Money Per Person: How Much Would We Get?

[Dooga Blackrazor]

If the world's supply of money was divided equally amongst all people, how much money would each person have? Does anyone know the answer?

 

[russ_watters]

It depends on what you mean. The actual amount of cash in circulation is far below the actual amount of wealth available. Most developed countries don't even run on cash money anymore anyway - in the US, there is only about $400 Billion in circulation, yet our anual GDP (total quantity of goods and services traded) is about $10 trillion.

So, the best, most relevant way of expressing it I can think of is the global per capita GDP. http://www.j-bradford-delong.net/TCEH/1998_Draft/World_GDP/Estimating_World_GDP.html site provides some discussion on the topic and gives a value of about $6,500 (1990 $$).

 

[Dooga Blackrazor]

So if we had a Communist Government throughout the world each person would have about $6,500 - and that is without government programs such as health care?

 

[russ_watters]

So if we had a Communist Government throughout the world each person would have about $6,500 - and that is without government programs such as health care?

No, GDP includes all government expenditures already. Remember, government only has as much money as we give it. While it can literally manufacture money, that money has no real value.

 

[ray b]

GDP is G=GROSS
and you can't divide GROSS equaly
now net could be divided

but as anyone with movie points knows
THERE IS NO NET

or in real world terms 6,500.00 gross = 1.25 or less net

or after you buy the world a coke
there ain't much left

 

[russ_watters]

ray, that's utter nonsense. But speaking of Coke, the US alone consumes enough coke every year to provide eighteen to every person on earth, at a cost of $10.66.

http://www.ediets.com/news/article.cfm/cmi_454368/cid_1

A 1997 USDA study showed that Americans spent over $54 billion dollars to buy 14 billion gallons of soda...

(that's 14 billion gallons times 8 pints per gallon divided by 6 billion people)

 

[Big Papa]

lawful Money Vs. monopoly money.

Lawful Money is gold and Silver only. paper ins not lawful money when it says U.S. Federal Reserve. It has to say U.S. Treasury to be backed by gold and silver. If you look real hard you will find $2 bills printed in 1963 that say U.S. treasury. Federal Reserve notes are Debt. Ever since 1933 the U.s. Geovernment has declared Bankruptcy and borrowed money from the the Federal Reserve. Te Federal REserve is a private for profit corporation with stockholders who make upwards of a billion dollars pero year.The Federal Reserve notes floating around represetn debt, or borrowed money. Borrowed money has to be paid back.

When the U.S. Government created new Bills to foil counterfitters, they did not take the same amount of money out of Circulation. When U.S. Military personnel are paid overseas, if their money is put under a special light to tell if the money is real or not, a lot of times it shows up fake. Basically, the united States is Counterfitting it's own money. If they used coins, which is a lot harder to counterfit then that would be a different story.

So the solution is not to give every one in the world an equal amount of money. The solution is to have people work in exchage for solid goods or services without using money. Study ho the non-violent Anarchists did this during the spanish civil war of the 1930's. Aquick example would be this: One day a bus driver threw up his hands and pulled his bus over and waled off the job. Another man, a passenger, got up and drove the bus until his stop. Then another passenger did the same. Now I don't think they were talking big huge buses as opposed to the smaller ones.

 

[Art]

I can't wait for my turn to perform brain surgery. :-)

 

[russ_watters]

When U.S. Military personnel are paid overseas, if their money...

Wait, you think US military are paid in cash? Have you ever considered how rediculous that would be? C'mon, apply some critical thinking to this conspiracy theory - don't just accept it.

Jeez, where do people come up with this crap?

And conspiracy theory aside, the gold (silver) standard was abandoned for the very reason of what we are discussing in this thread: the quantity of wealth available increases -- but the quantity of gold and silver is finite. That creates a real problem: it stifles economic growth.

 

[Art]

C'mon, apply some critical thinking to this conspiracy theory - don't just accept it.

And conspiracy theory aside, the gold (silver) standard was abandoned for the very reason of what we are discussing in this thread: the quantity of wealth available increases -- but the quantity of gold and silver is finite. That creates a real problem: it stifles economic growth.

Gold has no set intrinsic value so if wealth increases and the supply of gold remains the same then the value of gold increases. So this is not a reason for abandoning the gold standard.

 

[sid_galt]

So if we had a Communist Government throughout the world each person would have about $6,500 - and that is without government programs such as health care?

More like 0.01$. Production under capitalism is not equal to production under communism.

 

[russ_watters]

Gold has no set intrinsic value so if wealth increases and the supply of gold remains the same then the value of gold increases. So this is not a reason for abandoning the gold standard.

No, it is a reason for abandoning the gold standard because what you are describing is deflation and it is economic disaster. Deflation means the price of goods decreases with time. As a result, people don't spend as much because if they wait, things will be cheaper later. Economic activity slows down. Corporations' profits will decrease with time and employees will have to be paid less. There are other effects as well.

A healthy economy requires inflation.

 

[hitssquad]

Deflation theories vs. semiconductor-industry realities

Deflation means the price of goods decreases with time. As a result, people don't spend as much because if they wait, things will be cheaper later. Economic activity slows down.

In the period 1960-2000, the world semiconductor industry experienced a compound annual growth rate (CAGR) of 14.9%. Yet, the world semiconductor industry experienced price deflation over that period.
http://www.icknowledge.com/our_products/2005ICEconomics2.pdf

 

[russ_watters]

The semiconductor industry is a single industry/market, not a national economy. Further, it is a very unique market, characterized by vast improvements in technology. As a result, its fast economic growth rate (now slowing) can support a deflationary market.

 

[hitssquad]

Apparently, the major problem with deflationary economies is that lenders refuse to charge negative interest (pay borrowers to take out loans).
federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

 

[hitssquad]

The semiconductor industry is a single industry/market, not a national economy.

You said deflation is harmful because, "As a result, people don't spend as much because if they wait, things will be cheaper later. Economic activity slows down." Apparently that is not the case, and that the harm that can come from deflation comes through lenders refusing to charge negative interest. When lenders charge zero interest, the price of borrowing is equal to the deflation rate -- 10% in the case of the U.S. in the early 1930's. 10% is an outrageous real interest rate, so businesses don't borrow and lenders get rich holding onto their capital.

It would seem that inflation lights a fire under people's capital, encouraging them to invest it. In a deflationary economy, there is less impetus to invest. The money grows all by itself.

 

[russ_watters]

edit: that was in response to the article - didn't see your second post.

I'm not exactly an expert on this, but from what I understand, that's [the banking issue] what causes the "deflationary spiral" - the inability of the economy to recover from the recession induced by the deflation. If people can't borrow money, they can't build/buy things to jump-start the economy. Japan's long term, severe economic problems are a good example.

Good article.

You said deflation is harmful because, "As a result, people don't spend as much because if they wait, things will be cheaper later. Economic activity slows down." Apparently that is not the case, and that the harm that can come from deflation comes through lenders refusing to charge negative interest...

It would seem that inflation lights a fire under people's capital, encouraging them to invest it. In a deflationary economy, there is less impetus to invest. The money grows all by itself.

Well, the banking issue keeps deflation going (the downward spiral), but what really hurts is the recession itself. You might be annoyed at not being able to get a loan to buy a house, but the guy who really gets nailed is the carpenter who loses his job because he isn't building it. Minor point of semantics though.

 

[hitssquad]

Well, I was skeptical of your "deflation is harmful" thesis, but now that I have thought about it more it seems to me you are, on the whole, correct. Perhaps we can think of inflation as an extremely discrete and effective way to tax people's money stashes. With constant inflation, people are being taxed for the "sin" of holding onto money instead of using it to seed and fertilize enterprise.

So inflation acts as a sort of very clever "sin tax" -- commit the sin of non-investment of your money-stash and you get taxed, with no way to cheat the taxman. (And where does your taxed money go? It goes into successful investors' pockets in the form of increased purchasing power relative to yours.)

 

[Burnsys]

I think banks as private institutions has to much power in society and the hability to create money out of air when they want. Also they decide how the money is distributed along society. how much to middle class, how much to the bottom, and to top... The problem is they are PRIVATE banks. people with the same rights like you and me...
-----------------------------------------------------
About Deflation:

"There are four things that must be available for paid work to take place:

The work to be done.
The materials to do the work.
The labor to do the work.
The money to pay for the work to be done.
If any of those four things are missing, no paid work can take place. It is a naturally self-regulating system. If there is work to be done, and the material is available and the labour willing, all we have to do is create the money. Quite simple."

"Ask yourself why it was that depressions happened. All that went missing from the community was the money to buy goods and services. The labour was still available. The work to be done was still there. The materials had not disappeared, and the goods were readily available in the shops, or could be produced but for the want of money.
------------------------------------------------
Encyclopaedia Britannica, 14th Edition - "Banks create credit. It is a mistake to suppose that bank credit is created to any extent by the payment of money into the banks. A loan made by a bank is a clear addition to the amount of money in the community."

Mr Reginald McKenna, when Chairman of the Midland Bank in London - "I am afraid that ordinary citizens will not like to be told that the banks can, and do, create and destroy money. And they who control the credit of the nation direct the policy of governments, and hold in the hollow of their hands the destiny of the people.

None of our problems will disappear until we correct the creation, supply and circulation of money. Once the money problem is solved, everything else will fall into place.

 

[gravenewworld]

it depends on whether or not you are a keynsian or classical economist. both have different views on whether or not banks have any control at all on the supply of money. I would say the FED by far has more control on the supply of money than banks. THe FED can influence the supply of money by altering the required reserve ratios at banks, open market activities, changing the federal funds rate etc. these are extremely powerful tools the FED has over the supply of money.

 

[gravenewworld]

I also just noticed that you are from argentina. i don't know how your economy is structured and whether or not you have a central banking system independent of the government. Countries with central banks controlled by their governments have a long history of failure and high inflation. It may be the case in countries where the central bank is not independent of the government that private banks may have too much influence over the supply of money.

 

[russ_watters]

So inflation acts as a sort of very clever "sin tax" -- commit the sin of non-investment of your money-stash and you get taxed, with no way to cheat the taxman.

Well, I don't like calling it a "tax" because that implies that the government is taking the money. There was someone in here a few months ago that thought that the government really did profit from inflation, and it doesn't. Wealth lost to inflation just plain ceases to exist.

The other way to look at it though is the motivation angle, which you also mentioned - inflation really does motivate spending and investing, partly in a real way (people calculate what they need to do), but also partly just psychologically.

The main benefit from inflation for government is the lowering of the value of its outstanding loans.

(And where does your taxed money go? It goes into successful investors' pockets in the form of increased purchasing power relative to yours.)

Interesting way of looking at it, but I don't like characterizing investing as an us-vs-them game because in general, it isn't.
In fact, your not investing doesn't help other investors, it hurts them - it makes their investments less successful.

 

[russ_watters]

I think banks as private institutions has to much power in society...

That's a matter of opinion and one that varies from one country to the next. In the US, strict controls, mostly put in place due to the great depression, keep banks in check. But there are still problems (the S&L scandal of the '80s)

...and the hability to create money out of air when they want. Also they decide how the money is distributed along society.

Again, this may vary from country to country, but in the US, only the Federal Reserve, directed by the government, can print and distribute money.

...how much to middle class, how much to the bottom, and to top...

Now, I'm not sure what you mean by that. Banks don't hand out money - that wouldn't be profitable, would it? I get paid by my boss and I deposit the money in a bank - the bank doesn't give me money. A bank has no control over the distribution of wealth in a country.

The problem is they are PRIVATE banks. people with the same rights like you and me...

I'm not sure why you have a problem with that. that's capitalism and it works.

About Deflation:

"There are four things that must be available for paid work to take place:

The work to be done.
The materials to do the work.
The labor to do the work.
The money to pay for the work to be done.
If any of those four things are missing, no paid work can take place. It is a naturally self-regulating system. If there is work to be done, and the material is available and the labour willing, all we have to do is create the money. Quite simple."

Sounds simple enough... but wait - how do you just "create the money"? As my mother used to tell me, money doesn't grow on trees. The government can't just print money, hand it out, and expect it to be worth something.

Burnsys, its no wonder you have such a problem with capitalism - you're operating under some flawed assumptions that people pick up from a cursory examination of communism. Those "wouldn't-it-be-great-if's" that sound nice but don't work in reality. Just ask a Russian if the government can successfully control an economy in the way you suggest.

Economics, Burnsys, is driven by the consumer, not the producer or the government.

"Ask yourself why it was that depressions happened. All that went missing from the community was the money to buy goods and services. The labour was still available. The work to be done was still there. The materials had not disappeared, and the goods were readily available in the shops, or could be produced but for the want of money.

Again - how do you just "create the money"? The reality is that the labor is still there, but if no one can buy the car, there is no point in building it.

The great depression happened largely because of a stock market bubble and related economic factors (too many loans).

Encyclopaedia Britannica, 14th Edition - "Banks create credit. It is a mistake to suppose that bank credit is created to any extent by the payment of money into the banks. A loan made by a bank is a clear addition to the amount of money in the community."

That's true, but judging from what you said above, I think you misunderstand what that means. If a bank starts handing out money that isn't going to be paid back, then the bank fails. Again: see The Great Depression.

Also, that's different from "creaing the money" - that money still has to come from somewhere.

None of our problems will disappear until we correct the creation, supply and circulation of money. Once the money problem is solved, everything else will fall into place.

No offense, but most of the western world is doing just fine the way it is. Countries that aren't need to fix their systems by adopting ours.

RE: Reginald McKenna - a Google reveals that he died in 1943. His opinion on the matter is therefore, irrelevant. What he said was probably true of the conditions that led to the Great Depression, but is not true anymore.

edit: Ironically, this takes us all the way from one extreme to the other: from using precious metals for currency to just printing and distributing it willy-nilly. Even more ironic is that neither work: the economy is going to do its own thing either way.

Take the gold standard, for example. What's the main argument for it? That gold is "worth something". But wait - gold is a commodity - and if you use it as a currency, it takes on a value dictated by the market, same as paper money. So how does that really help you?

Then the other side is just printing money and handing it out. But then what? The fears of the gold-standard people are realized: it really does become worthless.

 

[Burnsys]

I also just noticed that you are from argentina. i don't know how your economy is structured and whether or not you have a central banking system independent of the government. Countries with central banks controlled by their governments have a long history of failure and high inflation. It may be the case in countries where the central bank is not independent of the government that private banks may have too much influence over the supply of money.

Yes we had a peculiar situation with banks over here, our central bank is a part of the government but it takes it's own decitions.. anyway every central banker we had was an agent of private banks, for example:

Presidents of the argentina central bank:

Alfonso Prat Gray JP Morgan chief economist
Mr. Mario Blejer 20 years working in the imf and now director of the bank if england
Jose Luis Machinea Now working for the imf
Domingo Cavallo Memeber of the trilateral comision
Roque Maccarone Ex director of various private banks.
etc...

Anyway private bank has a lot of influence over the supply of money, the Central bank or the fed can't give loans to common people nor corporations, are private banks the one who "Distribute" the money (correct me if i am wrong) so they decide who get which part of the pie...
----------------------------------------
Thomas Jefferson: I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.

Famous Sir Josiah Stamp (President of the Bank of England in the 1920's) Quote:
"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits,
and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine
will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits "

 

[Burnsys]

That's a matter of opinion and one that varies from one country to the next. In the US, strict controls, mostly put in place due to the great depression, keep banks in check. But there are still problems (the S&L scandal of the '80s)

Again, this may vary from country to country, but in the US, only the Federal Reserve, directed by the government, can print and distribute money.

But bank create the money digitaly in their computers and in their books and then distribute it in the form of loans... You don't go to the federal reserve for a loan, you go to a private bank. for example citybank.. and so corporations.. the bank has the power to decide who get loans and who don't and how amount...

Now, I'm not sure what you mean by that. Banks don't hand out money - that wouldn't be profitable, would it? I get paid by my boss and I deposit the money in a bank - the bank doesn't give me money. A bank has no control over the distribution of wealth in a country.

They give loans. if you want to start a bussines or buy a car or build a house. you get a loan at leats most people does...
Yes. when you deposit your money in the bank.. let's say you deposit u$s1000

the bank by law is only required to left only a percent of that money in their reserve, let's say a 20%. So if you put 1000 the bank only has to "keep" 200 in their save. the rest can be borrowed...

then i go to the bank and say.. please i want a loan for u$s1000..
Then the bank employe type in his computer... new loan... u$s1000. and then an acount is created with 1000 dolars... but remember, the bank only has to keep 20%, so they need only 200U$s to borrowme 1000, so they can borrow 4 times te money you had put in the bank. i don't know the exact % they have to keep but it work like that.. So they magicale has created money and then borrowed...

I'm not sure why you have a problem with that. that's capitalism and it works.

Well. i can't create money.. privates banks can. if i start printing money in my house i go to jail... but banks print" money in their computers...

Sounds simple enough... but wait - how do you just "create the money"? As my mother used to tell me, money doesn't grow on trees. The government can't just print money, hand it out, and expect it to be worth something.

Credit created by a Government-owned bank is much better than credit created by private banks, because there is no need to recover the money from people by way of taxes, and there is no interest attached to inflate the cost. The public work completed with the credit by the Government bank is the asset that replaces the money created when the work is finished.

Burnsys, its no wonder you have such a problem with capitalism - you're operating under some flawed assumptions that people pick up from a cursory examination of communism. Those "wouldn't-it-be-great-if's" that sound nice but don't work in reality. Just ask a Russian if the government can successfully control an economy in the way you suggest.

Economics, Burnsys, is driven by the consumer, not the producer or the government.

My problem is that it can't be right that we for example, argentina are a poor country when we have plenty of natural resources, plentY of people willing to work, plenty of food and land, but this system (capitalism) don't let us use them, so we also have plenty of people starving, plenty of people without a job, and plenty of our resources going to foreing countrys...

Again - how do you just "create the money"? The reality is that the labor is still there, but if no one can buy the car, there is no point in building it.
The great depression happened largely because of a stock market bubble and related economic factors (too many loans).

Loans gived by private banks??

The understanding of this issue of money into the community can be best illustrated by equating money in the economy with tickets in a railway system. The tickets are printed by a printer who is paid for his work. The printer never claims the ownership of the tickets … And we can never imagine a railway company refusing to give passengers seats on a train because it is out of tickets. By this same token, a government should never refuse people the access to normal commerce and trade by claiming it is out of money

That's true, but judging from what you said above, I think you misunderstand what that means. If a bank starts handing out money that isn't going to be paid back, then the bank fails. Again: see The Great Depression.
Also, that's different from "creaing the money" - that money still has to come from somewhere.

The banks don't faild.. they can take your home or anything you put as a guaranty when you taked the loan

The following quotation was reprinted in the Idaho Leader, USA, 26 August 1924, and has been read into Hansard twice: by John Evans MP, in 1926, and by M.D. Cowan M.P., in the Session of 1930-1931.

In 1891 a confidential circular was sent to American bankers and their agents, containing the following statements:
"We authorise our loan agents in the western States to loan our funds on real estate, to fall due on September 1st 1894, and at no time thereafter.
On September 1, 1894, we will not renew our loans under any consideration.
On September 1st we will demand our money - we will foreclose and become mortgagees in possession.
We can take two-thirds of the farms west of the Mississippi and thousands of them east of the great Mississippi as well, at our own price.
We may as well own three-fourths of the farms of the west and the money of the country.
Then the farmers will become tenants, as in England."

No offense, but most of the western world is doing just fine the way it is. Countries that aren't need to fix their systems by adopting ours.

yes i see: http://www.brillig.com/debt_clock/

edit: Ironically, this takes us all the way from one extreme to the other: from using precious metals for currency to just printing and distributing it willy-nilly. Even more ironic is that neither work: the economy is going to do its own thing either way.

Take the gold standard, for example. What's the main argument for it? That gold is "worth something". But wait - gold is a commodity - and if you use it as a currency, it takes on a value dictated by the market, same as paper money. So how does that really help you?

Then the other side is just printing money and handing it out. But then what? The fears of the gold-standard people are realized: it really does become worthless.

My problem is with private banks...
I wan't to build a house.. so i take a loan, i buy the materials, and i pay the workers. and then i pay the bank, if you do the numbers. the bank has gained more money that the people who sold me the materials and the people who build the house... and they just "typed some numbers in their computers..."

 

[russ_watters]

But bank create the money digitaly in their computers and in their books and then distribute it in the form of loans...

That simply isn't true, Burnsys. There's really not much else to say here: you don't understand how banks work.

edit: Ok, there is more to say. I honestly didn't know where to go from there, I was so incredulous, but I'll try to explain some of it:

First off, apply some critical thinking (again with the critical thinking...): If a bank can do that, what's stopping you or me? (answer: the FBI). Banks are, after all, private corporations and anyone with a pen to sign the forms can become a corporation. So why can't you just declare yourself to be a bank and start handing out loan (or other) checks? Well - people do it, but when the bank that receives the check tries to get the money and finds out that there is no money behind the check, they call the FBI and you get arrested for fraud.

The fact of the matter is that for most large loans, banks don't really have the money, but then, they don't own the loans themselves either. Most large loans (mortgages) are sold by banks and backed by one of two enormous lending institutions (Fannie Mae and Freddie Mac). This means that the money for the loan actually comes from the lending company and the bank just takes its little slice of the interest profits. But the money does exist. Fannie Mae and Freddy Mac are companies of enormous real assets.

 

[Pengwuino]

Burnsys, your understanding of the banking system seems to be really 'out there'. Banks do not get most of their money from the federal government. They get it from their customers who have accounts with them. What your talken about is borrowing money. They are equally accountable and simply do not "type in numbers" to magically create money. They are requird to keep a certain % on hand and essentially are credited a large amount of money just like you are credit a large amount of money when you get a loan. If the government demands the money back or increases the on-hand rate, the bank can't just "type in a few numbers" and boom, you instantly have money. They have to get to selling their assets figuring out other ways to get their money back. Banks have historically gone out of business because of this very clear fact of banking.

You also seem to forget that everyone you pay.. materials.. workers... etc, all provide a service. The bank equally provides you a service and they deserve to be compensated for it. They are allowing you to have access to enormous amounts of money that you wouldn't be able accumulate on your own and in return, you pay interest on it. A loan is not a privilage just as a contractor is not a privilage. If you agree to a loan with the underlying threat is that your house gets taken away, well thanks to capitalism, you have the choice to NOT sign and go out and work your ass off for a few decades to accumulate the few $100,000 needed to build that dream house of yours (which of course, you can only build the 3 or 4 decades later once youve accumulated the money). But of course with private banks, you simply ask for a loan and they will hand you $200,000 right then and there to build your house. You of course, pay for this service... thus, the joy of banking.

Also, those quotes ignore the huge fact that banks do not have hte power to forcebly demand you make a deposit. The quotes simply touch on those ignorant enough to demand money from a bank with no intentions on paying it back or those that forget that this service is not free. And this "give it back to the people" idea is insane. Credit unions are the perfect example of "giving it back to the people" and you see what happens? They are absolutely unable to make business loans... thus, unable to help an economy or help business growth.

 

[Art]

That simply isn't true, Burnsys. There's really not much else to say here: you don't understand how banks work.

Sorry to contradict you Russ but banks do create money. Some customers leave money in the bank earning interest. A bank can use these idle deposits to make loans to people who then buy goods. Shopkeepers receive extra money which they redeposit with the bank. Some of this redeposited money is left to earn interest and can be re-lent (The multiplier effect). The bank has therefore created money. If all customers were to try to cash their deposits at once, there would not be sufficient cash.
The amount of money the bank can create therefore depends on the ratio of cash to liabilities that they hold. In some countries this ratio is dictated by government in others the banks themselves decide. The higher this cash ratio the less money the bank can re-lend or create.

Oh and by the way the reason the gold standard was abandoned by the USA in 1933 was to give America more control over it's internal budgetry controls by allowing it's currency to float on the worlds markets not because of the finite supply of gold.

 

[russ_watters]

Sorry to contradict you Russ but banks do create money. Some customers leave money in the bank earning interest.

You misunderstand: That interest doesn't come out of thin air, that's money the bank pays you for the priveledge of borrowing your money from you. It comes from the interest people pay the bank when the bank loans them money. That's why the interest rate you pay the bank and the interest rate they pay you are different: the difference (minus their other expenses) is the profit.

Burnsys was saying that the money for the loan itself is created out of thin air. Just change a 0 to a 100,000 and poof, you have enough money to buy a house. Not so.

A bank can use these idle deposits to make loans to people who then buy goods. Shopkeepers receive extra money which they redeposit with the bank. Some of this redeposited money is left to earn interest and can be re-lent (The multiplier effect). The bank has therefore created money.

Where is the created money? Show it to me. Every penny of what you just described has a source. The "idle deposits" come from people depositing their money - real money. The interest paid on loans comes from the people who are lent the money - again, real money.

I think you understand how it works but misunderstand the depth of Burnsys's misunderstanding.

If all customers were to try to cash their deposits at once, there would not be sufficient cash.

That's true, but that's only because the banks lend out the money that was paid in. Again, that money exists, its just out in circulation, not in a vault (or on a disk) somewhere.

The amount of money the bank can create therefore depends on the ratio of cash to liabilities that they hold. In some countries this ratio is dictated by government in others the banks themselves decide. The higher this cash ratio the less money the bank can re-lend or create.

That isn't created money - that ratio is the amount of risk the bank is allowed to take when lending money to ensure that the system of you lending to the bank, lending to others doesn't collapse. Again, the money exist, its just out in circulation, not on hand.

Oh and by the way the reason the gold standard was abandoned by the USA in 1933 was to give America more control over it's internal budgetry controls by allowing it's currency to float on the worlds markets not because of the finite supply of gold.

"Allowing its currency to float" is synonomous with inflation/deflation - its the entire point of what I was saying before.

 

[russ_watters]

HERE is a good explanation of all of this.

 

[Pengwuino]

@Art

Burnsys was implying that banks can at will, create money like a coutnerfeighting operation... not create money through interest and the such.

 

[Art]

HERE is a good explanation of all of this.

"That isn't created money - that ratio is the amount of risk the bank is allowed to take when lending money to ensure that the system of you lending to the bank, lending to others doesn't collapse. Again, the money exist, its just out in circulation, not on hand."

Russ here's a quote from the article you referenced-

"Banks create money in the economy by making loans."

Trust me on this banks do create money. In the example on the page you referenced you will see that with a 10% reserve the banking industry will lend approx $1000 for every $100 deposited - a multiplyer of 10. They can't print dollar bills but you will find cheques are considered the same form of M1 money supply as dollars and coinage by the Fed. When you take a loan from the bank they do not give you cash they give you a credit balance against which generally you will write a cheque which is then redeposited by whoever you make it payable to back into the banking system.
I think Burnys argument is that there is something intrinsically wrong with banks charging you interest to borrow money that they themselves don't have and never had. Personally I don't mind so long as people accept cheques written against a bank loan it doesn't bother me whether they actually have the cash or not, but there is a lot of criticism around these days that banks have become too greedy.

 

[Burnsys]

Please read this:

A Phone Call To The Fed
http://goldismoney.info/forums/showthread.php?t=3988


Mr. Ron Supinski if from the Public Information Department of the San Francisco Federal Reserve Bank

"CALLER - Am I correct when I say, $1 deposited in a member bank $8 can be lent out through Fractional Reserve Policy?

MR. SUPINSKI - About $7.

CALLER - Correct me if I am wrong but, $7 of additional Federal Reserve Notes were never put in circulation. But, for lack of better words were "created out of thin air " in the form of credits and the two cents per denomination were not paid either. In other words, the Federal Reserve Notes were not physically printed but, in reality were created by a journal entry and lent at interest. Is that correct?

MR. SUPINSKI - Yes
"

Please Read the complete article

"and If the reader has any doubts to the validity of this conversation, call your nearest Federal Reserve Bank, YOU KNOW THE QUESTIONS TO ASK! You won't find them listed under the Federal Government. They are in the white pages, along with Federal Express, Federal Deposit Insurance Corp. (FDIC), and any other business. Find out for yourself if all this is true. "

 

[Burnsys]

"Then the bank employe type in his computer... new loan... u$s1000. and then an acount is created with 1000 dolars... but remember, the bank only has to keep 20%, so they need only 200U$s to borrowme 1000, so they can borrow 4 times te money you had put in the bank. "

(Sorry when i sayd borrowme i mean lend me... in spanish borrow and lend are the same word.)

That is what i am saying.. you deposit 100, and the bank can lend 1000! and then charge interest on it... The have created 900 dolars just typing some numbers in their computers...

 

[Pengwuino]

No Burnsys, you still don't understand what credit is. If the Fed decided at any point that they (using your 100 -> 1000 example) wanted that entire $1000, then they can demand it and the bank must find a way to find that extra $900 EXACTLY like the consumer can do it. A person can walk into a bank and ask for a $100,000 loan for a house with say a $10,000 down payment. Instantly, you now have $100,000 and only paid $10,000 for it! Now where both of our understandings diverge is the fact that you think that $100,000 can go completely unaccountable for and just disappear. In reality, if the bank wants that $100,000 back (or well, its $90,000 now because of the down payment), you MUST figure out a way to give them that $90,000 back EXACTLY like the bank would have to figure out a way to give back that money if the Fed requests it. And remember, banks are charged interest exactly like how consumers are charged. And the fact that the author of that conversation used the word "credit" is the big key. Credit is money that MUST be returned if requested. When you use a credit card and are extended say... $100,000 (yah... so its a platinum card)... if you use up to that credit limit, you did not just create out of thin air, $100,000 of your own money. You simply "credited" a few companies $100,000 and you MUST return or make up that $100,000 if demanded by the credit company. The reason you are charged interest is because if you just dissappeared off the face of the Earth or you go bankrupt, the credit company must come up with that $100,000 to pay off the people you bought from.