Do you know how money is made?

Discussion in 'Politics, Religion, Social Issues' started by miniConvert, Mar 15, 2010.

  1. miniConvert macrumors 68040


    Mar 4, 2006
    Kent, UK - the 'Garden of England'.
    #1's not as stupid a question as you might think!

    I was initially quite surprised to hear money referred to as 'debt', and that it is created almost entirely by private banking corporations. This great film, Money as Debt, does a great job of explaining how money is actually made, and how that's a massive problem for us.

    A few highlights:
    • Only ~3% of all the money in circulation was created by governments, 97% is actually loans issued by private banks.
    • Banks don't lend money, i.e. from deposits, they create new money equal to the amount we promise to pay them. They are empowered to do this by law.
    • Not enough money exists to pay back all of the loans plus the interest; we have to keep borrowing more money in order to service the existing debt.
    • If we all repaid our loans (technically impossible), there would be no money.

    If that makes me sound a bit off my rocker then, I'm sorry, it's difficult to talk about the banking system without coming off as a little nuts. Especially when we consider that our governments can actually create all the money that they need (providing they're respectful of inflation) but choose to create it as debt, at interest, by taking loans from banks.

    After watching the video (or perhaps you already know how money is created in our current system), how do you feel about our system of private banks and debt-based money? Do you, like I, feel the need for monetary reform?
  2. Chundles macrumors G4


    Jul 4, 2005
    Eh? Money is made in the Mint from metal and plastic.

    That's how it's made.
  3. Queso macrumors G4

    Mar 4, 2006
    We've just seen exactly this happen. Quantitative Easing was the Bank of England creating a bunch of debt to buy "assets" from the failing investment banks, thereby allowing those banks to carry on issuing debt to each other.

    The system is more than a little effed up isn't it?
  4. niuniu macrumors 68020


    Mar 29, 2009
    A man of the people. The right sort of people.
    I'v always felt at a loss when it comes to money, banking, debt etc. Never really had a good grasp of even the basics.. will check the movie out at lunch, thanks :)
  5. Desertrat macrumors newbie

    Jul 4, 2003
    Terlingua, Texas
    I gotta hit the highway in a minute; offline for a while.

    It's highly complex. Part of the deal is to read up on the interplay between the Treasury and the Federal Reserve Bank. Fractional reserves is another important term. (I've been looking at this whole deal for several years, but I don't profess to be able to sit down and give a full run-down in one swell foop.)

    "Quantitative easing" is sorta senior-level stuff. Do the Freshman/Sophomore studying first...

    :), 'Rat
  6. StruckANerve macrumors 6502

    Dec 31, 2008
    Rio Rancho, NM
    The second Zeitgeist movie touches upon fractional reserve banking for the first part of the movie and then spirals off into coo-coo banana land for the rest of the film. Another movie to watch is called The Money Masters.
  7. rhsgolfer33 macrumors 6502a

    Jan 6, 2006
    Well, if you watch a video that intends to make you feel like we need monetary reform then you'll probably feel like that. You might try taking a class in Money and Banking instead of gleaning your knowledge from a source that is about as biased as the chairman of a political party.

    I don't have time to debunk all the ******** videos like this spew, I actually have courses in accounting and banking that I need to study for, but here is a wonderful post that someone (with a hell of a lot of time created) regarding the many factual errors that riddle this video (and the many conspiracy theory videos like): link
  8. ravenvii macrumors 604


    Mar 17, 2004
    Melenkurion Skyweir
    You're only debunking this because you're one of them!

    *adjusts his tin foil hat*
  9. Ttownbeast macrumors 65816

    May 10, 2009
    In the U.S. money is still made from linen so our currency is primarily made from cotton which is why we don't let black people make any money out of liberal guilt for making them pick cotton during slavery--we don't want to give them any bad memories. We care enough right?:D

    That makes as much sense as that Zietgiest ********
  10. rasmasyean macrumors 6502a

    Jul 11, 2008
    I haven't watched that video and whatever but I can tell you simply that the fabric of society is built on "promise'. In fiscal analogy it's called "debt"...among other things.

    It's a principle to extract work and contribution from members of the community.
    For example....

    You promise to make something for me, I promise to feed you. Your paycheck is my debt to you. Otherwise, why would you help me at all?

    Extrapolate this a bit and one day you promise the market to make useful widgets and the "bank" will mediate that promise by transfering debt between investors in various ways to help you. You still owe on your promise. You succeed, you make even more money and now the public is in your debt now because you have millions of dollars that can make them "fullfill their promises" to help you back for using your making you nice cars, big houses, etc.

    Is it fragile? Sure it is. When there is no one to mediate all these promises. The country collapes and the financial system along with more country, you can't track your everyone becomes broke. The only thing of "real value" you have is perhaps that gun you have over the fireplace. That's why you see on currency, it says "promisory note".
  11. jmann macrumors 604


    Dec 8, 2007
    bump on a log in a hole in the bottom of the sea
    I don't care how it's made. But I love lots of it. $$
  12. miniConvert thread starter macrumors 68040


    Mar 4, 2006
    Kent, UK - the 'Garden of England'.
    Boom boom! In the UK, for example, we have about £50bn of real money made this way. We have £2000bn of money in circulation, which has been created by banks issuing loans. We have to repay £3000bn, because of all the interest, from a pool of £2050bn. Hence the perpetual creation of new loans is required to pay the interest on the old ones, endlessly inflating the money supply and leading to inevitable bankruptcies.

    Ok ok, pipe down, I didn't *just* watch the video, I've been exploring this for quite some time now.

    That blog is hardly gospel, either. Banks do create money, typically against the pledge from the borrower to repay it - which creates the value that the money represents. They don't lend directly out of other peoples deposits, at all, ever. The deposits form a figure on the balance sheet that permits the bank to issue credit.

    If you look up the Basel Accord you'll note how lending capabilities are all tied to capital. Currently banks must have capital of 8% of the value of all lending, which supposedly affords them enough insulation on losses if too many loans go bad. But it's not even that simple - different types of loans have different weightings. Residential mortgages, for example; they're only 50%, meaning banks can issue more of those than they can of, say, commercial mortgages or unsecured credit.

    For what it's worth, I'm not saying that the current system is somehow evil. I am saying that it's a bad system, though, one that isn't sustainable in the long term and one that entrusts private corporations to manage the money supply. It's also one that demands governments take loans from private banks (and even public ones, in the UK our central bank is nationalised, but we still treat it like the Fed) rather than creating additional money themselves. For example, in the UK our money supply has grown massively and, to an extent, it has needed to in order to keep pace with GDP. But the government could have created a lot more in 'real money' than it has under the current system, where instead the increased money supply has been created as debt.

    Back to the film, there are many great quotes in there. Woodrow Wilson is often quoted in his admission that allowing this banking system to take hold in America was a massive mistake. Today, congressman Ron Paul can be seen in many videos talking on the subject, and his comments have interested me greatly.

    The banking system we use needs to be understood by all of us, and we all need to decide if, in fact, we could change it for the better.
  13. miniConvert thread starter macrumors 68040


    Mar 4, 2006
    Kent, UK - the 'Garden of England'.
    Indeed. As the UK banks found their capital rapidly eroded as loans started to go bad at the end of the credit bubble they couldn't lend anymore due to the Basel Accord.

    The government stepped in to increase the capital of our banks (and so enable new lending) by buying shares (etc) in them, nationalising some entirely in the process. In order to do this it had to run a deficit of hundreds of billions of pounds.

    Private borrowers could never buy all of the new debt, not quickly enough, anyway. The Bank of England (central bank) made up the shortfall by buying government debt off of private companies, enabling them to buy more. They're not allowed to buy government debt directly, you see - EU says no, no, no.

    As a result the Bank of England now owns £200bn of government debt. The idea being to sell it back to the market when our current monetary system recovers, i.e. new loans enable the money supply to start growing again by itself.

    That £200bn didn't need to be borrowed from anyone; the government can and does create money - just hardly any. The money supply had contracted massively, which would have led to massive deflation, so the government could have issued £200bn of new money and spent it into the economy via other means, such as investment in infrastructure and lower taxes, and let the banks operate within their newly reduced capital confines. The banks that couldn't survive, like Northern Rock? Savers could have been compensated and debtors sold to other banks.

    Despite intensely disliking the man, Gordon Brown has actually done 'the right thing' by our current banking system in order to keep the economy moving. He clearly understands our current system of debt, which is why the government continued to perpetuate its own debts during the boom times rather than pay them down as has happened in the past. Unfortunately all he has done is made things smooth for us now - the increased interest repayment obligation of government means heady taxation and slashed public spending for many, many years to come.
  14. barkomatic macrumors 68040

    Aug 8, 2008
    Don't be silly. Money is made by the credit card companies out of plastic. You then send your paycheck to them every month and as long as you are making the minimum payment you're good and don't need to worry. :rolleyes:
  15. Surely Guest


    Oct 27, 2007
    Los Angeles, CA
    In the US:
    • Coins are designed, minted and issued by the Department of Treasury's Bureau of Mint, and
    • Bills are designed and printed by the Department of Treasury's Bureau of Engraving and Printing.
  16. rhsgolfer33 macrumors 6502a

    Jan 6, 2006
    Of course banks "create" money, its the nature of a fractional reserve banking system. Its known as deposit creation and the money multiplier.

    And they do lend out people's deposits, the amount they can lend is, essentially, the amount of checkable deposits they take in minus what ever the require reserve ratio dictates they have to hold. If they're not lending other's deposits, where do you suppose they're getting the cash to lend? Yes, lots of money flows through the system without ever becoming "cash," however, my company or I can take out a loan with a bank and demand cash for that loan; who's cash are they giving me? They're giving me the cash that other people deposited.

    Where does that capital come from? It comes from deposits, interests on loans, and other investment activities.

    The reserve requirement is actually 0% of the first $10.7 million, 3% from $10.7 million to $55.2 million, and 10% on anything above $55.2 million in the United States. Also, reserve ratios have little effect and have actually been abolished in some countries (Canada, Australia, New Zealand). Most banks currently hold well in excess of the 10% required by the reserve ratio.

    Of course 10% doesn't always afford enough of a cushion in extreme cases (see bank runs/panics; most recently, Washington Mutual), however, that is why we created the Fed independent agency known as the FDIC.

    The Fed manages the money supply, not private corporations. The Fed can pretty easily manipulate the supply using the required reserve ratio, open market operations, and the discount rate. Can private corporations have an affect on the money supply? Sure, however, the Fed uses its tools to manipulate the money supply on a daily basis to ensure that private corporations don't manipulate the money supply the way they want to.

    In the United States the Federal Reserve is a large buyer of government debt securities (ie the loans you're speaking of). So are foreign governments, citizens, private corporations, and banks. It is hardly a requirement under the current system that the government secure loans and issue debt to private banks.

    And you'd really purpose that the government create money on its own? The inflationary bias in that would be astounding. Preventing the government from creating all the money it needs is a large reason the Fed was create as an independent agency in the first place. The government already spends in a nearly unchecked manner, imagine if they just printed money for that spending instead of financing it via securities, there would be even less checks on government spending that there are now.

    And he's an utter twit when it comes to economics, finance, and banking. I'm much more inclined to trust the economists, bankers, and accountants with years of experience at the Fed than I am to trust a biology and medical degree holding congressmen when it comes to economic issues.

    For the record, I voted libertarian in the last election, however, I think they're dead wrong when it comes to the Federal Reserve System.

    I'd love to know how you purpose to change it. Any move away from fractional reserve banking would devastate our economy. Fractional reserve banking is essentially a requirement for banks to be able to loan money. Without credit in our economy, we would likely face a huge economic contraction, lack of investment, and other significant side-effects of having little to no credit available (see the current recession for an example of what can happen when credit tightens).

    Also, I wouldn't mind the Fed being a little bit more transparent. However, I don't think there are any sweeping changes need in regards to the way the Fed is run or the fractional reserve system.
  17. GfPQqmcRKUvP macrumors 68040


    Sep 29, 2005
    Indeed. While I admire him advocating fiscal discipline in government, he's definitely loony and paranoid. Central bankers are, without a doubt, some of smartest people in the finance industry. They make their mistakes, but they're remarkably competent given the complexity of the financial system.
  18. miniConvert thread starter macrumors 68040


    Mar 4, 2006
    Kent, UK - the 'Garden of England'.
    Hmm, yes - but no. I think you might be a little confused on this one, or making a different point to the one I am. Yes, banks have to hold banknotes and yes, those banknotes are deposited by people in exchange for credit on their bank accounts. The bank will also bring in banknotes from the mint/central bank. The bank is not lending out the money that its depositors deposit - the depositor doesn't go to the bank and say "please can I have my money", to be told "sorry, it's lent to someone else at the moment". The bank just keeps enough banknotes on site to issue cash when required - the depositing and withdrawing of the physical paper isn't really relevant.

    When some of our badly run British banks fell over, the government swooped in and boosted the banks capital by buying vast amounts of their shares. Why? Because their share price was in free fall, meaning their capital was severely eroded and they couldn't lend. So actual bread-and-butter deposits aren't necessarily a big factor anymore. As far as I'm aware there is no conventional 'fractional reserve' link between deposits and debt money in the UK banking system anymore.

    That may be the case in the US, I don't know, but it wasn't in the UK and at least some of Europe. Many banks were forced into new share issues in order to claw up to that 8%, I recall figures like 4% being banded about during the crisis.

    Is the Federal Reserve Bank a public/nationalised body? I'm under the impression that it's a private institution run in a large way by appointees of private banks.

    Why would it devastate our economy?

    The government could easily have a remit of 0% inflation. That way it can't overspend and is still forced to tax in order to contract the money supply when inflation picks up. The government should be responsible for the money supply, then if they screw it up we can vote for change! At the moment the money supply is managed behind closed doors, free from democracy. How can that be allowed?

    Yes, we'll always need to be able to take out loans. Credit is, of course, very important. Perhaps returning to a true fractional reserve system of something like 3:1 loans to deposits, gradually, would be an option. What we don't need is what we currently have, where practically all money is created as bank loans, debt - we could have 0% inflation and have our money supply managed through government deficits and surpluses.

    But finding a workable solution is going to be very complicated. What I'm asking in this thread is if many people have an appetite for change. You're clearly not one of them, which is fine, though I find it hard to understand why anybody would be 100% behind a system where:
    a) Almost all money in circulation is debt. Almost everyone, even our governments, is in debt at the same time.
    b) There isn't enough money to pay off all the debt, so defaults are built-in.

    How can there not be enough money to pay all the debt? It's insane! Truly economic slavery.
  19. callmemike20 macrumors 6502a


    Aug 21, 2007
    The other guy was more right then you. All you said in the huge paragraph is that the deposits is pooled together. The bank has to keep enough money in hand to give cash when people withdraw money. However, what if everyone went into the bank at once and said "give me all my money." The banks would not be able to pay everyone all their money because they don't just have all the deposits sitting there doing nothing. They invest them in loans and such.
  20. rhsgolfer33 macrumors 6502a

    Jan 6, 2006
    Uh yeah, that is what they do. They do loan other peoples money, its why you can go to a bank at anyone time and they will absolutely not have enough money to give to everyone that has made deposits there their deposit back if they were all to demand them back. Its the entire reason the FDIC exists, because banks only hold a fraction of the deposits made there, its the basis for the entire concept of a fractional reserve system.

    In the US, those numbers are the law. Banks have to hold 10% as required reserves with the Fed. Right now banks are holding an extreme amount of excess reserves. If banks aren't able to meet the 10% required resrves, they get the money via overnight loans from other banks at the federal funds rate or via the Fed at the discount rate. Strong institutions are able to get money from the Fed in the primary window at the discount rate, while financially troubled institutions must use the secondary window at a higher rate.

    The Fed is not a private institution, its an independent entity within the government. Its has private and public components. And no, its not run largely by appointees of private banks. Who appoints the the board of governors? The President. The Federal Open Market Committe (FOMC) is composed of seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and the presidents of 4 of the other Federal Reserve Banks.

    You don't vote for all of the laws do you? You elect someone who does via congress. That's not true democracy, we don't have a true democracy; hence the representative democracy thing. The Fed is much like all the other departments the voters don't control within the government. Much like you don't pick the attorney general, the President does; the same thing applies to running the Fed, we don't pick the Chairman or Board Members, the president does. So by your logic, most of the US government is run free from democracy.

    Also, as much as I'd love to continue to this debate, I have others things to do that are more pressing. If you want to learn more about this topic without all the fear and bias that you seem to have had in many of the sources you've viewed, I suggest the book "The Economics of Money, Banking, and Financial Markets" by Frederic Mishkin; buy the 8th edition, as the 9th is about $170. Its a college textbook and has a lot of excellent information regarding the subject; it is mostly focused on the US, so since you're in the UK it might not provide much regarding your system.
  21. miniConvert thread starter macrumors 68040


    Mar 4, 2006
    Kent, UK - the 'Garden of England'.
    That's not true. When we deposit money with a bank all it does is give them the ability to create new money as loans. They don't directly loan out the money we deposit with them.

    If a bank runs out of banknotes it just brings more in, from other branches or the central source if necessary.

    Most people, however, make withdrawals (and deposits) electronically.

    If too many people withdraw, sell shares, or even if asset values decrease (i.e. property crash), then yes, a bank can, and as we've seen in recent times will, fail.
  22. miniConvert thread starter macrumors 68040


    Mar 4, 2006
    Kent, UK - the 'Garden of England'.
    @rhsgolfer33 - the bank can't lend out the money we've deposited, it needs that to allow it to create the new debt money (loans). If a bank has £1 of deposits and £10 of loans then, lets say we're using the 10% fractional reserve you mentioned previously, that's OK. If it lends that £1 of depositor cash then it can no longer sustain the £10 of loans.

    I think we could discuss the semantics forever.

    But what are your feelings regarding the broader situation? Don't you find it absurd that there's not enough money in existence to repay all of the debt? That if we all paid down our debt, there would be no money?
  23. rhsgolfer33 macrumors 6502a

    Jan 6, 2006
    A bank cannot have $1 of deposits and $10 of loans, you clearly don't understand the concept. Its not a 10:1 multiplier, its a 10% reserve requirement. If a bank takes in a $100 deposit, the bank has the ability to loan $90 of that deposit, it has to hold $10 on reserve as the Fed requires. It doesn't need that cash on hand to create new "debt money", you've bought totally into the BS of that video; the reserve requirement is based on deposits, not on loans. The $100 deposit allows the bank to create a $90 loan in a fractional reserve system. The whole concept of fractional reserve banking is that you only hold a fraction of all deposits whilst loaning out the rest (which does, in effect, create new money). The bank simultaneously holds two claims on that money, one from the person who deposited it and one from the person in loaned $90 of that money to.

    What situation? I think the Fed does a generally good job at what it does. It is able to easily control the money supply when it wants or needs to via things like open market operations. I wouldn't mind if the Fed were more transparent, however, I entirely think it should maintain its independence and should continue to operate. Its quite common in down economies for a few people to start harping on the Fed, this is nothing new and in a few years, once the economy turns around, it will likely all have passed without anything coming of it.

    The thing is, there will be enough money in existence to repay all of the debt because deposit creation continues to happen. When you take out a loan there may not yet be money in the system to repay that loan per se (though I'm not sure I entirely agree with this), however, since that loan will be spent, more deposits will be created, thus more loans and more money will continue to be created via deposit creation. Money creation is a continuous process, its not likes going to stop and there is suddenly not going to be enough money in the system.
  24. miniConvert thread starter macrumors 68040


    Mar 4, 2006
    Kent, UK - the 'Garden of England'.
    Sorry, that's me trying to over-simply it and getting it wrong - not the video, the video is accurate with regard to that. :) A customer's deposit would allow the bank to lend 9/10ths of that amount in new money - but it still doesn't lend out the money the customer deposited. All the money lent is new money. The point is the same.

    Only holding a fraction of a deposit and loaning out the rest wouldn't make new money. The deposit still has to remain intact for that to happen.


    Ok, so you're alright with the fact that right now there's not enough money in circulation to repay all of the debt outstanding - meaning we require an endless process of new loans in order to keep up with the payments on the old ones. But this is the problem:

    The credit crunch was exactly that! The British government had to borrow hundreds of billions of pounds to put into the economy to replace the massive contraction of money in supply as the banks began to fail. If it hadn't have picked up the slack in the 'money as debt creation' process then the result would have been massive deflation and economic ruin as people defaulted on debt on an enormous scale. Wow, what a stable system we've got - all triggered by over-zealous sub-prime mortgage lending in the US and that debt being resold in complex financial products around the world.

    Now, as a result, we have years of even higher taxes and brutal cuts to public spending to look forward to. Sigh. Of course, we'll never repay the hundreds of billions of pounds of government debt - we'll do what we did after WWI and WWII and rely on inflation to debase the pound and make the debt insignificant. Sucks to be a saver!
  25. rhsgolfer33 macrumors 6502a

    Jan 6, 2006
    Ah, but that's where you're wrong, loaning that money does create money. See, when that $90 loan goes out, where does it end up? More than likely it ends up as a deposit at a bank (either the same one or another one). So that bank then takes $9 of the deposit and puts it in reserves and loans out the other $81. Essentially, this creates money because it allows numerous claims on the original $100.

    This is easier to explain if we start off as having the $100 be an open market purchase from by the Fed. When the Fed makes an open market purchase it buys securities from a member bank and deposits the cash into reserves. So say the Fed buys a security from Bank X for $100, the $100 is deposited into the Fed's reserve account. Well, the bank now has $100 in excess reserves which it can lend, so it does. The person that gets that $100 will likely spend it and that $100 will end up back in a bank as a deposit, call this Bank Y. So Bank Y holds $10 of that deposit as reserve and loans out other $90 as in the previous example. That deposit will likely end up in another bank, call this Bank Z. Bank Z then holds $9 as require reserves and lends $81. This has the effect of creating money. That $100 increase in reserves from a Federal Reserve Open Market Purchase creates $1000 of deposits and $1000 of loans. This is how the Fed manipulates the money supply; using open market purchases they can increase the money supply and using open market sales they can decrease the money supply.

    This is also related to the money multiplier. See Money Multiplier and Re-Lending on the wiki page for money creation.

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