The Creation of the Federal Reserve System (Part 2)

Deposits are included in some measures of money. Deposits however are not cash/reserves/base money.

Deposits are not cash/reserves/base money measured by M0.


Sure they did. That's why the Primary Dealers were established in 1960.

You might be right if we said Primary Dealers create "claims" out of thin air. But they don't.

 

Feel free to cite to the language of MMM that supports your positions.

 

So deposits are money when you want them to be but not when you don't want them to be. I get it now!

Never said they were

Sure they do. If you consider deposits simply claims on reserves, than Primary Dealers do create "claims" out of thin air.

 

Banks use Fed funds to make short term loans of surplus reserves they have or cover short term deficits.

I never said banks need deposits to make loans. They need reserves, however, and they must maintain reserves equal to 10% of deposits.


Correct

Deposits are a (and the primary) source of reserves. When you deposit a check written on another bank into your account, that increases the bank's reserves.

The Fed funds are short term loans. They don't cover long term loan obligations. Banks don't make much money borrowing from other banks or the Fed, because those rates go up.

Sure transactions happen everyday. My references was to application of fed funds and discount window loans. From MMM.

 

See definition of M0 here:

http://en.wikipedia.org/wiki/Money_supply

MMM clearly explains the process of how reserves are created by the Fed and those reserves fund loans which creates deposits. MMM clearly describes the difference between reserves and deposits.

I agree that banks thru loans create far more deposits than reserves. That is the money multiplier effect.

 

You still have not explained how people saving money causes price inflation.

What causes people to save?

Basic logic. Artificially raised costs of employment cause higher unemployment and contribute to higher prices.

This statement means nothing. More fluff.

Silver certificate dollars = dollars.

Repetetive and already addressed. There is now no limit on how many dollars that can be created out of thin air by the Fed.

That does not destroy gold. It simply converts it into smaller individual units of mass. Basic science.

Incorrect. The gold standard had plenty of structure. People wouldn't have used it if it didn't have structure. Try again.

By "structure" do you mean "government force"?

Of course, that is one of the basic functions of government. The Constitution specifies a structure laid out for a true gold standard. So your premise that "there would not be enough structure" is false.

Fiat paper is a medium of exchange. What's your point?

You don't think putting your money in a safe for 50 years constitutes taking it out of circulation? If it doesn't, then what does?

As Iriemon pointed out, these deposits are "money" in the broader sense of the term, but they are not money in the sense that it never circulates. It is only a creative fractional reserve accounting trick.

That's becuase it never actually existed in the first place. The bank only ever actually had 10% of what it claimed to have.

The cost of living is too high and businesses aren't hiring. Why is the cost of living so high, and why aren't businesses hiring?

 

The numbers in the computer represent the reserves a bank has to fund loans.

Where does MMM say that?

A bank can lend money it can fund with its reserves. When the loan proceeds are applied the bank transfers its reservers to cover the loan. If it doesn't have the reserves it cannot make the loan. The funded loan proceeds are deposited in another bank which expandes the amount of deposits.

That is not creating money out of thin air to me.

Interesting. What does that have to do with the claim that a Govt bond is represented by a deposit?

Wake me up when that happens.

How is that different from what I said?

 

I'm not arguing with you on what base money is. But you are the one saying that deposits are NOT money. They aren't money when you look at base money, but they ARE money when you look at the money supply that is used to determined how much money is in circulation being used for transactions in the real world.

You call my deposit claims, I call my deposit money. If I pay someone $1000 out of my deposit and transfer it to his deposit. I didn't transfer $1000 in claims I transferred $1000 in money.

The reserve system is simply the Fed's way of controlling the money supply by affecting the demand for money.

If the Fed does not create the amount of reserves necessary to make Govt spending usable in the real economy than the Govt would get rid of the Fed. The Fed is dependent on the Govt not the other way around. The Govt doesn't need to ask the Fed to create money for them to spend. Since yes, deposits are MONEY!!

 

To the contrary, that is exactly what happened in the GD. Millions lost their money because they demanded their deposits and the bank did not have the reserve on hand to pay their deposits and went bankrupt.

Today banks are required to have insurance (FDIC) to cover at least some of their depositors money if the bank lacks adequate reserves.

Banks don't trade reserves. They do loan them on short term markets. If a bank has a temporary shortage of reserves it can get a short term loan to cover.

A bank that has a major lack of reserves goes bankrupt.

p

Pretty close to accurate. Reserves control how much money a bank can lend (and thus create deposits). The reserve requirement affects how much money banks as a whole can lend.

 

This does not contradict anything I have said.

Correct. There is never any more money in circulation than the initial amount the Fed creates. The only way for that to happen is for depositors try to withdraw an amount that is more than the bank's 10% reserve ratio. In that case the Fed has to create more money to bail them out.

The banks do not create any money that circulates. Only the Fed does.

No, I am not referring exclusively to paper money. I am referring to all physical and digital currency that circulates.

 

Deposits are your claim on a bank's reserves.

Then you acknowledge your statement "Any knowledgeable person in banking or economics understands that deposits are money." is not accurate if the money we are talking about is M0 - reserves/cash/base money.

It is the Fed purchasing the security that creates the deposit out of thin air.

 

I didn't say saving creates price inflation. It creates the opposite which is far worse.

People save for all sorts of reasons.

There is no such thing as "artificial" costs. If there is someone willing to purchase it at a price and someone will to sell it at that price there is nothing artificial about that. What is artificial is the person who purchases it thinking it is worth more than what someone is willing to give them for it.

After 1934 dollars != Silver certificate dollars

Of course there is. How much Govt debt is out there and then you'll find your limit.

That's why I said "almost" impossible. And what I meant by destroy is take it out of circulation (as in being able to be used for purchases of real goods and services).

Lol, it does not have as much structure than fiat currency.

Yes I do mean force. As in when I agree to a contract with an individual, I expect to be paid. I expect you to pay your taxes in the same currency that I pay my taxes.

The Constitution also gave us the ability to evolve

My point is there is no difference than gold

It is not being used, but it is still calculated as being in circulation, since I can use it any time I want

So now they are money?

But the people who actually buy goods and services have much more?

This is a whole different conversation and it wouldn't go anywhere since you already have your mind made up that it's the Govt's fault.

 

No, deposits are my money that I use to purchase goods and services. I have nothing to do with the bank reserves. When my employer pays me they are not paying me in claims on bank reserves, they are paying me with money.

That is a calculation of a form of money. That does not mean deposits aren't money. They are just not included in base money. Notice how there is that "base" word precluding the word "money".

So you are now agreeing that deposits are money and banks create deposits out of thin air?? Couldn't you have said this couple months ago and stop this ridiculous argument about claims and deposits not being money?

 

Where did I ever say that? Quote please. Deposits are a form of money, if you measure money to include deposits (e.g. M1).

Depends on which measure of the money supply you are looking at. For M1 and above, I agree this is true.

True, and your bank transferred $1000 in reserves.

The reserve system it more than that, but true.

The Fed doesn't create reserves for the Govt. The Govt gets its reserves from taxes and loans. The Fed creates reserves to expand the money supply.

 

If they want FRB money. They can simply operate on Cash deposits for their reserves if they want.

It does not contradict anything. Where did I claim MMM was the end all be all on bank lending?

What if I cash the check at the bank that originated the loan and then make a large cash deposit at a different bank? Did I just double the amount of reserves in circulation? Or does Bank A simply destroy $9k?

Holy (*)(*)(*)(*), when I say deposits are reserves I am referring to CUSTOMER DEPOSITS. My deposits into my bank are counted as reserves.

Oh I understand the word game associated with how money is measured. That does not make it valid.

Cash, with no way to tell what bank it came from.

You have been arguing that deposits are not reserves this entire time.

What if it is a cash deposit? What if I deposited $10k in cash money?

The reserve requirement obviously limits them.

You are implying that I stated they can create money out of thin air without limit. Which I did not at all say. I simply said they can create money out of thin air with no mention of the limits on this ability. That is your straw man.

As has been explained to you a bank does not neccessarily need the reserves. It can make the loan and borrow the money to cover its reserve requirement.

Does more money exist after the bank loan than did before the bank loan in the entire system?

It is represented on their books as a loan to the Government. Which would be represented as both and asset and liability on their books. So yes, technically it is a deposit on their books.

It was meant to speak to the fact that there are indeed limits on what the Fed can create.

I suppose it isn't, I misread your post.

 

Banks fail because they can not meet their liabilities. Your deposit goes to pay off their liabilities. This does not change the fact that banks create money out of thin air and that deposits are not simply claims on reserves.

Yes, it does give a lot more confidence in the banking system

Fine, loan reserves. You are a master of making arguments about definitions even though they have no bearing on the end game.

They go bankrupt because they can't satisfy their liabilities. And yes, as long as I can spend my deposit regardless of how many reserves a bank has, then reserves do not have a constraint on my money.

 

No, you use cash/reserves obtained from your bank to purchase goods and services. When you do, your bank debits your deposit account.

OK. Doesn't contradict anything I said.

I've never denied deposits are a form of money, if that is the definition of money you want to use. And I've never denied that loans from banks create deposits.

I've tried to point out how deposits are different from cash/reserves/base money to explain to folks how the Fed creating money (by creating new reserves as well as deposits) is different than when banks create "money" (by creating new deposits).

If you use the generic term "money' to try to understand and explain this stuff, you get hopelessly confused as to what is going on. As this thread so aptly illustrates.

 

What I don't understand is how this concept is escaping you.

The bank does not have $10,000 in actual reserves after it makes the $9,000 loan. It only has $1,000 in reserves and $10,000 in liabilities (claims on its reserves). A $10,000 deposit can only be turned into a $9,000 loan that goes into circulation. When that $9,000 loan is turned into a deposit and taken out of circulation, it can only be turned into a $8,100 loan. Each subsequent loan that goes into circulation is smaller than the previous one. There will never be more than the initial $10,000 in circulation at any given time.

Why wouldn't it? It's only required to keep 10% of it.

 

Exactly. When depositors demand money from their deposit accounts (the bank's liabilities) and the banks does not have the assets on hand (reserves) to pay that money, the bank fails.

Your deposit account *is* a liability to the bank. See MMM steps 1-6.

At least it is supposed to.

I disagree it has no bearing.

You cannot spend your "deposit". You don't have a "deposit." You have a deposit account. And no, you cannot spend money from your deposit account unless the bank has the reserves to cover it. Because whether you withdraw cash, or write a check on your account, you are demanding your bank to transfer reserves. If it doesn't have the reserves, you don't get cash and your check doesn't get paid.

 

No, I use the little bytes in my account. If the banks does not have reserves then they have to deal with that with the banking system. I still can purchase what I want with MY MONEY. It is not a claim on reserves, it is my money.

So what is your point? If deposits are a form of money and the Govt creates deposits... then the Govt creates money. That's what I've been saying the whole time.

And I have said from the whole time that the Fed also creates a "form" of money to represent another form of money (aka deposits created by the Govt)

There is a difference between the two moneys when regards to what balance sheet you are looking at. In regards to the money that is actually used to purchase real goods and services in America, than deposits are as money as it gets.

I understand what base money is and I understand that banks do not create base money. Now that you admit deposits are actually money than I have no clue what your argument is.

 

This issue has already been addressed several times in this thread. It depends on how you define "money". If you define "money" as all circulating money + all bank deposits, then yes they do create "money". But the point is that none of the "money" the banks create ever actually end up in circulation; they are simply creative accounting tricks that allow them to make more loans and collect more interest. But these accounting tricks do not cause inflation. Only the Fed can create money that will end up in circulation, and thus only the Fed is responsible for inflation. The banks have no effect on it.

 

Deposits aren't the banks only liabilities. You don't lose your deposit because the bank doesn't have cash to give you, you lose your deposit because the bank leveraged their reserves to the point that they can not afford their liabilities. In the case of the last crisis, banks leveraged their reserves in Govt MBS's. So basically the bank invested your money and lost it. They use your deposits to pay basically pay the system back.

Never said it wasn't.

You are confusing the two. I'm not reserve constrained. I don't need my bank to have reserves in order for me to make a purchase. Banks need reserves to satisfy requirements with the Central Bank. If they do not have reserves available for when I make a purchase with my deposit then they will have to go and borrow some.

If my purchases were constrained to how many reserves my bank had than yes, I would start agreeing with you. But when they transfer money out of my account to another account, it is not dependent on how many reserves my bank has.

That is simply an interbank related need... and has nothing to do with your or my money.

 

This is irrelevent. We are all in agreement here that the Federal Reserve creates bank reserves and money that eventually ends up in circulation, given a positive velocity of money.

 

We are in agreement that the Fed creates bank reserves.

No knowledgeable person is in agreement that deposits are not in circulation. That is just something you made up.

 

Because he's not.

A banker's say-so is not good enough. He would have to adequately explain why Iriemon and I are wrong.