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Loans make deposits II
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John Burns
Posted 2/27/2015 20:45 (#4419480 - in reply to #4419382)
Subject: Some quotes for the reading challenged



Pittsburg, Kansas

Not nearly as clear or in as plain language as the Bank of England paper, but the same message. I have underlined areas to emphasize what it is saying.

-------------------------------------------------------------------------

The actual process of money creation takes place
primarily in banks.' As noted earlier, checkable liabilities
of banks are money. These liabilities are customers' accounts.
They increase when customers deposit currency
and checks and when the proceeds of loans made by the
banks are credited to borrowers' accounts.
In the absence of legal reserve requirements, banks
can build up deposits by increasing loans and investments
so long as they keep enough currency on hand to redeem
whatever amounts the holders of deposits want to convert
into currency.

------------------------------------------------------------------------------

Loans create deposits. NOT the other way around, which is what the "money multiplier" way of explaining fractional reserve tries to tell us. The textbooks that tell us that are a convenient way of explaining how expansion can take place, but the reality is that reserves expand along with the credit creation via new loans. It works out to be the same multiplier when a certain reserve requirement is met (for example a 10% reserve), but it is not the way banks actually operate. They actually create the deposit WITH the loan proceeds. They create new money that did not exist before the loan out of nothing. That is what the BOE paper told us outright. That is what the Chicago Fed paper is explaining but not putting it in as easily understandable terms. They also use the money multiplier example but also say:

--------------------------------------------

Of course, they do not really pay out loans from the money
they receive as deposits. If they did this, no additional
money would be created. What they do when they make
loans is to accept promissory notes in exchange for credits
to the borrowers' transaction accounts. Loans (assets)
and deposits (liabilities) both rise by $9,000. Reserves are
unchanged by the loan transactions. But the deposit credits
constitute new additions to the total deposits of the
banking system.

------------------------------------------------

It's been that way for ages. But why is it that so few people understand where money comes from? Why has it not been explained to us in simple terms? Because maybe if we understood it we would not like it?????

And who benefits from this type of exponential growth unsustainable system? Follow the money.

John



Edited by John Burns 2/27/2015 21:37
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