The Creation of the Federal Reserve System (Part 3)

Cash In bank vaults/Reserves != Spendable Money
Deposits = Cash in the hands of the public

Sure it is, I use my deposit account to purchase things all the time!

It's not really a claim

Yes, I understand MMM was written in a simple language so people like you and Iriemon can understand it. But in the real world reserves are transferred or not transferred regardless of the banks reserve position. Banks can and do go in to reserve deficiency. This is where your theory crumbles like a cookie.

Sure there is

 

Totally wrong. Reserves are designated for the specific purpose of being withdrawn as spendable cash by depositors.

How can deposits be cash if there exists up to 10x the amount of deposits than there is cash in existance?

Deposits != cash.

You are not spending "deposits". Deposits are not spendable money because exists up to 10x the amount of deposits than there is cash. That means that for every dollar in cash that a bank has, there exists up to $10 worth of deposits (claims) owned by depositors on that same cash dollar. You are not using "deposits" to buy anything. You are redeeming your claim on that $1 cash in reserves to make a purchase with that $1 cash.

Your say-so is not good enough to contradict the facts.

Your random personal attack is noted.

Sure. There is no need for reserves to be transferred if a transaction is taking place within the same bank.

Sure. But if they are too low to meet a deposit withdraw claim at any particular time, they are insolvent.

It does no such thing to my theory.

Feel free to provide a source to back up your dubious claim.

 

That is not what reserves are designated for.

Deposits = Cash

This doesn't mean the amount of deposits equal the amount of cash. It simply means they are interchangeable and used the exact same way.

Sure it is. I transfer and receive money in my deposit account all the time. Funny how no one ever puts reserves in my account!!

If they can't borrow reserves because they are already insolvent than yes, they are insolvent. Banks are capital constrained not reserve constrained. Reserves come and go because a bank has the capital to back their deposits, not reserves.

 

Your misunderstanding still comes down to how banks fail.

Deposit accounts are literally an electronic form of cash.

People do not keep their deposits when a bank fails, they lose their money. They do not lose their claim on money. They lost their money.

 

Maybe if I draw out the steps of how the banking system works you will better understand.

 

Of course it is. Reserves exist so that the bank can satisfy the withdrawal demand in accordance with a ratio set by the Fed.

Deposits are not spendable. They are not interchangeable with cash. If that were true, then depositors could withdraw up to 10 times the amount of cash in reserves and spend it. This is not true because the bank would fail.

Feel free to cite a source that backs up your dubious claim that deposits = cash.

See Step 6, MMM. You're wrong.
You have still failed to provide a source that backs up your claim that banking transactions transfer money from account to account, regardless of what reserves are.

Nobody puts anything in your account. Your account is a claim against the bank's reserves. It is not spendable cash.

This point is completely irrelevent because Capital backing deposits = reserves.

 

This has nothing to do with anything in your post here.

They are not. Reserves are an electronic form of cash. Deposits are claims on the electronic form of cash.

Wrong. How do you think the FDIC insures deposits? The accounts don't disappear when a bank fails. They can't insure an imaginary account.

Correct. Their claim is not lost; it simply becomes worthless.

 

It has already been drawn out for you in MMM, yet you continuously ignore it because it contradicts your position.

 

You are taking the perspective of a bank. I am not a bank. I do not accept reserves for settlement of payment. My employer simply credits my account with electronic bytes that I accept for my labor. When I go to a restaurant they accept a transfer of my little electronic bytes in to their account. They do not accept reserves.

Deposits are our money, not the bankers money. Just like bank notes were money to the nonbank public but liabilities to the banks. They are liabilities to the banks because banks are creating money. When you give someone $120 in new bank notes you a liable for that $120.

Like I said, all money is a claim on something... but it is still money. Those little bytes in your account are still money just like cash is money.

 

The perspective of the situation is irrelevent to how it actually works.

Correct. You accept claims on reserves.

Your employer credits nothing to your account. You transfer nothing to the restaurant's account.

Your employer requests that the bank credit your account with electronic bits that represent the claim he wishes to transfer to you, which you accept for your labor if the bank is capable of performing the transfer. Same deal with the restaurant.

Correct. They accept claims on reserves.

Wrong. Deposits are claims on our cash/reserves. You cannot spend deposits.

Bank notes are not liabilities to banks. Where do you come up with this nonsense?

We established long, long ago that cash is money and deposits can be considered money, depending on how you define "money". The reason that it depends on how you define "money" is that deposits are not spendable, while cash is.

 

Sure it is. From my perspective I accept cash or little bytes in my account for payment. From the banks perspective... they accept cash or little bytes in their account. From the banks perspective deposit accounts are liabilities... to our perspective they are assets.

All money is a claim on something. It's still money.

Sure you can. I do it all the time!

Of course bank notes are liabilities to the bank

This is ridiculous. Of course deposits are spending. I just bought something off ebay with my deposit account. Are you saying that I actually didn't buy anything just because all I did was transfer a claim? Lol... isn't that what money is.

 

There is no cash in your account. The only cash at a bank exists in the vault or in a computer as reserves, AKA the bank's "account". You are putting your cash into the bank's "account" and they are giving you a deposit account with a number attached to it that is the amount of claim that you have on the cash in the bank's "account".

This is correct. The bank's "account" is its reserves.

This is also correct.

I agree that it's still money. But there are different forms of money. Proven by the fact that there are multiple equations used to determine the money supply. Deposits are money that are a claim on bank reserves, or cash. Cash is money that is a claim on government debt.

Deposits are a claim on a claim, where as cash is just a claim.

You cannot spend deposits. You can request that the bank transfer all or part of your claim to another deposit account.

Bank notes are not liabilities to banks. Deposit accounts are liabilites to the bank.

Get all of the people at your bank to try to "spend their deposits" (transfer their claims) at the same time. See what happens. You cannot "spend" deposits because deposits are only claims. People will not accept your account statement as a form of payment. You can only request your bank to transfer claims.

Sure, you did buy something because the seller accepted your claim on reserves as a form of payment.

Yes, we agreed long, long ago that deposits (claims on reserves) can be considered money, depending on what definition of "money" you use.

 

There isn't cash in the account... the account is money like cash is money.

Alright, than we are in agreement.

Lol, I like how you use the word "request". No, deposits are money and I transfer my digits to another account who is willing to accept this electronic transfer. They do not accept reserves for payment. That is why deposits are money. There is literally no difference between me going to the bank getting cash out, going to a store, and that store putting the cash in to their bank... than me simply taking the money out of my account and putting it in to their account.

This is a transfer of money. When banks transfer reserves they are also transferring money amongst themselves.

Deposit accounts are the 21st century bank notes

The bank would borrow reserves and all our spending would go through. Banks are capital constrained not reserve constrained. Banks don't lose any capital when we use our deposit accounts.

Isn't that what money is? Lol

Listen I think we both know what the other is trying to say and we both are right when provided the context we are referring to.

 

Now we are starting to make some progress.

The account is money. Cash is money. The account is not money "like" cash is money. They are two different types of money. That's why the account isn't considered money according to some definitions of money supply.

It's good to see that you have finally admitted that deposits != cash.

You transfer nothing. You request the transfer. The bank does the transferring if and only if the reserves can be transferred.

No reserves, no transaction.

Step 6, MMM.

Correct. They accept claims on reserves for payment.

This was established long, long ago.

Yes, there is a difference, because that's not how it works. Step 6, MMM.

I agree that banks transfer reserves and transfer money. You do not do it. The bank does, if it is capable of doing so.

Now you are contradicting yourself. First you said that deposits are cash, then you agreed that deposits are not cash, and now you're saying that deposits are cash again. Which is it?

Maybe. Or maybe nobody wants to lend it to them and they fail.

Depends on how you define "capital".

Yes, we agreed long, long ago that deposits (claims on reserves) can be considered money, depending on what definition of "money" you use.

You are not right.

Deposits are not the equivalent of cash. You agreed with this but continue to contradict yourself. Deposit accounts are not 21st century bank notes.
There is no cash in your deposit account. You admitted this but continue to contradict yourself. You cannot transfer cash from your account to someone else's account if there is no cash in your deposit account.

 

They are the same type of money other than physical differences. When you take cash out and pay for an item and that money gets deposited back in the system, that is a transfer of reserves. When you use your deposit to purchase something, that is a transfer of reserves. There is literally no difference.

Deposits are equivalent to cash. QTY of deposits does not = QTY of cash.

You keep quoting that same stupid step lol. Banks can have a deficiency in reserves and banks can accept transfers of accounts with out accepting reserves by lending the reserves back to the bank. Reserves are not instantly transferred when you purchase an item with your account.

So you are 100% incorrect about "no reserves, no transaction"

So they accept money? Lol

Sure I do. The second I pay for something with my debit card there is a transfer from my account to another account. Reserves are handled after the fact.

How do you not comprehend this? I didn't say deposits are cash. I said they are equivalent to cash. As in deposits don't need cash in them because they are money like cash is money. Stop screwing up my words so much.

Banks can borrow at the fed funds rate as long as they have capital

Assets - Liabilities

You don't need to transfer cash from your account to another account because your account is money just like cash is money. Paying for something with the digits in your account is no different than paying for something with cash.

 

If they were the same type of money, they would be considered money in all equations for money supply. Think about that, and think long and hard about why this makes your position illogical.

Who says that cash is going to get deposited back into the banking system? It could get stuffed under a mattress for an indeterminate amount of time.

LOL. That means they are not equivalent.
If they were equivalent, they both would be considered money in all equations for money supply.

Think about both of these points, and think long and hard about why they make your position illogical.

That's true, but the recipient bank would not make the loan to the sending bank unless it was confident that the sending bank would send the reserves at some point. They will not make the loan if they do not believe that the sending bank can't pay it back. But that in no way nullifies the fact that you're not transferring anything.

This is partially false. Reserves can be instantly transferred, but they are not necessarily instantly transferred. One thing is for sure...if the recipient bank is not confident that the sending bank will eventually send the reserves, it will not accept the transaction.

Lol, of course they accept money!!!! Lol! Lol!

You are transferring nothing. You are requesting a transfer.

Not necessarily. Reserves are handled immediatley if it is the same bank. Sometimes reserves are not handled at all, because the transaction is not accepted if the recipeint bank is not confident in the sending bank's ability to transfer reserves in the future.

Disproven above. Deposits are not the equivalent of cash.

Sure, but that involves the creation of more cash/reserves, which is totally irrelevent to this discussion.

Sure, but if they have enough capital, then they are able to keep their reserves at the necessary levels. So your point is irrelevent.

Totally false. Reserves are drained when we use our deposit accounts. Reserves = Assets. Therefore, capital is lost when we use our deposit accounts.

Your account is not money "just like" cash is money. This is false. If they were the same type of money, they would be considered money in all equations for money supply. Think about that, and think long and hard about why this makes your position illogical.

 

Currency in the hands of the public and deposits are together in every money supply other than the monetary base. Only reserves and currency in the bank vaults are not because that would be double counting how much money there really is.

Than the banking system has less reserves.

Cash in the hands of the public + Deposits = Money. How's that for logic.

Yes, they are capital constrained not reserve constrained. So the fact that one bank can just transfer the money from my account to another account and I get in return real goods and services while the bank agrees to transfer reserves later, should be a clear indication to you why deposits are money.

Reserve positions are handled at the end of the day. If the bank doesn't have enough reserves for it's transactions, it goes out and borrows them.

Just having a little laugh at your expense. A transfer of "claims" is what we call a transfer of "money".

When I click pay now on ebay with my debit card I am transferring my money to another account. I am not transferring reserves. Just like when I pay for something with cash I am not transferring reserves. Cash is only a reserve when it is in the banking system.

Yes, based on capital

Deposits + Cash = Money

Completely and utterly false. No capital is lost for the bank when you spend money from your account, only reserves and deposits. Capital is lost when someone defaults on a loan or an investment fails.

Cash + Deposits = Money

 

Exactly. Like I said, it depends on how you define "money".

You are an astute observer.

Depends on how you define "money".

You are transferring nothing from your account to another account. You are requesting that the bank transfer all or part of your claim from one account to another.

Recipient banks do not always front the capital/reserves for sending banks. If the sending bank doesn't have the reserves or capital to make it happen, and the recipient bank refuses to loan the bank the money, then no transaction takes place.

If there are no reserves/capital, or if there is no agreement reached between the banks to arrange a later payment, then no transaction takes place.

If there was cash in your bank account, then there wouldn't be a need for reserves. There wouldn't be a need for the FDIC.

We have established long, long ago that deposits are counted as money in some money supply equations.

Maybe. Sometimes it can't get a loan and it becomes insolvent.

Nonsense. If your friend gives you an IOU for the $5,000 you let him borrow, and you give that IOU to somebody else, you have not transferred any money. You have transferred a claim on money.

You are transferring nothing. You are requesting that the bank transfer your money to another account. No reserves/capital, no transaction. See above.

Correct.

The equation does not say Deposits = Cash = Money. That is because Deposits != Cash. They are two separate variables in this equation.

 

thread bump

 

You say I transfer nothing from my account to another account. Than you say the bank transfers all or part of my claim from one account to another. Hmmmm....

You are just throwing reserves in there to save face. If a sending bank doesn't have capital to make it happen the recipient bank refuses to loan the bank the money.

Yes, because the bank is insolvent and lost your money.

In ALL money supply equations except one, lol

Nonsense... it is not a claim anymore, it is MONEY. If that individual gave me a good or a service for the piece of paper that is a claim on $5,000 than that piece of paper is money. That is what money is... it's a claim.

Yes, because the bank doesn't have any money if it doesn't have any capital. It lost your money. I can't believe you do not comprehend what happens when I transfer digits from my account to another account.

Deposits + Cash = Money... Happy?

 

Correct. You transfer nothing. You request that the bank transfer all or part of your claim on its reserves to another account. You are not transferring cash from deposit account to deposit account.

Wrong. As a matter of bookkeeping, the bank has to have reserves, regardless of how much capital it has. It can convert its capital into reserves if it needs to. A bank can have zero capital and proper reserves and it won't fail.

Not necessarily. The recipient bank might be willing to engage in shoddy lending practices, like what contributed to the crash in 08.

That piece of paper is not money at all. It is a claim on money. Try going to McDonald's and buying a burger with the IOU your friend gave you. See what happens.

You're still confused. Money is a claim on government debt. The IOU is a claim on money. They are two completely different things. One is a claim, the other is a claim on a claim. You cannot buy anything with a claim on money, you can only buy things with money.

It didn't lose "your" money. It lost the money you invested in it, and therefore your claim on its reserves becomes worthless if the bank is insolvent.

You don't transfer anything. You request that the bank transfer your claim on its reserves. You are not transferring cash from deposit account to deposit account.

So you are finally admitting that Deposits != Cash?

 

When I use my debit card I am transferring the digits from my account to another account. If there is an intermediary in between it still does not negate the fact that it is a transfer of money (or claims in your words) from my account to another account.

The reserve requirement in America is very small. Capital is much more of a requirement in the banking industry than reserves. As long as a bank has capital they can get the minimal amount of reserves they need.

Than it wouldn't be money. In your example you gave the IOU to someone else. If McDonald's does accept the IOU just like it accepts payments from my debit card, then it is considered money.

And since I can buy things with my debit card, it is money. If I walk in to a store and all I have is a piece of plastic and I walk out with goods and services after transferring little digits from my account to their account, that is money. Money is what is used in a transaction. Just like if you walk in with cash you can walk out with goods and services. No different.

No, it lost your money.

Who cares if it's a "request". You are still transferring money from your account to another account. Just because there is an intermediary that pushes the button for the transfer doesn't mean it isn't a transfer.

Deposits + Cash = Money

When I said Deposits = Cash I meant they were used the same I didn't mean the qty of deposits = qty of cash... but since you couldn't grasp that I had to change it.

 

You transfer absolutely nothing from your account to another account. You request that the bank transfer money from your account to another account.

Wrong again. You are requesting a transfer of money from your account to another account. You aren't personally transfering anything.

You're fabricating things again. There is zero requirement for a bank to have capital. The only thing that matters is that a bank meets the reserve requirement and that its equity is non-negative. Its capital is totally irrelevent.

Depends on how you define "money". By the dictionary definition, yes you are technically correct, because money is "anything which is accepted as a medium of exchange for payment". By that definition, anything could hypothetically be considered money, which renders your point moot. I'm sure that you'd be unsuccessful in convincing McDonald's manager to accept your friend's IOU as a medium of exchange, which is another reason your point is moot.

Your debit card is not money. Your debit card is only the method by which you request the bank to transfer money from your bank account to the store's bank account, or request the redemption of all or part of your claim on the bank's reserves. No reserves - no transaction.

The bank didn't lose your money. You lost your own money when you chose to invest it.

You're transferring nothing. You request that an intermediary make the transfer. Sometimes the intermediary isn't always able to meet your request, for example if the bank is insolvent. That makes a huge difference.

Depends on how you define "money".

LOL. Back to the drawing board.

They are not used the same at all. You don't need to request anything from your bank in order to transact with cash. If you are holding onto cash, the transaction can always take place. You don't need to rely on the bank being solvent in order to transact with cash. If the bank doesn't have reserves, then no transaction can take place between deposit accounts.

 

So I don't need to swipe my card to transfer money from my account to another account. The bank just magically knows I'm about to spend money? Hmmmm...

So the bank is doing this on their own. I play no part in the transfer?

False, the reserve requirements are so small these days they are easy to get for anyone who has capital. The deposits that require reserves are about 6% of actual deposits and investments in banks. Banks are literally capital constrained, not reserve constrained.

Of course. But they will accept the plastic card I have in my wallet.

Of course my debit card is not money. The money in my account is money and it can be access from my debit card.

How can I lose my own money if according to you, I no longer have it?

Sure I'm transferring something. So when my employer credits my bank account with money that isn't a transfer? That is magic?

If I go to best buy with cash I can walk out with a tv. If I go to best buy with my plastic debit card I can walk out with a tv. How are they different?

 

Mischaracterization of my statement. You need to swipe your card to initialize the request to transfer money from your account to another account.

Sure you do. You're the one making the request. You're informing them how much money you wish to transfer from your account, and what account to transfer it to.

It's no smaller today than it has been for decades. 10%

Sure.

This is a lie. The deposits that require reserves are 10% of actual deposits.

You're fabricating things again. There is zero requirement for a bank to have capital. The only thing that matters is that a bank has the necessary amount of reserves and that its equity is non-negative. Its capital is totally irrelevent.

Not necessarily. If you walk into McDonald's, they won't accept the plastic card you have in your wallet if the bank declines your request for a transaction. They will tell you that your card was declined and request another form of payment. Debit cards are not the same as cash. You're fabricating again.

Not always.

The same way you lose your money if you choose to put it in any other risky investment. Banking is just one form of investment.

You are transferring nothing. Your employer credits nothing to your bank account. He requests that the bank transfer money from his account to your account. Bringing the word "magic" into your argument does not make it any stronger because the fact is that you are completely wrong.

Sometimes you can't go into Best Buy with your plastic debit card and walk out with a TV, for example if your bank decides to cancel your card or if the bank is insolvent. That never happens when you walk into Best Buy with cash.