rationalskepticism.org

ProVox wrote:UE:
Nice to hear from you. I kept checking for replies but I thought everyone had died!

I thought you put the case for the argument on how banks create money very well. One thing you said I would however question.

Fractional Reserve Banking has been proved by Werner not to be the method by which banks expand (multiply) the money supply. This is supported by the BoE statement that it does not require deposits to generate loans and thus expand the supply. Loans create deposits not the other way round.

FRB implies that a single bank cannot on its own create new money and Werner proved this not to be the case. The bank creates a credit account and, just like a credit account with a Card Company, it does not deposit money in that account. All it has to do is enter a credit limit, a limit usually larger than the limit agreed between bank and borrower because the credit limit has to cover the accumulating compound interest, calculated and added daily to the account.

Werner makes a statement I disagree with, when he says the bank creates money in the borrowers account. It does not work like that. (At least I don’t think so!) The bank simply creates an empty account with a credit limit, again just like a credit card account. It effectively allows you to spend money you do not have BUT ...... interestingly, neither does the bank. It is only when the borrower spends his non-existent money that the new money appears .......... in two places! The first is as the creation of new money when the recipient deposits the borrower’s cheque into his account, as a deposit and a liability to the bank but it also appears at the borrower’s credit account as a DEBIT.

A standard banking software package (a logical assumption?) would ADD a deposit to an account but would subtract a DEBIT from the balance in that account. Thus the account with a balance of zero would have the debit subtracted from zero. The account would go negative and the debt has been created! It must be able to do this to account for overdraughts.

When the borrower repays the loan amount, plus interest, the negative value decreases until it reaches zero again and the debt is settled.

Other than that single point I cannot fault your explanation(s).

How about expanding the scope of the thread and discussing PM’s suggestion of Central Bank created money and a withdrawal of the commercial bank’s current privilege to create electronic money out of thin air as debt (Revision to Banking Charter act 1844) and the separation of commercial and investment banks? (US - Glass Steagall act 1932.... or similar) IMO the idea has a lot of potential ................ much greater than it would first appear related to both Public and Private debt.