The Creation of the Federal Reserve System (Part 2)

Here's another mental exercise to understand why deposits are just like cash.

Back in the day when they didn't have computers banks started handing out notes that were redeemable for gold.

For example. The bank could have

A | L
Gold $100 | Notes $100

So they think... hey I can create loans by handing out more notes because this guy isn't going to come and want his $100 worth of gold.

So they start handing out notes. Say they gave $50 in notes out as a loan

A | L
Gold $100 | Notes $150
Loan $50

So now there was $150 in money going around purchasing goods and services. People started accepting these notes as payment since they knew they could exchange them for gold. The notes are MONEY because they were able to settle transactions. So when the bank created $50 to lend to the borrower they created $50 out of thin air. You can call it a claim all you want but it goes out and purchases real goods and services.

So it is a claim on gold but it is money for transactional purposes.

Nowadays in our more sophisticated society banks do not need to lend notes. They can now just create deposits. These deposits are what we use to transact. The reserves are sort of like the gold. We might have a claim on reserves (aka cash) but our deposit is just as much as money as cash itself since we use it for our transactions.

 

Say each one of those notes had a banks name on it. Say for example... someone from Bank A came to Bank B looking to get gold for his Bank A note.

Bank B would want to know how much gold/capital bank A had in case they wanted to exchange the Bank A's note for gold.

If Bank A had too many loans and not enough gold, Bank B would deny the note. If the person than went to exchange the note for gold, went back to Bank A, Bank A wouldn't have anything to give him. Bank A would fail and Bank A's note would fail with it. Sure it can still exist, but it doesn't exist as money.

Today these notes are created in the form of bytes in a computer. We can use these bytes as money as long as other banks believe our bank can satisfy the payment.

This does not mean deposits are "claims"... deposits are definitely money just as bank notes were money. Money is what is accepted in a transaction. People do not accept reserves as payment, they accept little bytes (aka electronic notes) or cash (physical notes).

 

So you gave your friend $5000. You get an contract saying its your money. He blows the money your money gambling. You're saying you no longer have a claim against him for $5000.

Sure you do.

Which you said is the same as cash. Which is it.

Now you're claiming the FDIC can create new money too, eh?

Is there anyone who can't create new money?

You said you account disappears and no longer exists when the bank fails. You just said they disappeared.

If the account has disappeared, how can the FDIC "plug them into a new account"?

You can't plug something that doesn't exist.

Time for you to make up a new explanation.

I'm making nothing up. You theory is inherently illogical and you are trying to weasel out of confronting it.

You claim a deposit account is just the same as cash.

Please explain how your "money" in a worthless deposit account is "just the same" as money in cash.

Be a little bit honest. If you cannot even admit something obvious like this I'm just wasting my time with someone who is being dishonest.

Don't dodge the question. Let's have some honesty or this is just a waste of time.

Your position is that a bank account is just the same as cash.

Please explain to me how having $5000 in cash is "just the same" as having a $5000 account balance in a failed bank.

 

1) It works the same way as it did before electronic transfers. They have just made reserves which are the electronic version of cash.

2) Please cite a source that says cash = deposits.

3) If cash = deposits, then deposits = reserves. How can a bank have less reserves = cash than deposit? That is a logical nullity.

Reserves are money.

If deposits = cash then why do we need the FDIC? How can your account never be worthless if the bank fails.

We've already gone thru this and you're going around in circles.

MMM step 6. You are transferring reserves, which are no different than cash as stated in the MMM.

You admit that reverses are transferred. Why would you need to transfer cash from you account, that you've admitted contain nothing, if reserves, which the MMM explains is cash, are transferred?

 

Cash doesn't become worthless if the bank fails.

You're position has it that the the notes are the same as gold. Of course they are not.

And that is exactly the way it works today. Except we have cash instead of gold, and deposits instead of notes.

And just like notes were not gold but a claim on gold, deposits are not cash but a claim on cash. They can be used like money, just like notes could be used for gold, but they are not the same. The deposit is a claim on the banks cash just like notes were a claim on the bank's gold.

It still works the same way. We just have electronic cash so we can do transactions without physical currency. Those are call reserves at deposit at the Fed.

 

Deposits are "money" like notes were money. You could use them as money, as long as your bank was sound and didn't fail. If it did your note didn't disappear, but might be worthless. Of course, while the notes could be used as money (if your bank didn't fail) notes were not the same as gold. No matter how much banks lent and created more notes, no more gold was created. If you made a payment with a check or note, you bank would transfer gold to the payee's bank. That was how payments were made.

Exchange deposit for notes and cash/reserves for gold, and it works the same way today.

 

So than what in the world is your argument? Deposits are money just like bank notes were money. WE, the nonbank public uses deposits to transact just like they used bank notes to transact. If our deposit becomes worthless it is because the bank lost our "gold".

 

Thread has passed its 500 post limit and is therefore about to be closed. Feel free to start another thread.

http://www.politicalforum.com/political-opinions-beliefs/225919-creation-federal-reserve-system-part-3-a.html#post4940397

New thread is at above link.