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Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now h

Here's how banks counterfeit money. You deposit $100. The bank loans out $80 of your money to someone else. They put that money back in the bank. The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180. The bank has now effectively created--that is, counterfeited--$80 in new money. They gave this new money to themselves, and then loaned it out. Since their reserves are still over 20% (or whatever the present reserve requirement is), they keep doing this until 80% of the money is money they have counterfeited and loaned out. And the Fed does give money to banks. They gave loans at 0% interest to Goldman Sachs who then buys government debt with it and earns interest >0%. That is the same as giving them the new money. And that is only one way, but there are others. Another way is by buying government debt from banks using freshly printed money at prices that are necessarily above what the market value would be if there wasn't an institution like the Fed that can print new money any time it wants to buy stuff.

swampthing 15y ago
... except unlike with counterfeiting, when all is said and done (all debts paid and all bank balances withdrawn), the total amount of US dollars in this closed system you describe will still be $100. You are ignoring the balance sheet of the second person (the one the bank lent $80 to) and only looking at that of the bank and the initial depositor. Edit: Wow really, someone downvoted this?
- Astrohacker 15y ago
  No. Suppose the $80 are immediately paid back. The bank just moves the $80 from the loanee's checking account into the bank's own checking account. Total amount of money is now $180. $80 have been created, and is now owned by the bank.
eternal_skeptic 15y ago
So you're calling fractional reserve banking "counterfeiting". I assume you oppose it. Let's analyze your argument. Fractional lending doesn't particularly benefit the rich. A lot (IIRC, the vast majority) of the current millionaires in the US are 1st generation. They got their money in their lifetime. The vast majority therefore required a loan at some point, to fund their money-making venture. Even the evil financiers in virtually all cases get rich by leveraged (i.e. loan-fueled) investments. So at least for those people who are able to help successful businesses - by creating, funding, or helping them in any way - fractional lending is a good thing. The vast majority, or at least a substantial number, of poor people who are now rich were able to do so because at some point, they received a loan of money that fractional reserve banking made more readily available. You can still ban fractional lending, pulling the financial system back 500 or so. By doing that, you will get all the effects of the system that existed at that time: limited money supply, reduced lending, limited allocation of funds and investment to grow businesses, therefore stunted growth, less innovation, reduced social mobility, etc, etc. Are you sure that's what you want? Because you haven't explained why fractional lending is bad yet, so it seems like we'll be sacrificing an awful lot for unclear benefit. In all seriousness, a community focused on creating new businesses is the last place I'd expect to see fractional lending attacked so severely. Edit: phrasing.
- rayiner 15y ago
  The fact that current millionaires are first generation is kind of inapposite. We haven't really been on a fractional reserve system for long enough to really create generations of financial dynasties.
marcamillion 15y ago
Ok...so I am going to bite. Fractional reserve banking is the process you described. Give the bank $100, it is then legally obliged to only keep X%, let's say 10%. Hence, why most - if not all - banks today are vulnerable to a 'run on the bank', because banks never have 100% of outstanding liabilities immediately liquid. However, that being said, you make it sound as if those banks are lending/giving that money to rich Saudi princes who squander it. They are not. They are lending it to entrepreneurs that have built a business to X point that want to expand. Those entrepreneurs take that money at a relatively low interest rate (in America anyway) and invest it into their company, believing that the return they can generate is higher than the interest they pay. Those entrepreneurs in turn hire people and when they are successful, they pay themselves a lot of money. They can also sell the business at some point in the future. All the while, they pay back the bank the principal + interest and they have their business. This is the way it should work and this is the way it works about 80% of the time. The other way fractional reserve banking works is that those same banks, end up using some of those funds to invest. They invest in a diversity of assets - stocks, gov't debt, etc. They also invest in an asset class known as 'Alternative Assets'. You know what type of fund is a major beneficiary of raising money from banks and large financial institutions by fulfilling the alternative asset type category? Venture Capital funds. Sure, you can argue that there is a bubble in Silicon Valley, but VC funds have been - undoubtedly - a major part in the major creation of MANY things we take for granted today. From Fairchild Semiconductor to Apple to Intel to Facebook, Twitter, Microsoft (eventually), Cisco to FedEx, UPS, McDonalds, Burger King, to many others in between. Guess who got rich along the way? All those founders + many employees. Not just in earning good wages, but also in stock options and experience for their next job. So let's just cut this crap about fractional reserve banking being the bane of society. Sure, fiat currency, can and does lead to inflation - but inflation is the cost of technological advancement. If there was no fiat currency, we (the ENTIRE world) would have gone through the worst depression we have ever seen - rather than just a 'Great Recession'. It would make the 1930s look like a blip in the radar. It is precisely because the fiscal and monetary authorities were able to take those drastic measures to save the global economic system, that we can even be discussing this today. It's also easy to dismiss the crisis as being caused by Wall Street, but...again...progress and advancement comes with a price. Also, if you hate fiat currency so much and you think the world would see less recessions as a result of going back to the gold standard or backed by some finite amount of money, how about you take a look at history for a sec: http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite... As you can see, the list of recessions before 1960 is pretty extensive. America 'broke' the Bretton Woods system in 1968 - http://en.wikipedia.org/wiki/Bretton_Woods_system http://en.wikipedia.org/wiki/Bretton_Woods_system - and that essentially marked the end of using a reserve currency backed by a physical good (gold). Since then, there have been recessions but they haven't been as severe as many before the great depression. The 1800s were absolutely BRUTAL when it comes to economic recessions. Going through that list, it feels as if almost every year was a recession. Kinda insane. I apologize if this reply comes across as very terse and perhaps facetious, but I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight. Every system has it's drawbacks, and has its pros. The fiat system is one where the global economic systems evolved into it - not because bankers wanted to get rich, but because policymakers realized that by being able to print more currency on-demand, it would soften economic pullbacks. What this 2008 credit crisis has shown us, is that they were DEAD right. We can debate the causes of the crisis until the cows come home, but what cannot be debated is that the policymakers (from Hank Paulson, Geithner, Bernanke, Sheila Beir, Jean-Claude Trichet, Mervyn King, and everyone else around them in their jurisdictions) made the right choices and used the right tools - because the world economy has truly been saved from possibly the worst recession we have ever seen. The only thing worse than what could have been, is what could have been had America defaulted on it's debts - but that's another argument for another day. Oh, and when the Fed prints new money and earns interest on that new money, if they earn any profit you know who gets that? You. The taxpayer. It's called seigniorage - http://en.wikipedia.org/wiki/Seigniorage http://en.wikipedia.org/wiki/Seigniorage . At the end of the Fiscal year, if the Fed has profited from it's monetary activities during the year, it writes a fat ass check to Uncle Sam. Sometimes in the $50B range. Imagine ANY corporation paying a tax bill that large. Edit: Although this isn't terribly up-to-date, ehre is a nice paper explaining seigniorage and how much the US gov't made over the last 50 years up to the 90s - https://docs.google.com/viewer?a=v&q=cache:iB65wWXSx3oJ:research.stlouisfed.org/publications/review/92/03/Seigniorage_Mar_Apr1992.pdf+seigniorage+federal+reserve&hl=en&gl=jm&pid=bl&srcid=ADGEESiIMVMX_ddPJTa6XmPdOFaIuATvwQKXgbIe-9vOBmz2M_fg3nA41dv-M0GwNLAwjALdV_y9DuTrhfCbXzeMqJ_8nx1GmbTyiwSviRDlyprgQbMBwyCDnFCWi8JHN1Q3OFuN6YJe&sig=AHIEtbTwEN5WhXznwkbzgas9x37C7Qs-iQ https://docs.google.com/viewer?a=v&q=cache:iB65wWXSx3oJ:... Edit 2: Here is a nice summary of the Feds performance and how much it paid over to the US Treasury in 2009 and 2010 if anyone wants to debate their performance, oh and this is ON TOP of them saving the world economy (basically single handedly) - http://www.marketwatch.com/story/the-feds-annual-profit-surges-to-817-billion-2011-03-22 http://www.marketwatch.com/story/the-feds-annual-profit-surg...
andylei 15y ago
> The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180 you should learn about accounting. the loanee also has an $80 debt to the bank. no money is created. in fact, even if the bank didn't exist, in your fantasy land, basically everyone would be "money counterfeiters". let's construct a scenario. when you loan your aunt $100, you give her $100, and then you sign a little contract with her indicating she owes you $100. you now have an asset worth $100 (the contract), and she now has a fresh $100 bill. oh my god, you just magically created $100! you're a counterfeiter! when you deposit money in a bank, you loan them your money, which they then loan out. your checking account is essentially a low risk, pooled, variably timed bond that you buy from the bank. i have a question for you though. do you believe in free markets? if so, then why do you oppose fractional reserve banking, which, at its fundamental core, is a contractual agreement between two parties?

swampthing 15y ago

... except unlike with counterfeiting, when all is said and done (all debts paid and all bank balances withdrawn), the total amount of US dollars in this closed system you describe will still be $100. You are ignoring the balance sheet of the second person (the one the bank lent $80 to) and only looking at that of the bank and the initial depositor. Edit: Wow really, someone downvoted this?

Astrohacker 15y ago
No. Suppose the $80 are immediately paid back. The bank just moves the $80 from the loanee's checking account into the bank's own checking account. Total amount of money is now $180. $80 have been created, and is now owned by the bank.

eternal_skeptic 15y ago

So you're calling fractional reserve banking "counterfeiting". I assume you oppose it. Let's analyze your argument. Fractional lending doesn't particularly benefit the rich. A lot (IIRC, the vast majority) of the current millionaires in the US are 1st generation. They got their money in their lifetime. The vast majority therefore required a loan at some point, to fund their money-making venture. Even the evil financiers in virtually all cases get rich by leveraged (i.e. loan-fueled) investments. So at least for those people who are able to help successful businesses - by creating, funding, or helping them in any way - fractional lending is a good thing. The vast majority, or at least a substantial number, of poor people who are now rich were able to do so because at some point, they received a loan of money that fractional reserve banking made more readily available. You can still ban fractional lending, pulling the financial system back 500 or so. By doing that, you will get all the effects of the system that existed at that time: limited money supply, reduced lending, limited allocation of funds and investment to grow businesses, therefore stunted growth, less innovation, reduced social mobility, etc, etc. Are you sure that's what you want? Because you haven't explained why fractional lending is bad yet, so it seems like we'll be sacrificing an awful lot for unclear benefit. In all seriousness, a community focused on creating new businesses is the last place I'd expect to see fractional lending attacked so severely. Edit: phrasing.

rayiner 15y ago
The fact that current millionaires are first generation is kind of inapposite. We haven't really been on a fractional reserve system for long enough to really create generations of financial dynasties.

marcamillion 15y ago

Ok...so I am going to bite. Fractional reserve banking is the process you described. Give the bank $100, it is then legally obliged to only keep X%, let's say 10%. Hence, why most - if not all - banks today are vulnerable to a 'run on the bank', because banks never have 100% of outstanding liabilities immediately liquid. However, that being said, you make it sound as if those banks are lending/giving that money to rich Saudi princes who squander it. They are not. They are lending it to entrepreneurs that have built a business to X point that want to expand. Those entrepreneurs take that money at a relatively low interest rate (in America anyway) and invest it into their company, believing that the return they can generate is higher than the interest they pay. Those entrepreneurs in turn hire people and when they are successful, they pay themselves a lot of money. They can also sell the business at some point in the future. All the while, they pay back the bank the principal + interest and they have their business. This is the way it should work and this is the way it works about 80% of the time. The other way fractional reserve banking works is that those same banks, end up using some of those funds to invest. They invest in a diversity of assets - stocks, gov't debt, etc. They also invest in an asset class known as 'Alternative Assets'. You know what type of fund is a major beneficiary of raising money from banks and large financial institutions by fulfilling the alternative asset type category? Venture Capital funds. Sure, you can argue that there is a bubble in Silicon Valley, but VC funds have been - undoubtedly - a major part in the major creation of MANY things we take for granted today. From Fairchild Semiconductor to Apple to Intel to Facebook, Twitter, Microsoft (eventually), Cisco to FedEx, UPS, McDonalds, Burger King, to many others in between. Guess who got rich along the way? All those founders + many employees. Not just in earning good wages, but also in stock options and experience for their next job. So let's just cut this crap about fractional reserve banking being the bane of society. Sure, fiat currency, can and does lead to inflation - but inflation is the cost of technological advancement. If there was no fiat currency, we (the ENTIRE world) would have gone through the worst depression we have ever seen - rather than just a 'Great Recession'. It would make the 1930s look like a blip in the radar. It is precisely because the fiscal and monetary authorities were able to take those drastic measures to save the global economic system, that we can even be discussing this today. It's also easy to dismiss the crisis as being caused by Wall Street, but...again...progress and advancement comes with a price. Also, if you hate fiat currency so much and you think the world would see less recessions as a result of going back to the gold standard or backed by some finite amount of money, how about you take a look at history for a sec: http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite... As you can see, the list of recessions before 1960 is pretty extensive. America 'broke' the Bretton Woods system in 1968 - http://en.wikipedia.org/wiki/Bretton_Woods_system http://en.wikipedia.org/wiki/Bretton_Woods_system - and that essentially marked the end of using a reserve currency backed by a physical good (gold). Since then, there have been recessions but they haven't been as severe as many before the great depression. The 1800s were absolutely BRUTAL when it comes to economic recessions. Going through that list, it feels as if almost every year was a recession. Kinda insane. I apologize if this reply comes across as very terse and perhaps facetious, but I am SICK and TIRED of people bashing the current fiat system when there is no other viable alternative in sight. Every system has it's drawbacks, and has its pros. The fiat system is one where the global economic systems evolved into it - not because bankers wanted to get rich, but because policymakers realized that by being able to print more currency on-demand, it would soften economic pullbacks. What this 2008 credit crisis has shown us, is that they were DEAD right. We can debate the causes of the crisis until the cows come home, but what cannot be debated is that the policymakers (from Hank Paulson, Geithner, Bernanke, Sheila Beir, Jean-Claude Trichet, Mervyn King, and everyone else around them in their jurisdictions) made the right choices and used the right tools - because the world economy has truly been saved from possibly the worst recession we have ever seen. The only thing worse than what could have been, is what could have been had America defaulted on it's debts - but that's another argument for another day. Oh, and when the Fed prints new money and earns interest on that new money, if they earn any profit you know who gets that? You. The taxpayer. It's called seigniorage - http://en.wikipedia.org/wiki/Seigniorage http://en.wikipedia.org/wiki/Seigniorage . At the end of the Fiscal year, if the Fed has profited from it's monetary activities during the year, it writes a fat ass check to Uncle Sam. Sometimes in the $50B range. Imagine ANY corporation paying a tax bill that large. Edit: Although this isn't terribly up-to-date, ehre is a nice paper explaining seigniorage and how much the US gov't made over the last 50 years up to the 90s - https://docs.google.com/viewer?a=v&q=cache:iB65wWXSx3oJ:research.stlouisfed.org/publications/review/92/03/Seigniorage_Mar_Apr1992.pdf+seigniorage+federal+reserve&hl=en&gl=jm&pid=bl&srcid=ADGEESiIMVMX_ddPJTa6XmPdOFaIuATvwQKXgbIe-9vOBmz2M_fg3nA41dv-M0GwNLAwjALdV_y9DuTrhfCbXzeMqJ_8nx1GmbTyiwSviRDlyprgQbMBwyCDnFCWi8JHN1Q3OFuN6YJe&sig=AHIEtbTwEN5WhXznwkbzgas9x37C7Qs-iQ https://docs.google.com/viewer?a=v&q=cache:iB65wWXSx3oJ:... Edit 2: Here is a nice summary of the Feds performance and how much it paid over to the US Treasury in 2009 and 2010 if anyone wants to debate their performance, oh and this is ON TOP of them saving the world economy (basically single handedly) - http://www.marketwatch.com/story/the-feds-annual-profit-surges-to-817-billion-2011-03-22 http://www.marketwatch.com/story/the-feds-annual-profit-surg...

andylei 15y ago

> The bank now has $100 - all your money. But your checking account says $100, and the loanee's checking account says $80, for a total of $180 you should learn about accounting. the loanee also has an $80 debt to the bank. no money is created. in fact, even if the bank didn't exist, in your fantasy land, basically everyone would be "money counterfeiters". let's construct a scenario. when you loan your aunt $100, you give her $100, and then you sign a little contract with her indicating she owes you $100. you now have an asset worth $100 (the contract), and she now has a fresh $100 bill. oh my god, you just magically created $100! you're a counterfeiter! when you deposit money in a bank, you loan them your money, which they then loan out. your checking account is essentially a low risk, pooled, variably timed bond that you buy from the bank. i have a question for you though. do you believe in free markets? if so, then why do you oppose fractional reserve banking, which, at its fundamental core, is a contractual agreement between two parties?