Tim, just one point. "... deposit provides the bank with precisely enough
money to lend ..."
The deposit is, by definition, M1 money, and is not reduced when the loan is
made. The loan creates a new deposit, provided the account it is paid to is not
in overdraft. ($100) has become ($100 X 2) New money has been created. I
believe a lot of economists try to disguise this by referring to "The multiplier
effect" rather than calling it creation.
John R.
>From: "Tim Knight" <Tim_Knight@NTLWorld.Com> >Reply-To:
socialcredit@elistas.com >To: <socialcredit@elistas.com> >Subject: [socialcredit]
Bank Administration - What do they Lend >Date: Wed, 27 Apr 2005 15:52:10 +0100 >
>There has been much discussion recently on the list about whether banks 'lend
their deposits' or whatever. It seems to me that these discussions rather miss
the point of modern, debt-based finance. > >With modern, debt-based finance, all
trade/employment is self-financing: > 1.. Initially, the buyer/employer borrows
from the seller/employee (recorded in payables and receivables accounts). > 2..
When the buyer/employer 'pays' the seller/employee via the banking system, the
bank debits the buyer and credits the seller as part of a single, self-contained,
integrated, indivisable,
closed circle of zero-sum double-entry book-keeping postings. >There are no
backward or forward implications. There is no need for an earlier deposit to
provide the bank with enough 'money' to lend to the buyer/employer. There is no
need for the bank to find someone to whom it could lend the seller's/employee's
deposit. In effect, the seller's/employee's deposit provides the bank with
precisely enough 'money' to lend to the buyer/employer, so that the
buyer/employer can 'pay' the seller/employee, so that the seller/employee can
make his deposit - all in a single, self-contained, integrated, indivisable,
closed circle of zero-sum double-entry book-keeping postings. > >Although the
global network of owed-wealth is zero-sum, its capacity to intermediate
individual debts is infinite. There are no economic constraints at all. Without
administrative limits (such as a the fractional
reserve requirements), any tinpot bank could intermediate a virtually-infinite
number of virtually-infinite debts as above. The books would balance. Owed-wealth
assets would be equal to owed-wealth liabilities. > >However, if any of the
owed-wealth assets went belly up, the books would be out of balance, and the
tinpot bank would be unable to honour all of its owed-wealth liabilities. Hence
the need for administrative limits (such as the fractional reserve requirements).
> >Originally, with gold-plus-debt finance, many saw the fractional reserve
system as a 'multiplier' or 'catalyst' in increasing the 'money supply' each time
the gold came back in and went out again. In fact, it never was. It was always a
prudential limiting factor, limiting the total of owed-wealth assets a bank was
allowed to administer to a multiple of gold deposits actually held. More
recently, with
debt-only finance, the fractional reserve system is a prudential administrative
limiting factor; limiting the total of owed-wealth assets a bank was allowed to
administer to a multiple of equity. In all cases, the fractional reserve system
is intended to ensure that if some of the bank's owed-wealth assets go belly-up,
it is the shareholders who suffer rather than the depositors. > > >Best Wishes >
>Tim Knight >Tim_Knight@NTLWorld.Com >
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