Tilted Forum Project Discussion Community - View Single Post - The money and banking system

hiredgun · 01-29-2007, 03:17 AM

To the original OP and the discussion it spawned (which we seem to have veered from a bit): I think your understanding of the banking system is a little confused.

The issuance of loans by banks is not the stage of the banking process during which money is created.

You are correct when you state elsewhere that it is the Federal Reserve, and only the Fed, that regulates the money supply; yes, the Fed is a private institution insofar as other financial institutions may hold its stock, but it was created by an act of government and, as the Central Bank of the US, remains a quasi-governmental organization (I would point you to www.federalreserve.gov). The Board of Governors is appointed by the President.

Private banks do not have carte blanche to loan out 'imaginary' money. If you get a loan from a bank, what you are receiving is real, accountable money, even if the physical transaction is only electronic.

Money creation is practiced only by the Federal Reserve, through the sale or purchase of (usually) Treasury securities. This step, yes, is a bit contrived, but it functions to steer the economy between inflation and stagnation by curbing or stimulating spending. You can read about the process here: http://en.wikipedia.org/wiki/Money_creation

There are various germane criticisms of the process and there's no problem with suggesting reforms, but it's not nearly so sinister as you seem to think, and the elimination of fractional reserve banking altogether is not the answer.

By the way, 'fractional reserve' banking simply means that the amount banks MUST (by law) hold 'in reserve' is only a fraction of what you deposit. This is what allows banks to function, because they can earn interest on your deposit (by lending or, more likely, investing it) instead of letting it rot in their vault. Despite this, if you go and ask to cash out your entire account, they will be able to do so; and if they cannot (if there's a run on the bank) and it goes under, the FDIC will bail you out for $100,000 per account (or $250k for an IRA). In practice the need for this is relatively rare.

01-29-2007, 03:17 AM	#39 (permalink)
hiredgun Addict	To the original OP and the discussion it spawned (which we seem to have veered from a bit): I think your understanding of the banking system is a little confused. The issuance of loans by banks is not the stage of the banking process during which money is created. You are correct when you state elsewhere that it is the Federal Reserve, and only the Fed, that regulates the money supply; yes, the Fed is a private institution insofar as other financial institutions may hold its stock, but it was created by an act of government and, as the Central Bank of the US, remains a quasi-governmental organization (I would point you to www.federalreserve.gov). The Board of Governors is appointed by the President. Private banks do not have carte blanche to loan out 'imaginary' money. If you get a loan from a bank, what you are receiving is real, accountable money, even if the physical transaction is only electronic. Money creation is practiced only by the Federal Reserve, through the sale or purchase of (usually) Treasury securities. This step, yes, is a bit contrived, but it functions to steer the economy between inflation and stagnation by curbing or stimulating spending. You can read about the process here: http://en.wikipedia.org/wiki/Money_creation There are various germane criticisms of the process and there's no problem with suggesting reforms, but it's not nearly so sinister as you seem to think, and the elimination of fractional reserve banking altogether is not the answer. By the way, 'fractional reserve' banking simply means that the amount banks MUST (by law) hold 'in reserve' is only a fraction of what you deposit. This is what allows banks to function, because they can earn interest on your deposit (by lending or, more likely, investing it) instead of letting it rot in their vault. Despite this, if you go and ask to cash out your entire account, they will be able to do so; and if they cannot (if there's a run on the bank) and it goes under, the FDIC will bail you out for $100,000 per account (or $250k for an IRA). In practice the need for this is relatively rare.