AGENT-784 wrote: Gerry wrote:
AGENT-784 wrote:Gerry wrote:
If you are saying that each other customer has taken the loan for the purpose of writing a cheque, then your whole premise falls apart. If borrower number 1 does not deposit or leave his money in in the bank, that money is not there for the bank to lend to borrower number 2. Either a bank account has money in it or it does not. I'll assume that you know that and don't mean what you are saying here.
In my example, all of the borrowers borrowed the money to write cheques, and therefore would not be earning interest, as you suggest.
Wrong. Banks lend money based on deposits held at the bank. Not on withdrawals. Fractional reserve at 4% means that they can lend 24 times the amount of money that they HOLD. In the examples we have been discussing, if it was only the original $100 deposit that stayed in the bank, fractional reserve at 4% means that $4 is in the vault. They would be limited to a loan of $96 and no more. Your whole progression stops there. If the loaned out money did not remain in the bank, the subsequent loans would not be possible. Look at the math I did in my post above. In each case the amount in reserve is 4% of the amount deposited and staying in the bank. In each case the amount out on loan is 24 times the amount of the reserve.
Why borrow money charged at 8 percent, and leave it with the bank to collect 4 percent. No working person would deliberately do that. But I digress.
Hey, it's your example. Of course no one would do that, although I have borrowed money at 4% and put it back in the same bank into a GIC at 3.5%. But now I disgress. It's only an example. The premise that the fractional reserve critics use is that money lent ends up back into the banking system as a deposit and is therefore the basis for more loans, but they are conveniently forgetting that it is not in the bank for long before it is spent.
Back to the statement above in bold. What borrower #1 does with his money has no impact on the bank's ability to loan to borrower #2. Your assumption is not correct...what I said is what I meant to say. The fractional system allows the banks to create the money for loaning to borrower #2.
No, it does not. If borrower #1 does not keep his money in the bank, there is no basis for the loan to borrower #2. Do the math. 4% fractional reserve.
Savings on hand versus Loans outstanding has validity at a credit union, or similar not-for-profit financial institution. The banks play an entirely different game.
Show me. It's a simple example. 4% reserve as the basis for loans. The money has to stay in order to be lent out again. There is no getting past that.
I have seen tables and graphs which clearly support your assertion very convincingly...but in every instance, it is assumed that the borrower immediately deposits the freshly loaned money back with one bank, or another. This is where we disagree, because, to me, the purpose of taking the loan would be the compelling need to SPEND the money, not give it back to the bank in the form of deposit.
From what I have read, the people who are critical of fractional reserve assert that any money lent out does end up back in the banking system as a deposit. In that way, they agree with you. They are talking about the system as a whole, not just a particular bank. The premise is that even a loan for a car, deposited into the car buyer's account and then spent at a dealership, ends up as a deposit in the manufacturer's account, and then in the supplier to the manufacturer's account, or the worker's in the manufacturer's plant account and thus forms the basis for further loans in the system as a whole. And that is true enough. But the criticism does not account for the fact that this "created" money is in circulation at the behest of many people, only half of whom are bankers. And, they all gain by it. Not to mention, most of those cheques and loans and deposits cancel each other out eventually, minus any actual created wealth along the way. That newly created wealth is "new money" or value and is not backed up necessarily by newly printed currency unless it is ultimately redeemed for currency, which it rarely is.
I have also seen financial ratios where a bank's cash assets versus deposit liabilities is well below one percent. That leads me to two possible conclusions : Either the published ratios are wrong, or the banks were ignoring fractional requirements.
I can't comment. Complex finances are not something I'm good at. Balance sheets are a mystery to me, unless it's my own cheque book.
In the end, I firmly believe that, with a 4 percent reserve, 100 dollars eventually expands into 2400 dollars of loan money.
It could I suppose, depending on the particulars. Hopefully each transaction adds a comparable amount of real wealth to the equation once the cheques, loan repayments, and deposits cancel each other out.
The math formula exists...still trying to track it down. And, you even said yourself that the bank will loan out 24 times what it holds...I say that the bank is holding 100 dollars, while you say the number is 4 dollars.
What I am saying is that if the bank has a $100 deposit, that it holds $4 in reserve and can lend out the $96. To me this is what 4% fractional reserve is. I also consider it entirely reasonable that a bank lends out the money that its depositors keep in the bank. That is how it can afford to pay interest on the deposits. Of course not all deposits earn interest. If I get a pay cheque and deposit it into my chequing account it might sit there for a few days until my mortgage payment is withdrawn, or my car loan, or the cheque to the grocery store, etc. In the meantime, the bank has my "deposit", interest free (depending on the type of account, of course), and can lend it out and earn interest on that money.
My point is that the bank is limited by the fractional reserve monies as to the amount that they can lend. And the fractional reserve is based on the money ON DEPOSIT at any given time. That would be why on any given day that a bank might need to borrow money from another bank to top up its reserves, if there has been more than anticipated withdrawals from their client's accounts.
I understand why people say that money is "created". In a sense it is, because every cheque we all write is money and we treat it as such. A deposit of $100 cash into my bank account can be the basis for many cheques totalling much more than $100 if the payees deposit their cheques and write new ones based on the deposits. Eventually though, they cancel each other out. Most of our "money" is never redeemed for actual Canadian currency. Cheques and loans and other forms of "money" cancel each other out all of the time as the loans are paid off or the cheques are credited to others' accounts. It's just that I don't consider this sinister, or to anyone's particular, evil advantage. We all participate, and we all are advantaged by it.
Good for you that tables and graphs are on your side, while I struggle to find that elusive math formula.
Another thing to consider is that we all create wealth every day. A factory takes in X dollars worth of raw material in a day, pays out another X dollars worth of wages, etc., and the resulting production is worth more than the total of what went in. We all agree on that value or price by paying the requested price for the result of that production. That increased wealth is expressed by us all in dollars and cents. It is new money, but there is no new currency printed that day to account for it. That wealth is expressed only in cheques and deposits. The wealth is still quite real in this case. That "created money" is still quite real. Where it all breaks down is when "wealth" is created by speculation and subterfuge. IMO, that is the cause of our current economic woes.