From: "Danny Van den Berghe" <[EMAIL PROTECTED]> > This becomes interesting. > From what the banks will pay the interest rate? Where it is going to come > from? > In your example the banks offer an attractive interest rate, say 6%, to > seduce people like gates to bring their gold to the bank as deposit. > Lets suppose there is a money supply of 1000oz gold in this little country, > and the rich people put it in the bank. > At the end of the year their accounts will show a balance of 1060oz, but > there is only 1000oz of gold available... > Hmmm.. problems..
Lets consider a closed economy with a present gold stock of 1 000 oz. (We will suppose that the production of gold and consumption of gold are the same, and that therefore the stock of gold is stable over time). Suppose that the non-gold capital stock (e.g. buildings and factories) was worth 15 000 oz. Suppose that the 1 000 oz was used as coins and that there was no borrowing and lending, and all the capital stock was financed by equity only. And suppose that the return on the capital stock was 10% p.a. This gives an income to capital owners of 1 500 oz p.a. Where does this income come from? Businesses have operating surpluses, whereby they charge more for their output than their input and labour costs. In other words consumers pay for it. Business operating surpluses provides for consumption and replacement of capital, return on capital, and profits. Put in terms of product, the output of the firm is divided between the owners and the suppliers. For example a bakery could produce 15 000 loaves and pay 10 000 loaves to suppliers and keep 5 000 for its owners. Or in money terms, it might take in 150 oz for 15 000 loaves, and pay 100 oz to suppliers and keep 50 oz to its owners. And then the owners and suppliers spend their money on loaves or other goods, so it amounts to the same thing. Now suppose that a bank starts and take deposits and makes loans and holds reserves. Suppose a bank with 50 oz in reserves takes 500 oz in deposits and makes 500 oz in loans. It pays 6% p.a. on its deposits and charges 8% p.a on its loans. So it makes 10 oz in gross profit. If it has costs of 4 oz in costs this gives it a net profit of 6 oz on 50 oz of equity, 12% p.a. Now where does the money come from? The capital owners earn 10 % p.a. on their capital so they get more return on equity from borrowing at 8% p.a. Their money comes from their productive capital. This interest is spit between the bank and the depositors. Now suppose that 19 other banks do the same thing and have the entire gold stock in their vaults. Bank deposits are used as money rather than coins as before. (i.e. the 10 000 oz of deposits act as the medium of payment rather than the 1 000 oz of coin). How does this affect the balance sheets of the participants in the closed economy? The initial stock of wealth was held as 1 000 oz in coin, and 15 000 oz in equity. The new distribution is 8 000 oz in bank depsoits and 8 000 oz in equity. The stock of wealth is the same, the form in which it is held has changed. The value of money is unchanged and bears no relation to the quantity of money. Suppose that the capital stock, with labour and land, produced 10 000 oz p.a. worth of goods. These goods are paid for in money, and their producers get paid in money, which they then use to buy goods. Suppose that 6 500 oz p.a. was paid as compensation of employees and 3 500 oz p.a. was the gross operating surplus. That 3 500 oz p.a. gross operating surplus is allocated between the rent of land, say 1 000 oz p.a., leaving 2 500 oz p.a. Suppose that each year 1 000 oz of the capital stock wore out or was consumed, and that 1 000 oz was invested in new or replacement capital. This leaves 1 500 oz p.a. in return on capital. This funds the 640 oz p.a. in interest payments to banks, which funds the 480 oz p.a. in interest payments on deposits. Interest payments represents payments of output or goods from debtors to creditors. The money is transfered to the creditor, who spends it on the goods produced by the debtor, or another capital owner. So where does the money come from to pay interest? When creditors spend the interest, the debtors get it! So, this analysis shows up two persistent myths: the value of money myth, and the debtor incapacity myth. The monetisation of assets changes the form of wealth from non-monetary to monetary, and so increases the quantity of money. It does not influence the value of money. The value of money is determined by the supply and demand for the monetary asset, i.e. not the stock of money but the flow of the production of money (through mining, the monetisation of the ore) and the consumption of money (through manufacturing goods containing the (demonetised) monetary asset). The quantity of gold determines the interest rate on gold, not the value of gold. The interest rate on gold determines the rate of inflation or deflation, which over time regulates the value of gold and the stock of gold. However this is too many steps for some people to follow -- but that's not my fault, it's just how many steps there are. The debtors and creditors are just like the landlords and leasees. Leasees can pay rent from the money they get from the productive use of scarce land. The payment of rent in money is just the lower cost way of paying, than the payment of the particular output of the land. The landlords receive money, and spend it on the output of land, or whatever they want. The money thus is said to circulate. Payments of money do not change the stock of money, just the ownership of it. In the same way, debtors pay money to creditors, and creditors spend money on the output of debtors or other people. The stock of money does not change as a result of interest payments. David Hillary --- You are currently subscribed to e-gold-list as: [EMAIL PROTECTED] To unsubscribe send a blank email to [EMAIL PROTECTED] Use e-gold's Secure Randomized Keyboard (SRK) when accessing your e-gold account(s) via the web and shopping cart interfaces to help thwart keystroke loggers and common viruses.
