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Crash Course: Chapter 7 - Money Creation by Chris Martenson
September 15th, 2009
Crash Course Chapter 7 (Money Creation): Understanding how money is created provides a foundation for appreciating the implications of our massive levels of debt, because it tells us how that debt came into being. As John Kenneth Galbraith once said, “The process by which money is created is so simple, the mind is repelled.” Dr. Martenson walks us through this simple process of fractional reserve banking.
http://www.chrismartenson.com
Duration : 0:4:20
September 15th, 2009
I think I’ve a …
I think I’ve a pretty good grasp of how it works, but I’m certainly open to correction.
Fractional banking creates claims to greater sums of money than the bank has at its disposal. It creates the risk of a bank run, but it also allows the bank to give more loans, thus potentially giving better returns on savings.
It’s not good or bad, so long as customers are allowed to decide for themselves whether they want it or not. The real problem is the Fed’s virtual monopoly on currency provision.
September 15th, 2009
Doesn’t the term ” …
Doesn’t the term “bank run” alone indicate that the bank does not have the money it claims it does?
It seems that there are more claims by the people than there are actual money in the bank. That seems to be a problem. Are you arguing that no new physical money is created? It seems that new bank credits are definitely created. Again leading to the problem of the “bank run”.
Sorry if i can’t get the words out right, i’m no Econ major.
September 15th, 2009
B loans 90$ to Y.
…
B loans 90$ to Y.
B has 10$ cash, 90$ claim to Y’s money, and a 100$ debt to Z.
(If Z attempts to reclaim his money here, then the bank cannot repay it. That’s what’s called a “bank run”. Of course in the US, there’s a lender of last resort, that will step in upon demand to settle the final 90$ of Z’s claim by printing more money.)
Y gives 90$ to X in return for one car.
X deposits 90$ in B.
B now has 100$, plus a 90$ claim to Y, minus a 100$ claim from Z, minus a 90$ claim from X.
September 15th, 2009
However, in real …
However, in real terms, no new money is created. To prove it, I’ll run through the example you gave, and offer explanation where necessary.
Z deposits 100$ in B.
(In effect, Z makes a loan to B, that is repayable upon demand. The money leaves Z’s possession, but he retains a moral claim, to retrieve it at a time of his choosing.)
Z has nothing, B has 100$.
(The ets and liabilities here are:
B: +100$ cash
-100$ debt;
Z: 0 cash,
+100$ claim to bank’s money)
(To be continued)
September 15th, 2009
There’s a critical …
There’s a critical flaw in your analysis.
You say that, when Z puts his money in the bank, he keeps his money. This is false. He does retain the rights to his money when he loans it to the bank. However, it does leave his possession. Strictly speaking, Z does no longer own money, but rather a claim to money.
Most people tend to equate claims to money with the money itself. And in this sense, the bank is indeed inflationary, as it creates the perception of more money.
(to be continued)
September 15th, 2009
So B now loans that …
So B now loans that allowable $90 to Y.
Y spends $90 to buy a car from X.
X now takes his $90 and puts it in B
Now B can lend 90% of the $90 (can lend out $81)
Make sense? In this situation, at this point, Z has 100 in the bank, Y has a car, and X has 90 in the bank, meaning the B now has $190 in deposits from both X and Z.
Make sense? That’s why if both X and Z go to B to get their money out, the bank cannot pay them, because it really only has the original $100 from Z.
September 15th, 2009
Sorry dude, you got …
Sorry dude, you got it all wrong. Right off the bat too.
i don’t want to use A & B tho cuz it confused me a bit, i’ll use Z,X,Y for people, and B for Bank, and ume all people put money in same Bank (B), cuz it doesn’t really matter.
Z has $100, puts it in Bank(B)
Now BOTH Z and B have $100. Z does not lose money by putting it in the bank, the bank is holding the money for Z. B now has the right to loan 90% of the money it has ($100) which equals $90
September 15th, 2009
Assets of bank:
100 …
ets of bank:
100 dollars “cash”(i.e. the money that is currently in the bank’s possession),
+ is owed 90 dollars by B,
= 190 dollars
Liabilities of bank:
Owes A 100 dollars,
+ owes X 90 dollars,
= 190 dollars
You point to the interest as a source of profit. But in economics, the interest is not considered profit, but merely the growth of money over time, or a direct expression of time preference.
September 15th, 2009
Alright, fair …
Alright, fair enough. So let’s look at this exchange.
Bank has 100 dollars, A and B has 0 dollars.
Bank loans 90 dollars to B.
Bank has 10 dollars, B has 90 dollars.
B gives 90 dollars to X in exchange for one widget.
Bank has 10 dollars, A and B have 0 dollars, X has 90 dollars.
X deposits 90 dollars in bank.
Bank has 100 dollars, A, B and X each have 0 dollars.
If we look at the ets and liabilities for the bank on the final line, we find this:
(to be continued shortly)
September 15th, 2009
lol …
lol PanzerDivisionBOM youre overlooking that only idiots would loan money from a bank ( in form of a credit ) and then give it back to the bank by depositing it on their bank account. That would be plain stupid.
The credit most likely has a higher interest than a standard bank account.
Instead person B would spend his money on whatever he wanted the credit for.
X, who recieved the money then takes it back to the bank.
Bank now has 10$ + B’s credit (= 90$ + Interest) + 90$ from X = ~190$
September 15th, 2009
Unless I am …
Unless I am mistaken, newyorkfed org is an official fed website, and operate under the same rules.
There, it states banks can create money through the Fractional Reserve System. They actually use an example of 100$ to 1000$.
How would that not be making money? You can now lend money you did not have and collect interest from it.
So far I’d have to agree with Martenson.
I used this page as a source: newyorkfed org/aboutthefed/fedpoint/fed45 html
September 15th, 2009
There’s this …
There’s this perception of a bank as a vault, which holds your money for you until you come to retrieve it. That view is not supported by reality. Rather, the bank continually moves money through it, keeping only some spare change at hand to cover small exchanges, like a convenience store.
I feel a little dirty inside for having defended the Fed just now, but fair is fair. There are plenty of REAL reasons to oppose state action in the creation and maintenance of money, as with all other things.
September 15th, 2009
Actually, no. The …
Actually, no. The fractional reserve is what prevents the bank from lending out the last ten dollars at any given time.
I think what Mr. Martenson isn’t grasping, is that while each new iteration of the loan does indeed create new ets, (i.e. another person with money in their bank account), it also creates new liabilities equal to those ets plus interests (i.e. another person who owes the bank that much more money). -
September 15th, 2009
I believe you …
I believe you forgot about the Fractional Reserve part.
September 15th, 2009
This one is a lie.
…
This one is a lie.
A has 100 dollars.
A deposits 100 dollars in bank.
Bank has 100 dollars, A has 0 dollars.
Bank loans 90 dollars to B.
B has 90 dollars, bank has 10 dollars.
B deposits 90 dollars in bank.
Bank has 100 dollars. A and B have 0 dollars.
Bank loans 90 dollars to C.
Bank has 10 dollars, C has 90 dollars, A and B each have zero dollars.
C deposits 90 dollars in bank.
Bank has 100 dollars. A, B and C have 0 dollars.
This can go on virtually ad-infinitum. No new money is created.
September 15th, 2009
That’s a really …
That’s a really good point! Money was made out of thin air, but paying back doesn’t mean destruction - just revenue! It permanently stays in the system!
Which would be alright if all loans were for productive ets that never depreciated/ammortized/depleted, as 1 dollar would still represent same % of pie - but ets do depreciate, etc!! Hmmm….
September 15th, 2009
Or you can file for …
Or you can file for bankruptcy, chapter 11, and then get a secured credit card or pay cash. And yes, your credit rating will be screwed but you’ll be out of debt(except for school loans which can’t be written off).
September 15th, 2009
Jct: I’m not the …
Jct: I’m not the first to point out that Graham Towers explained that banks lend out new money. So how does Chris explain that his network of piggy banks create new money by lending out the old?
See my video “how banks create money” at my kingofthepaupers channel to watch the real flows. Other than this error, his videos explaining exponential growth are pretty good.
September 15th, 2009
Each and every time …
Each and every time a bank makes a loan (or purchases securities), new bank credit is created — new deposits — brand new money. (pp. 113 and 238)
Broadly speaking, all new money comes out of a Bank in the form of loans.
As loans are debts, then under the present system all money is debt. (p. 459)
September 15th, 2009
From Graham Towers …
From Graham Towers (Central Bank of Canada (from 1934 to 1955)
Q. But there is no question about it that banks create the medium of exchange?
Mr. Towers: That is right. That is what they are for… That is the Banking business, just in the same way that a steel plant makes steel. (p. 287)
The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. (pp. 76 and 238)
September 15th, 2009
So then the Fed, …
So then the Fed, the “lender of last resort”, will re-inflate in order to cover the claims.
Banks are inherently insolvent. Bank runs reveal this fact. The excess money created does vanish when deposits are withdrawn and kept as cash since reserves govern the amount of money creation, and people draw down reserves in a run. FDIC covers manageable runs.
The system always needs to be propped up because they issue multiple claims for the same money which can’t all be honored at the same time.
September 15th, 2009
@ 3:15, “When the …
@ 3:15, “When the loans are paid back, the money disappears…” No, it doesn’t.
This stuff gets confusing, but from what I know the loan balance goes to zero but the bank has increased its reserves. It just lends the money out again. What was an et on the books as a loan is now in the reserve pool.
The money has to leave the banking system in order to “disappear”. That’s why bank runs are deflationary. Only so many can get their money. The rest are stuck with empty claims.
September 15th, 2009
again your an idiot
again your an idiot
September 15th, 2009
good presentation, …
good presentation, thanks alot
September 15th, 2009
This guy is a CROOK …
This guy is a CROOK. He is NOT an economist or investment professional. He is a laid-off lab technician and he is using this economic collapse as a way to MAKE MONEY from you. He is charging for his stupid seminars. Stay away from this crook. He has no idea what he is talking about. He has dozens of shills who have been brainwashed with this “Yes We Can” hype, who troll the internet promoting him. This is the truth.
Martenson, GET A JOB AND STOP EXTORTING MONEY FROM DESPERATE FOOLS.