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Can someone provide an explanation of how this works or provide a reference with an overview? The article is light on details. I assume this means preventing

by zombees 11y ago

Can someone provide an explanation of how this works or provide a reference with an overview? The article is light on details. I assume this means preventing banks extending credit against deposits that don't necessarily exist? EDIT: http://ecedweb.unomaha.edu/ve/library/HBCM.PDF http://ecedweb.unomaha.edu/ve/library/HBCM.PDF it seems to be more about loans being spent and thus the spent money being at another bank and loaned out again

phaemon 11y ago
It seems clear enough: " limit financial speculation by requiring private banks to hold 100pc reserves against their deposits. " Normally, banks aren't required to actually have the money they lend out, so when a loan is credited to your account that money is created (and when you repay the loan, the money is destroyed). In many countries banks are required to hold a certain amount reserve (I think it's about 1.5% in the USA - the UK doesn't have such a requirement), so this is simply requiring that the banks have 100%, which means banks can only lend money they actually have. EDIT: Did you mean how does the whole money creation thing work at all? There's a very clear guide at: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... It's for the UK, but pretty much all modern countries work in a similar way.
- rayiner 11y ago
  That's not how fractional reserve banking works. Say I deposit $100 in a bank. The bank has $100. Now, say the law requires a 10% reserve. They can lend $90--which they actually have. That person takes the loan, and deposits it in their bank. Now, there are $190 in deposits from the original $100. But the bank never lent money it didn't have. Instead, the money creation comes from the fact I get to treat my $100 deposit as good as cash on hand, even though 90% of it has been lent to another person.
  - chimeracoder 11y ago
    Put another way, if everyone tried to withdraw all of their money from the bank at the same point, 90% (100% - 10% = 90%) of people's cash assets would be wiped out[0]. This is known as a bank run, or (when it happens to lots of banks simultaneously) a bank panic. During the Great Depression, banks were frozen, and people were barred from withdrawing money from the bank for a certain period of time. The motivation for doing this was to halt the bank panics that were occurring. Raising the required reserve ratio has very far-reaching implications. Broadly speaking, it tightens liquidity, making loans more difficult to come by, which decreases investment in infrastructure. This slows economic growth, because it's harder to find capital with which to start businesses, and it's harder for people to obtain money to purchase a home, further their education, etc. [0] in the aggregate; not everyone would lose 90%, but 90% of aggregate cash assets would be.
    - seivan 11y ago
      I take it those with large loans would be affected as potential buyers couldn't loan as much for real estate. However it also seems like it would be more sustainable.
    - PhantomGremlin 11y ago
      This is known as a bank run George Bailey explained this, in one of the greatest movies ever made.[1] CHARLIE I'll take mine now. GEORGE No, but you . . . you . . . you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house . . . (to one of the men) . . . right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. I have absolutely no idea what Switzerland will wind up with if they vote for this. But it certainly won't be banking as we know it. [1] http://www.aellea.com/script/itsawonderfullife.txt http://www.aellea.com/script/itsawonderfullife.txt
    - BlackFly 11y ago
      The loans are easy to come by because the fractional reserve requirements allow the banks to create money which they use to provide loans. When the government creates the same amount of money and directly spends it on infrastructure as opposed to loaning it to infrastructure providers... what changes other than the fact that the infrastructure becomes cheaper to the public since the provider does not need to pay back the loan?
  - mg1982 11y ago
    Additionally, this $90 deposit can then be treated as 'real' money and loaned out according to the same 10% reserve - $81. In the manner of a babushka doll, this can be deposited and loaned out ($72.90, $65.61, $59.05... etc.) until the amount becomes vanishingly small. Relevant section from 'Money as Debt': https://youtu.be/jqvKjsIxT_8?t=12m57s https://youtu.be/jqvKjsIxT_8?t=12m57s
    - slv77 11y ago
      While this is a textbook example reserve requirements haven't been a significant constraint on bank monetary creation since the 80's. The Bretton Woods system put in place after WWII and Nixon closing the gold window in the 1970's made reserves a less unique. The creation of non-bank demand deposits like money market funds put the nail in the coffin of using reserve requirements to manage the amount of money in the economy. Today the biggest constraint to monetary creation is bank capital ratios. Under current rules banks have to have roughly 1 dollar if equity for every 12 dollars of loans and that can vary based on the type of loans the banks make.
  - phaemon 11y ago
    No, read the pdf I linked. Yours is the first misconception they address. In summary, though, if we imagine that the bank is required to hold 10% reserve: I go to the bank and get a loan for $900. This is credited to my account. There is no requirement for this money to actually exist. The same day, you go and deposit $100 in actual dollar bills. Your account is credited with $100. The bank's liabilities are now $100 (in your account) plus $900 (in my account) for a total of $1000. The banks reserve is $100 (real dollar bills you gave them). This is 10% reserve so the bank is legally OK. $900 has been created. That's how it works. More detail in the PDF I linked.
    - poof131 11y ago
      Thanks for the pdf and this comment. The source seems reputable and it definitely changed my understanding of how money is created. I thought banks could only lend the money they took in through deposits or borrowing and had no idea they had the authority to actually create money directly.
      - RobertoG 11y ago
        It's a very common misconception. It's interesting to realize that you can create money in the same way that a bank. Just give your friend a promise that you will pay him in the future and he could use it as money with third parties. Most people wouldn't accept it, but that is a different issue. If somebody is in the mood to destroy more preconceptions about economy I recommend Warren Mosler 'Seven deadly innocent frauds of economic policy', it can be a good introduction to Modern Monetary Theory: http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
        blue1 11y ago
        > Deadly Innocent Fraud #1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow. Unfortunately, in the (deadly?) Eurozone this is indeed how it works.
- sambe 11y ago
  I've skimmed this before and have to say I read it as the BoE absolving itself of responsibility. The popular stance is "blame the banks" and some people even believe that (commercial) bankers just print money (for themselves) whenever they feel like getting a nicer car. Several places the paper state that the ultimate control of money creation is monetary policy i.e. not the banks. This is what I'd always thought before this idea of commercial banks having complete freedom became popular. It also states that the interest rate set by the central bank decides the rate of the loans, and thus the demand for them, and thus the amount of creation. Interestingly the link between the central bank rate and the commercial rate is not stated (I did not read it end-to-end). I always thought that ultimately they had to borrow from the central bank to remain solvent/meet reserve ratios. And that goes down as a debt to the central bank, whereas the central bank can genuinely create that loan from nowhere and is doing the creation.
pbreit 11y ago
This article explains it a bit better: http://www.bloombergview.com/articles/2015-11-09/what-if-swiss-banks-tried-100-percent-reserve-banking- http://www.bloombergview.com/articles/2015-11-09/what-if-swi... Banks would essentially just facilitate transactions and act as conduits between borrowers and the central bank. I don't think it makes much sense for country like USA that places such a high importance on free markets and liberty.
conistonwater 11y ago
Tobin's Commercial Banks as Creators of 'Money' (1963) is a pretty readable and interesting explanation: http://courses.umass.edu/econ711-rpollin/Tobin--Commercial%20Banks%20as%20Creators%20of%20Money.pdf http://courses.umass.edu/econ711-rpollin/Tobin--Commercial%2...
stefantalpalaru 11y ago
If you can read German, French, Italian or trust automated translation, check out the proposal's official site: http://www.vollgeld-initiative.ch/ http://www.vollgeld-initiative.ch/

by zombees 11y ago

phaemon 11y ago

It seems clear enough: " limit financial speculation by requiring private banks to hold 100pc reserves against their deposits. " Normally, banks aren't required to actually have the money they lend out, so when a loan is credited to your account that money is created (and when you repay the loan, the money is destroyed). In many countries banks are required to hold a certain amount reserve (I think it's about 1.5% in the USA - the UK doesn't have such a requirement), so this is simply requiring that the banks have 100%, which means banks can only lend money they actually have. EDIT: Did you mean how does the whole money creation thing work at all? There's a very clear guide at: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf http://www.bankofengland.co.uk/publications/Documents/quarte... It's for the UK, but pretty much all modern countries work in a similar way.

rayiner 11y ago
That's not how fractional reserve banking works. Say I deposit $100 in a bank. The bank has $100. Now, say the law requires a 10% reserve. They can lend $90--which they actually have. That person takes the loan, and deposits it in their bank. Now, there are $190 in deposits from the original $100. But the bank never lent money it didn't have. Instead, the money creation comes from the fact I get to treat my $100 deposit as good as cash on hand, even though 90% of it has been lent to another person.
- chimeracoder 11y ago
  Put another way, if everyone tried to withdraw all of their money from the bank at the same point, 90% (100% - 10% = 90%) of people's cash assets would be wiped out[0]. This is known as a bank run, or (when it happens to lots of banks simultaneously) a bank panic. During the Great Depression, banks were frozen, and people were barred from withdrawing money from the bank for a certain period of time. The motivation for doing this was to halt the bank panics that were occurring. Raising the required reserve ratio has very far-reaching implications. Broadly speaking, it tightens liquidity, making loans more difficult to come by, which decreases investment in infrastructure. This slows economic growth, because it's harder to find capital with which to start businesses, and it's harder for people to obtain money to purchase a home, further their education, etc. [0] in the aggregate; not everyone would lose 90%, but 90% of aggregate cash assets would be.
  - seivan 11y ago
    I take it those with large loans would be affected as potential buyers couldn't loan as much for real estate. However it also seems like it would be more sustainable.
  - PhantomGremlin 11y ago
    This is known as a bank run George Bailey explained this, in one of the greatest movies ever made.[1] CHARLIE I'll take mine now. GEORGE No, but you . . . you . . . you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house . . . (to one of the men) . . . right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. I have absolutely no idea what Switzerland will wind up with if they vote for this. But it certainly won't be banking as we know it. [1] http://www.aellea.com/script/itsawonderfullife.txt http://www.aellea.com/script/itsawonderfullife.txt
  - BlackFly 11y ago
    The loans are easy to come by because the fractional reserve requirements allow the banks to create money which they use to provide loans. When the government creates the same amount of money and directly spends it on infrastructure as opposed to loaning it to infrastructure providers... what changes other than the fact that the infrastructure becomes cheaper to the public since the provider does not need to pay back the loan?
- mg1982 11y ago
  Additionally, this $90 deposit can then be treated as 'real' money and loaned out according to the same 10% reserve - $81. In the manner of a babushka doll, this can be deposited and loaned out ($72.90, $65.61, $59.05... etc.) until the amount becomes vanishingly small. Relevant section from 'Money as Debt': https://youtu.be/jqvKjsIxT_8?t=12m57s https://youtu.be/jqvKjsIxT_8?t=12m57s
  - slv77 11y ago
    While this is a textbook example reserve requirements haven't been a significant constraint on bank monetary creation since the 80's. The Bretton Woods system put in place after WWII and Nixon closing the gold window in the 1970's made reserves a less unique. The creation of non-bank demand deposits like money market funds put the nail in the coffin of using reserve requirements to manage the amount of money in the economy. Today the biggest constraint to monetary creation is bank capital ratios. Under current rules banks have to have roughly 1 dollar if equity for every 12 dollars of loans and that can vary based on the type of loans the banks make.
- phaemon 11y ago
  No, read the pdf I linked. Yours is the first misconception they address. In summary, though, if we imagine that the bank is required to hold 10% reserve: I go to the bank and get a loan for $900. This is credited to my account. There is no requirement for this money to actually exist. The same day, you go and deposit $100 in actual dollar bills. Your account is credited with $100. The bank's liabilities are now $100 (in your account) plus $900 (in my account) for a total of $1000. The banks reserve is $100 (real dollar bills you gave them). This is 10% reserve so the bank is legally OK. $900 has been created. That's how it works. More detail in the PDF I linked.
  - poof131 11y ago
    Thanks for the pdf and this comment. The source seems reputable and it definitely changed my understanding of how money is created. I thought banks could only lend the money they took in through deposits or borrowing and had no idea they had the authority to actually create money directly.
    - RobertoG 11y ago
      It's a very common misconception. It's interesting to realize that you can create money in the same way that a bank. Just give your friend a promise that you will pay him in the future and he could use it as money with third parties. Most people wouldn't accept it, but that is a different issue. If somebody is in the mood to destroy more preconceptions about economy I recommend Warren Mosler 'Seven deadly innocent frauds of economic policy', it can be a good introduction to Modern Monetary Theory: http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
      - blue1 11y ago
        > Deadly Innocent Fraud #1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow. Unfortunately, in the (deadly?) Eurozone this is indeed how it works.
sambe 11y ago
I've skimmed this before and have to say I read it as the BoE absolving itself of responsibility. The popular stance is "blame the banks" and some people even believe that (commercial) bankers just print money (for themselves) whenever they feel like getting a nicer car. Several places the paper state that the ultimate control of money creation is monetary policy i.e. not the banks. This is what I'd always thought before this idea of commercial banks having complete freedom became popular. It also states that the interest rate set by the central bank decides the rate of the loans, and thus the demand for them, and thus the amount of creation. Interestingly the link between the central bank rate and the commercial rate is not stated (I did not read it end-to-end). I always thought that ultimately they had to borrow from the central bank to remain solvent/meet reserve ratios. And that goes down as a debt to the central bank, whereas the central bank can genuinely create that loan from nowhere and is doing the creation.

pbreit 11y ago

This article explains it a bit better: http://www.bloombergview.com/articles/2015-11-09/what-if-swiss-banks-tried-100-percent-reserve-banking- http://www.bloombergview.com/articles/2015-11-09/what-if-swi... Banks would essentially just facilitate transactions and act as conduits between borrowers and the central bank. I don't think it makes much sense for country like USA that places such a high importance on free markets and liberty.

conistonwater 11y ago

Tobin's Commercial Banks as Creators of 'Money' (1963) is a pretty readable and interesting explanation: http://courses.umass.edu/econ711-rpollin/Tobin--Commercial%20Banks%20as%20Creators%20of%20Money.pdf http://courses.umass.edu/econ711-rpollin/Tobin--Commercial%2...

stefantalpalaru 11y ago

If you can read German, French, Italian or trust automated translation, check out the proposal's official site: http://www.vollgeld-initiative.ch/ http://www.vollgeld-initiative.ch/