On Friday 22 Aug 2003 5:52 pm, Bill wrote: > A single bank in a multi-bank system does not create > net new deposits by itself when it grants loans. The > concept applies to the banking system acting in > unified whole as if it were one big bank with many > branches. ------------------------------
Thanks, Bill, for this. I have long been troubled by the fairly simplistic statement that �an individual loan creates money and the repayment of that individual loan cancels money.� Some little knowledge of our own South African Reserve Bank tells me that the matter is far mor complex than that. For the bulk of their liquidity requirements, individual banks (through their main branch) trade on the Money Market, and only when money is in short supply do the banks bid for credit at the the Reserve Bank auction. Meanwhile, the Reserve Bank employs all manner of instruments to regulate the liquidity in the system by taking money out when their is an over-supply and putting it back when there is a short supply, acting carefully to maintain the money supply at a level necessary to achieve interest rate targets, which in turn regulate the demand for cash, which circles back to interest rates. Very complex. What I am not clear on is where exactly the new money is created, and how it enters the money supply. I think, but I may be wrong, that it comes from Treasury bills, Land Bank bills, central government bonds and/or Reserve Bank debentures? Could this be correct? Anyway, thanks. I feel a bit more confident concerning this most fundamental concept in the SC argument. Jessop Sutton -------------------------- > Douglas certainly wasn't the first to observe that > loans create deposits, though he did much to promote > the concept among his contemporaries. The "math" by > the way is from Douglas not me. Most economists-- > especially those who call themselves "Post > Keynesian," now accept the concept. > > A single bank in a multi-bank system does not create > net new deposits by itself when it grants loans. The > concept applies to the banking system acting in > unified whole as if it were one big bank with many > branches. > > Individual bankers can't see this because they > themselves individually hold deposits with other > banks that cover withdrawals from their individual > banks. In the modern system those deposits are kept > with the central bank. Earlier, a "country" bank > might have kept its account with a "city" bank. > Typically, when an individual banker receives payment > on a loan, it results in a credit to his account at > the central bank. To him the money therefore "goes > somewhere" and is definitely not cancelled. > > So there is central bank credit and commercial bank > credit. Central bank credit is sometimes called M0 > or HPM--"high powered money." Commercial bank credit > in checking accounts is simply called M1. > > It is all of it completely interchangeable and > fungible bank credit that derives from loans (mostly > but not necessarily) by the central bank and the > commercial banks acting together. > > The concept is meaningful only as a rate--the rate of > flow of loans in the aggregate as compared to the > rate of flow in repayment in the aggregate. If the > rate of loans is exceeding the rate of repayment-- > money is being created by banks. > > It is not meaningful to say that an individual loan > creates money and the repayment of that individual > loan cancels money. > > > > --------- Original Message --------- > > DATE: Fri, 22 Aug 2003 14:10 +0 > From: [EMAIL PROTECTED] > To: [EMAIL PROTECTED] > Cc: [EMAIL PROTECTED] > > >Dear William. > > > >Like most people that have been exposed to Social Credit ideas, and have > > not rejected them, I accepted for a long time the statement you repeat > > that "Loans create deposits, and the repayment of loans cancels > > deposits", meant that money, after its creation, could be considered > > Un-created. > > > >Only after being challenged by John Tomlinson, a heretical practising > > banker, another colonial, now living in civilised Oxford, did I come to > > accept that no banker could face the prospect of having to write off his > > creation just because some miscreant had the temerity to pay off their > > debt. > > > >John patiently stuck to his attempt to explain the reality to me, and to > > John Hotson who he was in dispute with on this issue at the time. He > > explained that in point of fact this was yet another deviation from the > > accounting norms that bankers indulged in, and the returned debts were in > > fact not "destroyed", but placed somewhere convenient to the banker > > awaiting revival as yet more money creation. > > > >Now I do not know what this does to your maths. I for one believe that if > > it is necessary to go into the realms of higher maths to attempt to > > refute what can be clearly demonstrated by eye in any high street, that > > there is a deficiency of effective demand, then there is something wrong > > in the forces of opposition to change and progress in this world of ours. > > > >Ken. > > ____________________________________________________________ > Get advanced SPAM filtering on Webmail or POP Mail ... 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