is fully funded.

 

[Toddsterpatriot]

No. Banks create money by lending, but they must meet the reserve requirement of 10%. If they are below that, they will borrow cash from the Fed or other banks to make up the difference.


That deposits are larger than loans has nothing to do with anything I was saying. It only proves that banks are not loaning money. Everything I said is true--you haven't refuted any of it.

If you believe a $100 deposit ultimately expands the money supply by $90, you are alone in that opinion. Show me one credible source that has that analysis.

That deposits are larger than loans has nothing to do with anything I was saying.

You said that a bank with $100 in deposits could make $900 in loans.
Creating money out of thin air.

You responded while I was still editing my post. You misread the chart on Wikipedia--it actually supported my claim.

If you're changing your claim to, a bank with $100 in deposits that also borrows $900 from another bank, or the Fed, can now make loans of $900, welcome to the real world.
Glad I could help clear up your confusion.

I'm not. An initial cash deposit of $100 can finance $900 worth of loans and expand the money supply by that amount.

If you believe a $100 deposit ultimately expands the money supply by $90

Sorry, a deposit alone has no impact on money supply.
The $90 loan that it supports is what expands the money supply.

If you believe a $100 deposit will support only a $90 loan and expand the money supply by only $90 you are wrong. Again, please provide one reliable source that supports your claim.

You misread the chart on Wikipedia--it actually supported my claim.

The chart shows $457.05 in deposits, $357.05 in loans and $100 in reserves.
How does that support your claim?

An initial cash deposit of $100 can finance $900 worth of loans and expand the money supply by that amount.

Yes, a $100 deposit (plus $900 more in deposits or loans from other banks or loans from the Fed) can result in $900 in loans.

If you limit your scenario to the $100 deposit, you only get $90 in loans.

 

[ShackledNation]

The reserve requirement does not say the bank can only lend 10% of cash.

Of course not, they can lend 90% of deposits.

Not quite. Banks must have cash on reserve that backs of 10% of their net transaction account liabilities.
FRB: Reserve Requirements



False. As I illustrated, they had only the $100 initial deposit.

Assets
$100 cash

Liabilities
$100 original demand deposit
$900 demand deposits created as loans
$1000 TOTAL

Don't forget, assets of $900 in loans.
Assets and liabilities have to balance.

Correct, my mistake.

My conclusion remains true. The initial $100 can create $900 worth of loans, expanding the money supply 10 fold.

False. As I illustrated, they had only the $100 initial deposit.

And then they had loans and new deposits of $900 each.
$900 demand deposits created as loans <-----see, you said it yourself
So at the end, they have $1000 in deposits and $900 in loans and $100 in reserves.
Deposits are more than loans and every loan is fully funded.

Oh dear lord. I am sorry, but I cannot believe you just wrote that. I am sorry to sound condescending, but you really do not know what you are talking about. I don't know where to begin, honestly. What school of economic thought would you say you ascribe to?

Before I go any farther, let me ask you this. What is the money supply when the balance sheets are like we were discussing? A reminder:

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

 

[ShackledNation]

That deposits are larger than loans has nothing to do with anything I was saying.

You said that a bank with $100 in deposits could make $900 in loans.
Creating money out of thin air.

You responded while I was still editing my post. You misread the chart on Wikipedia--it actually supported my claim.


I'm not. An initial cash deposit of $100 can finance $900 worth of loans and expand the money supply by that amount.

If you believe a $100 deposit ultimately expands the money supply by $90

Sorry, a deposit alone has no impact on money supply.
The $90 loan that it supports is what expands the money supply.

If you believe a $100 deposit will support only a $90 loan and expand the money supply by only $90 you are wrong. Again, please provide one reliable source that supports your claim.

You misread the chart on Wikipedia--it actually supported my claim.

The chart shows $457.05 in deposits, $357.05 in loans and $100 in reserves.
How does that support your claim?

Read the paragraphs above the chart on wikipedia.

An initial cash deposit of $100 can finance $900 worth of loans and expand the money supply by that amount.

Yes, a $100 deposit (plus $900 more in deposits or loans from other banks or loans from the Fed) can result in $900 in loans.

Ok. That was my first point--in line with the text book example. I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans, thus expanding the money supply 10-fold.

If you limit your scenario to the $100 deposit, you only get $90 in loans.

This is where I think the main disagreement is. Under the text-book model, an initial money supply of $100 cash results in an initial loan of $90, which is then redeposited into a bank, resulting in another loan that is 90% of the $90, etc, until $900 in loans are made that is possible because of the initial $100 cash deposit.

While that could happen, the reality is not really like that. Banks do not loan their reserves--they create demand deposits when they create loans and give those deposits to the lender. The lender is rarely just given a wad of cash. Initially, there is a 1 to 1 ratio between the cash reserves and the demand deposits. But the bank can simply make a $900 loan from the $100 cash deposit, and the ratio will be 1 to 10--or a 10% reserve ratio--completely in line with the law.

 

[Toddsterpatriot]

Not quite. Banks must have cash on reserve that backs of 10% of their net transaction account liabilities.
FRB: Reserve Requirements



False. As I illustrated, they had only the $100 initial deposit.


Correct, my mistake.

My conclusion remains true. The initial $100 can create $900 worth of loans, expanding the money supply 10 fold.

False. As I illustrated, they had only the $100 initial deposit.

And then they had loans and new deposits of $900 each.
$900 demand deposits created as loans <-----see, you said it yourself
So at the end, they have $1000 in deposits and $900 in loans and $100 in reserves.
Deposits are more than loans and every loan is fully funded.

Oh dear lord. I am sorry, but I cannot believe you just wrote that. I am sorry to sound condescending, but you really do not know what you are talking about. I don't know where to begin, honestly. What school of economic thought would you say you ascribe to?

Before I go any farther, let me ask you this. What is the money supply when the balance sheets are like we were discussing? A reminder:

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

Money supply is the $1000 in demand deposits.
If you assume the $100 was high-powered money created by the Fed, the maximum money supply created by that high-powered money is $100/0.1 (the 10% reserve requirement) or $1000. If the reserve requirement was 20%, as shown in the wiki article, total money supply would be $100/0.2 or $500.

If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400. <------from Wiki

Your spreadsheet shows $1000 in deposits and $900 in loans.
I appreciate it when you make my point for me.

 

[Toddsterpatriot]

You responded while I was still editing my post. You misread the chart on Wikipedia--it actually supported my claim.


I'm not. An initial cash deposit of $100 can finance $900 worth of loans and expand the money supply by that amount.


If you believe a $100 deposit will support only a $90 loan and expand the money supply by only $90 you are wrong. Again, please provide one reliable source that supports your claim.

You misread the chart on Wikipedia--it actually supported my claim.

The chart shows $457.05 in deposits, $357.05 in loans and $100 in reserves.
How does that support your claim?

Read the paragraphs above the chart on wikipedia.

An initial cash deposit of $100 can finance $900 worth of loans and expand the money supply by that amount.

Yes, a $100 deposit (plus $900 more in deposits or loans from other banks or loans from the Fed) can result in $900 in loans.

Ok. That was my first point--in line with the text book example. I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans, thus expanding the money supply 10-fold.

If you limit your scenario to the $100 deposit, you only get $90 in loans.

This is where I think the main disagreement is. Under the text-book model, an initial money supply of $100 cash results in an initial loan of $90, which is then redeposited into a bank, resulting in another loan that is 90% of the $90, etc, until $900 in loans are made that is possible because of the initial $100 cash deposit.

While that could happen, the reality is not really like that. Banks do not loan their reserves--they create demand deposits when they create loans and give those deposits to the lender. The lender is rarely just given a wad of cash. Initially, there is a 1 to 1 ratio between the cash reserves and the demand deposits. But the bank can simply make a $900 loan from the $100 cash deposit, and the ratio will be 1 to 10--or a 10% reserve ratio--completely in line with the law.

I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans,

I've never denied it.

Under the text-book model, an initial money supply of $100 cash results in an initial loan of $90

YES!! And in every example I gave, I talked about a bank with only that initial deposit.

Banks do not loan their reserves

Sure they do. The bank with the $100 deposit has $10 in required reserves and $90 in excess reserves which they can, and do, lend out.

But the bank can simply make a $900 loan from the $100 cash deposit,

Nope. That would bounce the loan check. They need another $900 from somewhere.
That is not "simply mak[ing] a $900 loan".

 

[ShackledNation]

False. As I illustrated, they had only the $100 initial deposit.

And then they had loans and new deposits of $900 each.
$900 demand deposits created as loans <-----see, you said it yourself
So at the end, they have $1000 in deposits and $900 in loans and $100 in reserves.
Deposits are more than loans and every loan is fully funded.

Oh dear lord. I am sorry, but I cannot believe you just wrote that. I am sorry to sound condescending, but you really do not know what you are talking about. I don't know where to begin, honestly. What school of economic thought would you say you ascribe to?

Before I go any farther, let me ask you this. What is the money supply when the balance sheets are like we were discussing? A reminder:

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

Money supply is the $1000 in demand deposits.
If you assume the $100 was high-powered money created by the Fed, the maximum money supply created by that high-powered money is $100/0.1 (the 10% reserve requirement) or $1000. If the reserve requirement was 20%, as shown in the wiki article, total money supply would be $100/0.2 or $500.

If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400. <------from Wiki

You got it. I'm glad we agree on the conclusion now. The increase is $400. Your statement no money was created is false.

Your spreadsheet shows $1000 in deposits and $900 in loans.
I appreciate it when you make my point for me.

Very good. But I don't think you realize what that means. There are $1000 in demand deposits...but only $100 in cash backing them. $900 worth of demand deposits were just created out of thin air when the loans were made.

 

[ShackledNation]

You misread the chart on Wikipedia--it actually supported my claim.

The chart shows $457.05 in deposits, $357.05 in loans and $100 in reserves.
How does that support your claim?

Read the paragraphs above the chart on wikipedia.


Ok. That was my first point--in line with the text book example. I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans, thus expanding the money supply 10-fold.

If you limit your scenario to the $100 deposit, you only get $90 in loans.

This is where I think the main disagreement is. Under the text-book model, an initial money supply of $100 cash results in an initial loan of $90, which is then redeposited into a bank, resulting in another loan that is 90% of the $90, etc, until $900 in loans are made that is possible because of the initial $100 cash deposit.

While that could happen, the reality is not really like that. Banks do not loan their reserves--they create demand deposits when they create loans and give those deposits to the lender. The lender is rarely just given a wad of cash. Initially, there is a 1 to 1 ratio between the cash reserves and the demand deposits. But the bank can simply make a $900 loan from the $100 cash deposit, and the ratio will be 1 to 10--or a 10% reserve ratio--completely in line with the law.

I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans,

I've never denied it.

Then you completely misread my post.

Under the text-book model, an initial money supply of $100 cash results in an initial loan of $90

YES!! And in every example I gave, I talked about a bank with only that initial deposit.

And in every example I gave, I was talking about the whole process. Your responses to me were based on not understanding what I was saying. Nobody when discussing the expansion of the money supply ever just stops it at that step. What matters is the total money supply expansion resulting from the initial deposit. That we agree on.

Banks do not loan their reserves

Sure they do. The bank with the $100 deposit has $10 in required reserves and $90 in excess reserves which they can, and do, lend out.

They can, but that is not what they do.

But the bank can simply make a $900 loan from the $100 cash deposit,

Nope. That would bounce the loan check. They need another $900 from somewhere.
That is not "simply mak[ing] a $900 loan".

Absolutely. The New York Fed admitted that in the link I gave you, as do countless others. The only obligation of the bank is to ensure that it has enough cash to back 10% of its net transaction account liabilities. All it has to do is create loans with match demand deposits until its current reserves reach 10% of those liabilities.

They would never write a check the size of their entire cash reserves. If they did, that would be the same as a run on the bank, no different than everyone trying to cash out their demand deposits all at once above what the bank can provide. That in no way disputes how the excess demand deposits are created in the first place.

 

[Toddsterpatriot]

Oh dear lord. I am sorry, but I cannot believe you just wrote that. I am sorry to sound condescending, but you really do not know what you are talking about. I don't know where to begin, honestly. What school of economic thought would you say you ascribe to?

Before I go any farther, let me ask you this. What is the money supply when the balance sheets are like we were discussing? A reminder:

Assets
Cash.....................$100
Loans....................$900
Total Assets...........$1000

Liabilities
Demand deposits....$1000
Total Liabilities.......$1000

Money supply is the $1000 in demand deposits.
If you assume the $100 was high-powered money created by the Fed, the maximum money supply created by that high-powered money is $100/0.1 (the 10% reserve requirement) or $1000. If the reserve requirement was 20%, as shown in the wiki article, total money supply would be $100/0.2 or $500.

If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money supply is $400. <------from Wiki

You got it. I'm glad we agree on the conclusion now. The increase is $400. Your statement no money was created is false.

Your spreadsheet shows $1000 in deposits and $900 in loans.
I appreciate it when you make my point for me.

Very good. But I don't think you realize what that means. There are $1000 in demand deposits...but only $100 in cash backing them. $900 worth of demand deposits were just created out of thin air when the loans were made.

You got it. I'm glad we agree on the conclusion now.

I had it from the beginning, obviously.

Your statement no money was created is false.

LOL! That's funny! Where did you misread that as my claim?

There are $1000 in demand deposits..

Yes. $1000 in deposits, $900 in loans, $100 in reserves.
Not, as you claimed, $100 in deposits and $900 in loans.

but only $100 in cash backing them.

Absolutely!

$900 worth of demand deposits were just created out of thin air when the loans were made.

Leave out the words "out of thin air".

$900 worth of demand deposits were just created when the loans were made.

Or......

$900 worth of loans were made when the demand deposits were created.

 

[Toddsterpatriot]

Read the paragraphs above the chart on wikipedia.


Ok. That was my first point--in line with the text book example. I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans, thus expanding the money supply 10-fold.


This is where I think the main disagreement is. Under the text-book model, an initial money supply of $100 cash results in an initial loan of $90, which is then redeposited into a bank, resulting in another loan that is 90% of the $90, etc, until $900 in loans are made that is possible because of the initial $100 cash deposit.

While that could happen, the reality is not really like that. Banks do not loan their reserves--they create demand deposits when they create loans and give those deposits to the lender. The lender is rarely just given a wad of cash. Initially, there is a 1 to 1 ratio between the cash reserves and the demand deposits. But the bank can simply make a $900 loan from the $100 cash deposit, and the ratio will be 1 to 10--or a 10% reserve ratio--completely in line with the law.

I am glad you finally acknowledge that through the process of fractional reserve banking, a $100 deposit can result in $900 in loans,

I've never denied it.

Then you completely misread my post.


And in every example I gave, I was talking about the whole process. Your responses to me were based on not understanding what I was saying. Nobody when discussing the expansion of the money supply ever just stops it at that step. What matters is the total money supply expansion resulting from the initial deposit. That we agree on.

Banks do not loan their reserves

Sure they do. The bank with the $100 deposit has $10 in required reserves and $90 in excess reserves which they can, and do, lend out.

They can, but that is not what they do.

But the bank can simply make a $900 loan from the $100 cash deposit,

Nope. That would bounce the loan check. They need another $900 from somewhere.
That is not "simply mak[ing] a $900 loan".

Absolutely. The New York Fed admitted that in the link I gave you, as do countless others. The only obligation of the bank is to ensure that it has enough cash to back 10% of its net transaction account liabilities. All it has to do is create loans with match demand deposits until its current reserves reach 10% of those liabilities.

They would never write a check the size of their entire cash reserves. If they did, that would be the same as a run on the bank, no different than everyone trying to cash out their demand deposits all at once above what the bank can provide. That in no way disputes how the excess demand deposits are created in the first place.

And in every example I gave, I was talking about the whole process.

And when I talked about the whole process, I said deposits were always larger than loans.
That every loan was fully funded.
And you strongly disagreed.

They can, but that is not what they do.

Baloney.

The only obligation of the bank is to ensure that it has enough cash to back 10% of its net transaction account liabilities.

And enough to fund the loans.
$100 in deposits does not give them the cash to fund $900 in loans and $100 in reserves.

All it has to do is create loans with match demand deposits until its current reserves reach 10% of those liabilities.

How many loans have you taken out where you left the proceeds in a demand account in the bank you borrowed from?

They would never write a check the size of their entire cash reserves.

$100 deposit, $10 required reserves, $90 excess reserves.
They write the check for $90, not their entire cash reserve.