As far as I know, fractional reserve banking is universal. Keep watching and you'll see that banks are essentially creating "bank-money" through this process with the reserve-ratios placing a limit on how much money can be created by a bank.
Keep watching the playlist. I am not familiar with the Zeitgeist videos, but the Khan Academy videos do work up to the notion of a bank "creating" money by expanding its balance sheet.
Fractional reserve banking is how you can create multiple claims on the same asset. It’s a Ponzi scheme that’s enabled by the Fed. You can’t have two valid titles to the same house or car or any other good. But you can for money under fractional reserve banking.
If I make a loan, instead of handing the debtor cash, I could just create a checking account for the amount in their name so your friends are not incorrect. However, I would assume that this account would be drawn down very quickly so i couldn't re-loan this money and keep the cycle going forever. The end result is essentially what I describe in the video.
To everyone saying it doesn't work with gold, look at it this way. Gold is not created out of thin air, money is. The non-gold money doesn't exist in physical form. If 1 man made a deposit of 1000G and then a 2nd man asked for a loan of 900G at a 10% reserve rate, the 2nd man has 900G and the 1st man knows he has 1000G in his bank but only 100G is left there. If he were to withdraw any more than 100G without the 2nd man repaying his loan, there would be a bank run.
This can totally happen with gold. Go back and follow the video again. This time, assume that everything happens in the same day. Then look at the money supply - as defined by M1 - at the end of the day. Farmers deposit -> loan to irrigation -> money to workers -> workers deposit -> loan to factory builder, who deposit loan back into bank for time being. It makes sense!
maybe I'm just simple-minded, perhaps unintelligent, but the way this works, it appears to work almost like a legalized ponzi scheme. If I'm totally in left field, someone please educate me because this video only accentuated my mistrust of banks.
William Troutman; No, the difference between banks and Ponzi Schemes are that the idea that are funded are worth money because they can produce more value. This is where banking gets very, very complicated, very, very fast. Credit and stock and some other things get involved here and it can’t be explained in a comment. Anyways, banks are still net positive because they lend out money at a higher interest rate then what they get; Ponzi schemes don’t have any value production.
It is normal bro, these things can be confusing especially if you didn't watch previous videos. To answer your question, yes it is risky indeed but it works(most of the time). When it fail(doesnt have enough money to pay customers) it will be exactly like how you expected it to be, everyone angry, the bank likely go bankrupt
They (banks) create money to lend out with only having a fraction of the amount (like 5% or less in some cases) of cash deposited by someone. So they're creating money that doesnt exist (which is called counterfeit, prety sure thats jail time for normal people) and lending it out with interest to borrowers...
This is about creating wealth. When it is leveraged, more is created. Banking is a service industry. Think in terms of "value chain". Each player adds value so you at the end of the chain add value to your life.
Jonald your comment makes a lot of sense. Why else would a bank change your loan's interest rate and make you sign a contract that you have to oblige to the changes before lending? The fact that the govt recently changed these bad lending practices but have allowed banks to continue this practice until the year 2010 (closing the door when the horse is already out of the barn) is very telling.
As a real estate appraiser I know a bit about this. If we are talking real estate with inflated values then thats where the problem occurs. The bank has the over valued properties on their books that wont even sell for 50% of what they loaned for it due to corrupt brokers, RE agents and appraisers. This is why RE prices are going down so slow... The lending institutions do not want to suffer such a loss so they keep the prices fixed but its not working.
That was the greatsest explanation of FRB I have ever seen. All of your jumbled diagrams and wild colors really drove home how crazy someone would have to be to think FRB is a sustainable system! In a subsequent video will you please show what happened to the purchasing power of the farmers money. Also, can you explain how it is possible that the bank and the depositors both own the same money at the same time (a demand deposit by definition can be completely withdrawn at any time).
In the end fractional reserve lending is a major risk as it depends on the customer to pay the loan back. But this is why there is collateral. If a customer defaults, they can eventually be sued and have property seized. As long as the property which is seized has been valued correctly then the bank can get their money back by selling the seized property. The major problem we have had lately is the over-valuing of property.
No it's because the maturities of the deposits and loans do not match. The law is clear that deposits are loans to a bank, not bailments, and hence there is no 'misappropriation'. Banks generally have an emergency maturity-extension clause on demand deposits specifically to avert runs in a panic (although for reputation reasons, they would try everything else before resorting to using the clause).
Sal, Do you agree with the idea that default on loans is built into the system? I believe that it is. It is because of the the interest charged by the fractional reserve banking system that all loans can never be paid back. This 'interest' does not exist in the money supply, thus the only way to pay it back to the lender is through more debt or 'money' in the future. Let me know you thoughts.
@mychar111 The money is lent to the irrigation company and spent on the workers. The workers then deposit their check at the bank. So when the irrigation company pays down the loan, the money is given back to the bank. But the bank owes money to the workers who has a checking-account at the bank. So the money repaid goes to the workers. But this whole process of credit is funneled through the bank. The interest on the other hand, goes to the bank to pay for its expenses and profit.
Apart from that the 900 "gold" you pay the worker with *doesn't actually exist*, apart from as a book entry. More debt always exists within a fractional reserve system than actual money.
Not bad, but the trouble with this is that modern banks use "chequebook money" based on a fiat currency. When you ask for a loan, they literally just type it in. In the case of mortgages with 10% (100,000) money down, they bank does not even need any money at hand to create $1000,000. Since the "deposit" includes the cash they need to maintain the reserve. Not to mention some banks were inflating 40 to 1. See "Money as Debt" also on youtube.
What about the high powered money that is deposited at the federal reserve? That money is actualy multiplied. And when it is done with paper checks and computer entries and not a physical commodoties like gold, it is easy to create new credit that is not addequatly collateralized.
This video is leaving out the reserve deposits that banks can make at the Federal Reserve. This is called "high powered money". It can be multiplied by the fractional reserve rather than divided by it. So a bank can deposit one thousand dollars at the Federal Reserve and then lend out ten thousand as if they had the money to lend. Since it is all checkbook money nobody ever counts what is in the vault to see if they have it.
Theres a big difference... Gold has to be mined. Keep in mind that gold does not only yield a monetary value but an industrial value as well which makes it difficult to devalue. This is just a fact... Paper yields only monetary value which constantly changes based on global economic events. Inflation is a another key factor being that if one bank goes under then money can be printed to cover the loss (FDIC) meaning that the money losses value. This effects everyone that holds paper money.
when 900g is lent to the irrigation company, doesnt 900g need to be repayed to the bank? so 900g deposited by workers PLUS 900g repayed by the irrigation company = 1800g. Am i correct in my observation. Btw, this topic takes a long time to make sense because it's just so unbelievably clever. I'm gonna go start a bank :P
@BillWilliamsonSr That's untrue. Until Nixon abolished our tenuous link to gold in '71, dollars were still convertible to gold. If you're curious in further reading, I suggest Murray Rothbard's "What has government done to our money", available freely online (just google). There's a fair amount of basic explanation of "what is money", and it progresses to explain how inflation is theft.
Because it represents the business as a seperate entity. If you own the business, it owes you that equity. If you sell the business, it or the new owner owes it to you. ie.; The business is not you.
People worry too much about fractional banking. As long as the money that is "made from thin air" is going somewhere to create real value (eg investing in a new factory) then it doesn't matter. Money itself has no value, but so what? That doesn't matter. We give it value and with in we can create things that people really care about, eg food, shelter, coke, iphones etc.
Insaumnia In the UK the vast majority of the new money (billions & billions) was went into stocks & property for the wealthiest, not the real economy. See www.positivemoney.org or for using the system according to how it actually works (rather than a neoliberal economic fantasy), see Prof. Warren Mosler's "The Seven deadly innocent frauds of Economic Policy", which is a free pdf on his website. This is MMT. Another MMT, Stephanie Kelton, was Bernie Sanders' Economic advisor's (I don't know if main one).
+MR .... in a fiat currency system its not the dollars but the real resources .... if they are not enough real resources for those dollars to buy if people spend en mass then that's when you have inflation. The whole reason why the govt goes to a fiat currency system is so they are not financially constrained.
Money made from thin air robs everyone else of their purchasing power because it loses its value over time, its a foolish and evil way to grow an economy
Don't you think it is also a matter of whether one will keep their promise? Money is really only as good as the commitment to a promise. The society that supports its money determines the value it possesses on a global scale.
@brianD69 their product is "the service of banking" which is inevitable in any bartering system and necessary. perhaps we haven't perfected it, but we are striving in that direction. until humans have psychic links which help them all to feel the collective pain of the entire society, we will still have this free market system of competition to which the banking system is an enabler. Knowing this depresses me though.
that is your problem. Keynsian thought has brought us to the point where we are at. Fractional reserve banking and debt based currency has caused us to get to the point we are at today. Central bankers use the banking system to force default upon a certain portion of the population. The system is a closed loop. If you and I were on an island, and I loaned you $100 at 1% interest, and there were only $100 on the island, then where would you get the $1 for interest at the end of the year?
The act of saving does not cause money to lose its value. If this was true, less saving would cause the value (purchasing power) of money to increase. Logically, this does not make sense, but the evidence speaks for itself. Consider the savings rate vs. CPI in the US. The trend shows savings rates decreasing, while CPI increase (ie. money loses value).
@vickiormindyb you are describing an investment in an individual, or company, and not into a complete banking system. In the stock market if you see a company do things that you know will bankrupt them, you will pull your money out; however, in the banking system backed by the tax payers you don't worry about it because your money is guaranteed.
@Cenu911 No, there is actually 1000G circulating around, and people think they have 2710G in their savings. In the real world, a single person can withdraw SOME out of the 2710G pool and everyone else would be fine. However, If EVERYONE withdraws 2710G then there would be a bank run because there is only 1000G in the system.
Sal, why didn`t you address the money that the borrower boss of the ditchers has to pay back to the bank? Did the bank just gave him the deposited gold for free? Does the ACTUAL existing capital reflect the amount of ethereal gold created from the bank?
Very interesting video. But this doesn't take into account 2 things: Deposits from people you haven't given investment money to, and the return on your investment in the irrigation and factory.
Yes I actually I do. I know also know the difference between firearms without safeties and firing pin retractors as well. The MBA finance drones(of which I was on my way to become one) always assume ideals. Most money creation has occurred by inflating existing capital while creating little new capital. That is why we have the housing bubble now. Get it through you thick finance heads the ideal never occurs. Fractional reserve banking assumes continued capital investment which does not happen.
part 2. Now in the first explanation I said 1. is lending to 2 who is lending to 3. but get this, 1. only has 100G but because 3. keeps borrowing, they can fractionalize that 100G to infinity theoretically. 1. keeps printing money, inflating the dollar, which causes 2. to keep borrowing and lowering interest rates so that 3. can use credit and borrow 1. at the source turns 100g into billions 3. foolishly doesn't invest the money but spends it this is what's wrong with us today
Then, compare CPI with M2 data since 2008. Keep in mind the time scales for an accurate comparison. The relevant graphs are all here can all be found on the St. Louis Fed website. A simple google search for PSAVERT, CPIAUCSL and M2 Money stock will provide you with the graphs (I cannot, since RUclips won't allow me to post the URLs).
njneopatriot: Not sure if I am following you completely on your statement but I will do my best to answer. Fiat currency is only as good as a commitment to a promise as fiat currency has debt attached from the very beginning. There is only one controlling source (Central Bank) which operates as "the" primary lender for a nation. This controlling source issues credit that it knows can never be paid back causing permanent debt. *Continued on second comment*
Banker holds the equity in the form of the actual bank building. To construct it they had paid the 100G to the same construction company that builds the factories, who in turn spent it to the farmers for food before the bank opened so the 100G was already included in the original 1000G that the farmers deposited.
ok let me try, by inflating the dollar, 1. they lower interest rates, which cause the 2. commercial banks to borrow even more money, which floods the economy with more new dollars, 2. they then turn around and lower interest rates on credit cards and 2. their own loans, 3. common folk then turn around and borrow more money and use more credit now 1. can keep lending because 3. keeps borrowing due to low interest rates funneled through 2.
@ppsp3 The interest charged does exist but he doesn't mention it to avoid confusing the shit out of the normal person. The bank takes it in as revenue so that it can pay its bills so it can do the things it does, such as FRB, so that everyone can get what they need/ want. When everyone can get what they need/want sustainably, then thats all what a healthy economy is.
@Cenu911 A bank run is what everyone fears, but it is actually very unlikley to happen because people rarely take their entire savings out unless there is some panic from bad news. If you imagine a world without FBR, there would be no irrigation for the farmers, workers, or the factory. You have minimal risk vs enormous benefits.
OK - here's the problem we're having with gold. FRB CAN happen with both of the moneys - gold or paper. the problem of FRB is simply that there is MORE money chasing the SAME amount of resources: a bust HAS to ensue. With gold, FRB is severely limited because the people always exchange their paper receipts for gold bullion. This puts a limit on the amount of inflation that can take place. In ANY case, with FRB a bank run can happen, and this alone proves FRB to be evil.
I don't quite understand. Shouldn't we also be counting the money that the Irrigation guy and the factory guy still owe to the bank amongst the money in circulation? That is, shouldn't we count that as negative money? The farmers have 1000G entitled to in the bank, The irrigation Workers have 900G they are entitled to in the bank, the factory workers have 810G they are entitled to, so doesn't the Factory owner have -810G he is entitled to?
@gabriel mueller yup... you hit the nail on the head! The more people spend with the worthless paper (federal reserve money) the more debt/slave a person becomes.
So money is an idea... if we all stopped believing in it, it would just be worthless paper. I think the fractional reserve system would be ok if there were tighter constraints on how much the bank is allowed to loan compared to the actual money it has. Corporate banking (the banks being privatised) is what caused collapse. Would it be better if we all started over again with a single currency and what you earned was simply... yours?
I don't understand how FRB creates new money. If you loan money, you are simply transferring money from one person to another. There is no money creation. I've been trying to discuss this issue with people, but nobody can explain to me how FRB is inflationary.
What about interest? The "money" wasn't created (borrowed) to pay the interest (on loan #1). So more money must be borrowed(created) to pay that interest (loan #2). And a cycle of loans starts - forcing the economy(ex. apples) to increase. However, no increase=no new loan=not enough money to repay loan #1=recession. So if we always grow, we won't get hyper inflation or depression. But how big can we grow before we destroy the environment?
I like the explanations here though neutral concerning the debt trap and the huge power have over the economy. To leave the economy at the discretion of some banks willing to lend? If the 95 % of the money today is debt and it will have to eventually go back to the banks, then who owns the money, the people or the banks? And , of course, the other 5 % of the money which is currency/paper is also owned by banks. But what about the interest attached to the debt money? It doesn't exist.
Even the banking industry admits that only 5% of the 'money' in existance is physical legal currency (bills and coins). The rest is money created by the banking system as debt.
See, if you watch the end of the video he proves me correct. He says "People think they have 2710 gold pieces" and these people really do have this much gold. they just can't have it all at once. This is the creation of money that I was trying to explain to you.
But FRB does not transfer money, it creates (usually) nine times of the actual money it has. It IS money creation. And that happens after the central Bank (e.g. Fed) prints money ex nihilo for Bonds! Ron Paul wants a return to 'sound money' (i.e. full reserve banking).
10:1 if deposit is 1000 bank keeps 1000 as reserve (all of it) and lends out 9000???? is this the same thing or is that just the net result of completely exhausting the $1000 through the multiplyer effect? ie ends up creating 9000 of new money on a 1000 deposit. . . . either way wouldn't debt destruction reduce the money supply.....therefore even though the FED is printing huge amounts of money, if they dont keep up with debt destruction we will still experience deflation..thnks
Not every investment is good investment. If an investment projects is good ppl will invest anyway. With Fed cheap new money, basically encourages high risk investment decision, which pop out as a bubble. It calls Austrian business cycle theory.
Thanks, my point is that this current fractional reserve banking system is unsustainable. We really need a new system that is not based on debt. I hate to say it, but I think we would be better off with a government run banking system that did not allow for the creation of new money through fractional banking and was backed by a commodity such as gold. We need honest money again. The dollar is basically doomed because of this giant ponzi scheme.
Are these people watching the same video I am? Gold is not magic, in that it doesn't defeat fractional reserve lending. That is the banking system explained here. If you only count money as gold, then no new gold is created. If you count money as deposits in a FR system, new money can be created as demonstrated. Pay attention.
Yes but everyone has the money at the same time. If the bank keeps track of the loans and liabilities then they can balance them on the budget sheets at the end of the month/year, but there is still more money in the system than there was at the beginning. That's why he says "people think they have 2710 gold pieces." It's counter-intuitive that's why it seems so misleading at first, and why D4Shawn just can't get it.
I used the wrong words, They CAN have it all at once, that is what makes it new money. But the chances that everyone would withdraw at once is so rare that the lending rate, the "reserve" is set at ten%. If it were the same money being spent at different times then it wouldn't be possible for each individual to withdrawl at any time
He very quickly stepped over the part at 7:50 about sutainability and how it isn't built into this system. unfortunately this forgotten principle in current day financial equations is trumped by short term growth and the continual lining of banker/hedge fund/Koch brother's pockets. A zero value-added industry is what collapsed the system in 2008
Close. The ONLY way for all debtors to not default is to borrow more, and that is the fraud anonwoohoo misses. Sal neglects a couple serious issues with fractional reserve banking, however largest is the interest issue. How do the factory workers pay off the loan (ie P+I)? Every dollar of interest doesn't exist therefore more loans are needed to satisfy old ones...a ponzi scheme. Mathematical systematic transfer of wealth to those who lend the money first.
Hmmm... I wonder why they can't have it all at once... I don't suppose it's because there is no new money; it's the same money being spent at DIFFERENT TIMES.
That is why you cannot and there is a wait time. If you had an account at Bank of America with 100k in it and you show up one day and want it all out in cash. The bank is going to tell you no. And that you should have placed an "order" up to two weeks before you wanted the money so we could secure the funds either from other branches or the Fed Reserve. Sometimes its up to 60 days. Its all in fine print.
Low budget video with high quality information. Well done.
As far as I know, fractional reserve banking is universal. Keep watching and you'll see that banks are essentially creating "bank-money" through this process with the reserve-ratios placing a limit on how much money can be created by a bank.
I have got to say though - the Khan Academy as a concept is sheer brilliance. This could be the future of free market education right here. :)
Keep watching the playlist. I am not familiar with the Zeitgeist videos, but the Khan Academy videos do work up to the notion of a bank "creating" money by expanding its balance sheet.
One of the simplest, clearest explanations yet of our banking system is the RUclips video WHY WE ARE IN SO MUCH DEBT. Recommended.
Fractional reserve banking is how you can create multiple claims on the same asset. It’s a Ponzi scheme that’s enabled by the Fed. You can’t have two valid titles to the same house or car or any other good. But you can for money under fractional reserve banking.
If I make a loan, instead of handing the debtor cash, I could just create a checking account for the amount in their name so your friends are not incorrect. However, I would assume that this account would be drawn down very quickly so i couldn't re-loan this money and keep the cycle going forever. The end result is essentially what I describe in the video.
You are correct. We get into that in a few videos. I wanted to do this first to show how they are functionally the same thing.
Lol 😂 these comments are great . Post financial crisis emotions all captured in one place
To everyone saying it doesn't work with gold, look at it this way. Gold is not created out of thin air, money is. The non-gold money doesn't exist in physical form. If 1 man made a deposit of 1000G and then a 2nd man asked for a loan of 900G at a 10% reserve rate, the 2nd man has 900G and the 1st man knows he has 1000G in his bank but only 100G is left there. If he were to withdraw any more than 100G without the 2nd man repaying his loan, there would be a bank run.
This can totally happen with gold. Go back and follow the video again. This time, assume that everything happens in the same day. Then look at the money supply - as defined by M1 - at the end of the day. Farmers deposit -> loan to irrigation -> money to workers -> workers deposit -> loan to factory builder, who deposit loan back into bank for time being. It makes sense!
came here out of intellectual curiosity and found it very easy to understand. great work.
maybe I'm just simple-minded, perhaps unintelligent, but the way this works, it appears to work almost like a legalized ponzi scheme. If I'm totally in left field, someone please educate me because this video only accentuated my mistrust of banks.
Fractional reserve banking is the biggest scam ever. It is legal fraud
William Troutman; No, the difference between banks and Ponzi Schemes are that the idea that are funded are worth money because they can produce more value. This is where banking gets very, very complicated, very, very fast. Credit and stock and some other things get involved here and it can’t be explained in a comment. Anyways, banks are still net positive because they lend out money at a higher interest rate then what they get; Ponzi schemes don’t have any value production.
It is normal bro, these things can be confusing especially if you didn't watch previous videos.
To answer your question, yes it is risky indeed but it works(most of the time). When it fail(doesnt have enough money to pay customers) it will be exactly like how you expected it to be, everyone angry, the bank likely go bankrupt
They (banks) create money to lend out with only having a fraction of the amount (like 5% or less in some cases) of cash deposited by someone. So they're creating money that doesnt exist (which is called counterfeit, prety sure thats jail time for normal people) and lending it out with interest to borrowers...
This is about creating wealth. When it is leveraged, more is created. Banking is a service industry. Think in terms of "value chain". Each player adds value so you at the end of the chain add value to your life.
Jonald your comment makes a lot of sense. Why else would a bank change your loan's interest rate and make you sign a contract that you have to oblige to the changes before lending?
The fact that the govt recently changed these bad lending practices but have allowed banks to continue this practice until the year 2010 (closing the door when the horse is already out of the barn) is very telling.
Super stuff, Sir. Though all examples are hypothetical as expected,one can easily connect with the real world. Thank you for sharing.
As a real estate appraiser I know a bit about this. If we are talking real estate with inflated values then thats where the problem occurs. The bank has the over valued properties on their books that wont even sell for 50% of what they loaned for it due to corrupt brokers, RE agents and appraisers. This is why RE prices are going down so slow... The lending institutions do not want to suffer such a loss so they keep the prices fixed but its not working.
That was the greatsest explanation of FRB I have ever seen.
All of your jumbled diagrams and wild colors really drove home how crazy someone would have to be to think FRB is a sustainable system!
In a subsequent video will you please show what happened to the purchasing power of the farmers money. Also, can you explain how it is possible that the bank and the depositors both own the same money at the same time (a demand deposit by definition can be completely withdrawn at any time).
took a while to get to the point but made it very clear. 5 stars.
In the end fractional reserve lending is a major risk as it depends on the customer to pay the loan back. But this is why there is collateral. If a customer defaults, they can eventually be sued and have property seized. As long as the property which is seized has been valued correctly then the bank can get their money back by selling the seized property. The major problem we have had lately is the over-valuing of property.
Excellent explanation
No it's because the maturities of the deposits and loans do not match. The law is clear that deposits are loans to a bank, not bailments, and hence there is no 'misappropriation'. Banks generally have an emergency maturity-extension clause on demand deposits specifically to avert runs in a panic (although for reputation reasons, they would try everything else before resorting to using the clause).
Excelent explanation.
Sal,
Do you agree with the idea that default on loans is built into the system? I believe that it is. It is because of the the interest charged by the fractional reserve banking system that all loans can never be paid back. This 'interest' does not exist in the money supply, thus the only way to pay it back to the lender is through more debt or 'money' in the future. Let me know you thoughts.
@mychar111 The money is lent to the irrigation company and spent on the workers. The workers then deposit their check at the bank. So when the irrigation company pays down the loan, the money is given back to the bank. But the bank owes money to the workers who has a checking-account at the bank. So the money repaid goes to the workers. But this whole process of credit is funneled through the bank. The interest on the other hand, goes to the bank to pay for its expenses and profit.
Apart from that the 900 "gold" you pay the worker with *doesn't actually exist*, apart from as a book entry. More debt always exists within a fractional reserve system than actual money.
Not bad, but the trouble with this is that modern banks use "chequebook money" based on a fiat currency.
When you ask for a loan, they literally just type it in. In the case of mortgages with 10% (100,000) money down, they bank does not even need any money at hand to create $1000,000. Since the "deposit" includes the cash they need to maintain the reserve. Not to mention some banks were inflating 40 to 1. See "Money as Debt" also on youtube.
What about the high powered money that is deposited at the federal reserve? That money is actualy multiplied. And when it is done with paper checks and computer entries and not a physical commodoties like gold, it is easy to create new credit that is not addequatly collateralized.
This video is leaving out the reserve deposits that banks can make at the Federal Reserve. This is called "high powered money". It can be multiplied by the fractional reserve rather than divided by it. So a bank can deposit one thousand dollars at the Federal Reserve and then lend out ten thousand as if they had the money to lend. Since it is all checkbook money nobody ever counts what is in the vault to see if they have it.
This invention is older than the Bible, it has come to be life.
superb explanation
Excellent video - explains it very clearly.
Theres a big difference... Gold has to be mined. Keep in mind that gold does not only yield a monetary value but an industrial value as well which makes it difficult to devalue. This is just a fact... Paper yields only monetary value which constantly changes based on global economic events. Inflation is a another key factor being that if one bank goes under then money can be printed to cover the loss (FDIC) meaning that the money losses value. This effects everyone that holds paper money.
@tawk57 in this case yes because the irrigation was funded by the cash flows from fractional reserve banking
when 900g is lent to the irrigation company, doesnt 900g need to be repayed to the bank? so 900g deposited by workers PLUS 900g repayed by the irrigation company = 1800g. Am i correct in my observation. Btw, this topic takes a long time to make sense because it's just so unbelievably clever. I'm gonna go start a bank :P
@BillWilliamsonSr That's untrue. Until Nixon abolished our tenuous link to gold in '71, dollars were still convertible to gold. If you're curious in further reading, I suggest Murray Rothbard's "What has government done to our money", available freely online (just google). There's a fair amount of basic explanation of "what is money", and it progresses to explain how inflation is theft.
Because it represents the business as a seperate entity. If you own the business, it owes you that equity. If you sell the business, it or the new owner owes it to you. ie.; The business is not you.
I finally understand this!! thank you so much!!
People worry too much about fractional banking. As long as the money that is "made from thin air" is going somewhere to create real value (eg investing in a new factory) then it doesn't matter. Money itself has no value, but so what? That doesn't matter. We give it value and with in we can create things that people really care about, eg food, shelter, coke, iphones etc.
Insaumnia
In the UK the vast majority of the new money (billions & billions) was went into stocks & property for the wealthiest, not the real economy.
See www.positivemoney.org
or for using the system according to how it actually works (rather than a neoliberal economic fantasy), see Prof. Warren Mosler's "The Seven deadly innocent frauds of Economic Policy", which is a free pdf on his website. This is MMT. Another MMT, Stephanie Kelton, was Bernie Sanders' Economic advisor's (I don't know if main one).
+MR .... in a fiat currency system its not the dollars but the real resources .... if they are not enough real resources for those dollars to buy if people spend en mass then that's when you have inflation.
The whole reason why the govt goes to a fiat currency system is so they are not financially constrained.
Money made from thin air robs everyone else of their purchasing power because it loses its value over time, its a foolish and evil way to grow an economy
Don't you think it is also a matter of whether one will keep their promise? Money is really only as good as the commitment to a promise. The society that supports its money determines the value it possesses on a global scale.
@brianD69 their product is "the service of banking" which is inevitable in any bartering system and necessary. perhaps we haven't perfected it, but we are striving in that direction. until humans have psychic links which help them all to feel the collective pain of the entire society, we will still have this free market system of competition to which the banking system is an enabler. Knowing this depresses me though.
that is your problem. Keynsian thought has brought us to the point where we are at. Fractional reserve banking and debt based currency has caused us to get to the point we are at today. Central bankers use the banking system to force default upon a certain portion of the population. The system is a closed loop. If you and I were on an island, and I loaned you $100 at 1% interest, and there were only $100 on the island, then where would you get the $1 for interest at the end of the year?
Great video, makes banking easier then some teachers teach (:
The act of saving does not cause money to lose its value. If this was true, less saving would cause the value (purchasing power) of money to increase. Logically, this does not make sense, but the evidence speaks for itself. Consider the savings rate vs. CPI in the US. The trend shows savings rates decreasing, while CPI increase (ie. money loses value).
WE NEED TO ALL WAKE UP AND STAND UP TO WHAT THESE
@vickiormindyb you are describing an investment in an individual, or company, and not into a complete banking system. In the stock market if you see a company do things that you know will bankrupt them, you will pull your money out; however, in the banking system backed by the tax payers you don't worry about it because your money is guaranteed.
@Cenu911 No, there is actually 1000G circulating around, and people think they have 2710G in their savings. In the real world, a single person can withdraw SOME out of the 2710G pool and everyone else would be fine. However, If EVERYONE withdraws 2710G then there would be a bank run because there is only 1000G in the system.
Sir, when you say 10% Reserve in the example of 1000 gold pieces, is the 10% the same as capital adequacy ratio or CAR. Thanks.
Sal, why didn`t you address the money that the borrower boss of the ditchers has to pay back to the bank? Did the bank just gave him the deposited gold for free?
Does the ACTUAL existing capital reflect the amount of ethereal gold created from the bank?
Very interesting video. But this doesn't take into account 2 things:
Deposits from people you haven't given investment money to, and the return on your investment in the irrigation and factory.
Yes I actually I do. I know also know the difference between firearms without safeties and firing pin retractors as well. The MBA finance drones(of which I was on my way to become one) always assume ideals. Most money creation has occurred by inflating existing capital while creating little new capital. That is why we have the housing bubble now. Get it through you thick finance heads the ideal never occurs. Fractional reserve banking assumes continued capital investment which does not happen.
Thank. You. I completely understood with this explenation
part 2.
Now in the first explanation I said 1. is lending to 2 who is lending to 3.
but get this, 1. only has 100G but because 3. keeps borrowing, they can fractionalize that 100G to infinity theoretically.
1. keeps printing money, inflating the dollar, which causes 2. to keep borrowing and lowering interest rates so that 3. can use credit and borrow
1. at the source turns 100g into billions
3. foolishly doesn't invest the money but spends it
this is what's wrong with us today
@andrewldexter While your comment was not directed at me, I want to thank you for the reading assignment. I will be checking that out.
Then, compare CPI with M2 data since 2008. Keep in mind the time scales for an accurate comparison.
The relevant graphs are all here can all be found on the St. Louis Fed website. A simple google search for PSAVERT, CPIAUCSL and M2 Money stock will provide you with the graphs (I cannot, since RUclips won't allow me to post the URLs).
njneopatriot:
Not sure if I am following you completely on your statement but I will do my best to answer. Fiat currency is only as good as a commitment to a promise as fiat currency has debt attached from the very beginning. There is only one controlling source (Central Bank) which operates as "the" primary lender for a nation. This controlling source issues credit that it knows can never be paid back causing permanent debt. *Continued on second comment*
What about the equity of 100G in calculation of money in the economy?
Banker holds the equity in the form of the actual bank building. To construct it they had paid the 100G to the same construction company that builds the factories, who in turn spent it to the farmers for food before the bank opened so the 100G was already included in the original 1000G that the farmers deposited.
I'm not sure how your comment defies my statement that "gold isn't compatible with fractional reserve banking (system)" ...
ok let me try, by inflating the dollar, 1. they lower interest rates, which cause the 2. commercial banks to borrow even more money, which floods the economy with more new dollars, 2. they then turn around and lower interest rates on credit cards and 2. their own loans, 3. common folk then turn around and borrow more money and use more credit
now 1. can keep lending because 3. keeps borrowing due to low interest rates funneled through 2.
A biggest public campaign has started to abolish fractional reserve system. Visit POSITIVE MONEY website and support the campaign.
@ppsp3
The interest charged does exist but he doesn't mention it to avoid confusing the shit out of the normal person. The bank takes it in as revenue so that it can pay its bills so it can do the things it does, such as FRB, so that everyone can get what they need/ want. When everyone can get what they need/want sustainably, then thats all what a healthy economy is.
sorry,
what happens to the cash when it is used to pay back loans?? does the bank keep that cash for itself??
I would like to read/see more about this. Could you please reply with some links.
To whom or what should he be donated? =)
@Cenu911 A bank run is what everyone fears, but it is actually very unlikley to happen because people rarely take their entire savings out unless there is some panic from bad news. If you imagine a world without FBR, there would be no irrigation for the farmers, workers, or the factory.
You have minimal risk vs enormous benefits.
OK - here's the problem we're having with gold.
FRB CAN happen with both of the moneys - gold or paper. the problem of FRB is simply that there is MORE money chasing the SAME amount of resources: a bust HAS to ensue.
With gold, FRB is severely limited because the people always exchange their paper receipts for gold bullion. This puts a limit on the amount of inflation that can take place.
In ANY case, with FRB a bank run can happen, and this alone proves FRB to be evil.
I don't quite understand. Shouldn't we also be counting the money that the Irrigation guy and the factory guy still owe to the bank amongst the money in circulation? That is, shouldn't we count that as negative money? The farmers have 1000G entitled to in the bank, The irrigation Workers have 900G they are entitled to in the bank, the factory workers have 810G they are entitled to, so doesn't the Factory owner have -810G he is entitled to?
@gabriel mueller yup... you hit the nail on the head! The more people spend with the worthless paper (federal reserve money) the more debt/slave a person becomes.
So money is an idea... if we all stopped believing in it, it would just be worthless paper. I think the fractional reserve system would be ok if there were tighter constraints on how much the bank is allowed to loan compared to the actual money it has. Corporate banking (the banks being privatised) is what caused collapse. Would it be better if we all started over again with a single currency and what you earned was simply... yours?
ya the money in fractional reserve banking is backed up by the printing of huge amounts of money out of thin air
I don't understand how FRB creates new money. If you loan money, you are simply transferring money from one person to another. There is no money creation. I've been trying to discuss this issue with people, but nobody can explain to me how FRB is inflationary.
What about interest? The "money" wasn't created (borrowed) to pay the interest (on loan #1). So more money must be borrowed(created) to pay that interest (loan #2). And a cycle of loans starts - forcing the economy(ex. apples) to increase. However, no increase=no new loan=not enough money to repay loan #1=recession. So if we always grow, we won't get hyper inflation or depression. But how big can we grow before we destroy the environment?
I like the explanations here though neutral concerning the debt trap and the huge power have over the economy. To leave the economy at the discretion of some banks willing to lend? If the 95 % of the money today is debt and it will have to eventually go back to the banks, then who owns the money, the people or the banks? And , of course, the other 5 % of the money which is currency/paper is also owned by banks. But what about the interest attached to the debt money? It doesn't exist.
Do equities count in m1 or m0 ?
how is this full reserve banking? part of the reserves are being kept by the bank, surely that's fractional?
And what about the issue that this allows wealth to flow to bankers who don't actualy produce any tangible products.
Even the banking industry admits that only 5% of the 'money' in existance is physical legal currency (bills and coins). The rest is money created by the banking system as debt.
See, if you watch the end of the video he proves me correct. He says "People think they have 2710 gold pieces" and these people really do have this much gold. they just can't have it all at once. This is the creation of money that I was trying to explain to you.
But FRB does not transfer money, it creates (usually) nine times of the actual money it has. It IS money creation. And that happens after the central Bank (e.g. Fed) prints money ex nihilo for Bonds!
Ron Paul wants a return to 'sound money' (i.e. full reserve banking).
Debt is not the driving force in the economy. Savings is. Investment is. Debts is a plague on the economy. A burden.
You can't define "having money" both as having it physically (with an equal debt to the bank) and having it deposited in the bank.
So up until minute 5:00 they are basically getting paid their own money?! (excluding apple sales)
10:1
if deposit is 1000 bank keeps 1000 as reserve (all of it) and lends out 9000????
is this the same thing or is that just the net result of completely exhausting the $1000 through the multiplyer effect? ie ends up creating 9000 of new money on a 1000 deposit. . . .
either way wouldn't debt destruction reduce the money supply.....therefore even though the FED is printing huge amounts of money, if they dont keep up with debt destruction we will still experience deflation..thnks
Not every investment is good investment. If an investment projects is good ppl will invest anyway. With Fed cheap new money, basically encourages high risk investment decision, which pop out as a bubble. It calls Austrian business cycle theory.
@poorperson There would be no irrigation without fractional reserve banking?
Thanks, my point is that this current fractional reserve banking system is unsustainable. We really need a new system that is not based on debt. I hate to say it, but I think we would be better off with a government run banking system that did not allow for the creation of new money through fractional banking and was backed by a commodity such as gold. We need honest money again. The dollar is basically doomed because of this giant ponzi scheme.
Are these people watching the same video I am? Gold is not magic, in that it doesn't defeat fractional reserve lending. That is the banking system explained here. If you only count money as gold, then no new gold is created. If you count money as deposits in a FR system, new money can be created as demonstrated. Pay attention.
@alohastewie No, It's lending people paper and digits then using scarcity to attain their material wealth.
you are great!!
The problem comes up when the farmes, the workers and the factory builders ask for their money at the same time...
So , how do the banks get their profits ?
Yes but everyone has the money at the same time. If the bank keeps track of the loans and liabilities then they can balance them on the budget sheets at the end of the month/year, but there is still more money in the system than there was at the beginning. That's why he says "people think they have 2710 gold pieces." It's counter-intuitive that's why it seems so misleading at first, and why D4Shawn just can't get it.
I used the wrong words, They CAN have it all at once, that is what makes it new money. But the chances that everyone would withdraw at once is so rare that the lending rate, the "reserve" is set at ten%.
If it were the same money being spent at different times then it wouldn't be possible for each individual to withdrawl at any time
Thanks .
He very quickly stepped over the part at 7:50 about sutainability and how it isn't built into this system.
unfortunately this forgotten principle in current day financial equations is trumped by short term growth and the continual lining of banker/hedge fund/Koch brother's pockets.
A zero value-added industry is what collapsed the system in 2008
Close. The ONLY way for all debtors to not default is to borrow more, and that is the fraud anonwoohoo misses. Sal neglects a couple serious issues with fractional reserve banking, however largest is the interest issue. How do the factory workers pay off the loan (ie P+I)? Every dollar of interest doesn't exist therefore more loans are needed to satisfy old ones...a ponzi scheme. Mathematical systematic transfer of wealth to those who lend the money first.
Hmmm... I wonder why they can't have it all at once...
I don't suppose it's because there is no new money; it's the same money being spent at DIFFERENT TIMES.
Can someone please tell me how to download specific videos from Khan Academy
so, uh, what happens if the farmers come back wanting to withdraw their 1000gp before the irrigation and factory investments come to fruition?
That is why you cannot and there is a wait time. If you had an account at Bank of America with 100k in it and you show up one day and want it all out in cash. The bank is going to tell you no. And that you should have placed an "order" up to two weeks before you wanted the money so we could secure the funds either from other branches or the Fed Reserve. Sometimes its up to 60 days. Its all in fine print.
since m0 is gold instead of debt it on the gold standard. m0 what i call the core.