|Subject:||[socialcredit] John, it's all fungible bank credit|
|Date:||Monday, July 2, 2007 22:06:38 (-0700)|
|From:||william_b_ryan <william_b_ryan @.....com>
[John Hermann] "Central banks advance 'reserve
credit'. Commercial banks advance 'monetary credit'.
There is an important difference - reserves are not
part of the money supply."
John, it's all fungible bank credit--what both central
banks and their member banks create. The demarcation
between "reserve credit" and "monetary credit" is
fictitious. The credit that both create become
deposits--in the case of the central banks some of
which being in the form of securities called bank
notes, which can be thought of as deposits we may
carry in our pockets rather than in the bank. They
are merely bearer checks issued by the central bank.
The purchase of securities by banks is the functional
equivalent to loans. The theorem is that loans create
deposits, and the repayment of loans cancel deposits.
So, when the central bank purchases securities by
tendering its checks, deposits are being created, as
with any bank. These purchases now are mostly of
"repos" issued by the member banks themselves rather
than government securities, although the textbooks
continue to state otherwise.
The difference is that the check that the central bank
issues can have no problem clearing, inasmuch as the
central bank is the clearing bank for its member
banks. It has no need therefore for reserves to back
its deposits. We are assuming of course a closed
system. Its check, when deposited by its holder into
a member bank, will come back to it, and the member
bank's clearing or reserve account will be credited as
a matter of accounting essentially at the same time
and in the same amount that the member bank's
depositing customer's account is credited by the
member bank. Reserves are not counted as being part
of the money supply because that would be double
I wanted to comment briefly on your link to an essay
by William Hummel at his website, which greatly
disappointed me. The first third of the essay is pure
Warren Mosler crank theory and is quite worthless.
The rest is utter confusion.
This morning he posted this nonsense to his personal
"It is an illusion that banks create the money they
lend. When a bank issues a deposit to fund a loan, the
borrower receives a credit against the bank's capital,
in particular its reserves. When the borrower writes
a check against the deposit, the bank must surrender
that much in reserves to the payee's bank. The bank
will then hold a claim against the borrower in
exchange for having surrendered that much in reserves.
If the bank cannot collect on its claim, it loses
capital equal to the amount of the loan."
There is just so much wrong with this. He starts from
a false premise. The borrower does not receive a
credit against the bank's capital, nor its reserves.
It is simply a credit by the bank to the borrower's
bank account. The corresponding debit is to the
borrower's loan account, a receivable of the bank.
Credits equal debits from the transaction.
The theorem that loans create deposits describes a
macroeconomic, or statistical process, pertaining to
the banking system as a whole. You really can't
analyze the concept by looking at arbitrarily selected
transactions at a single or even two banks. He is
looking only at part of the process, and fallaciously
abstracting to the whole. He looks at the transfer
from bank A with the equal transfer to bank B in the
particular transaction. But he ignores the
statistical transfer from bank B to bank A resulting
from loans by bank B. Both banks are creating
deposits through loans and deposits are being
transferred between them.
--- John Hermann <email@example.com> wrote:
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