Money supply is fake anyway

>   Garfinkel described it like this: "My name is Agent
>   Jenkins. I'm an investigator with the secret service,
>   working on a counterfeiting case. And it's tough. Last
>   year, my office got a priority call from an economist at
>   Stanford. The economist was looking at something called the
>   money supply and velocity and both were increasing a little
>   too fast. They just didn't add up. The economist finally
>   figured an organisation was printing its own electronic
>   money -- just like the US government does.

Banks "invent" money on a daily basis.  You would have to counterfeit a 
great deal of currency (probably more than it out there right not) before 
you would start making a serious impact on the money supply. 

That said, enough counterfeit money may change the way people value 
money, and may cause inflation.

-Thomas

Thomas Grant Edwards writes:
> Banks "invent" money on a daily basis.

Really? Since when?

.pm

On Thu, 11 Apr 1996, Perry E. Metzger wrote:

> Thomas Grant Edwards writes:
> > Banks "invent" money on a daily basis.

> Really? Since when?

Since the invention of fractional reserve banking.  Banks loan out far
more than they have currency reserves.  This loaning out of non-existant
money inflates the money supply.  The trick of being a banker is loaning
out enough money to make a profit, while keeping enough currency on
reserve to pay people when they take money out of your bank. 

There is far more money in demand deposits (i.e. figures on a computer)
than there is currency (i.e. green stuff).  The ratio of demand deposits
to currency backing in banks is set by the government.  If everyone came
and took out all their currency for their demand deposits, banks would
fail right and left. 

The Federal Reserve also controls the expansion of the money supply by
buying and selling federal securities as well as setting interest rates on
its "loans of last resort" it makes to member banks. 

I don't consider the Fed a "conspiracy," as I believe that even in a
privatized money system, there would need to be flexible fractional
reserve banking to avoid damaging deflationary periods which come with
spurts of credit demand. 

Most of my free-market money buddies assure me that deflation in a
hard-money system is mainly a product of socialist spending policies
coming to an end, especially after a time of war.  I remain in belief that
even without massive government spending that hard currency would have
credit cycles that would lead to dangerous deflationary periods. 

As far as inflation, the Fed has managed to create the most massive 
inflationary period the U.S. has ever had.  

-Thomas

Thomas Grant Edwards writes:
> On Thu, 11 Apr 1996, Perry E. Metzger wrote:
> 
> > Thomas Grant Edwards writes:
> > > Banks "invent" money on a daily basis.
> 
> > Really? Since when?
> 
> Since the invention of fractional reserve banking.  Banks loan out far
> more than they have currency reserves. 

Thats true. However, that isn't the same as "inventing" money. They
never give out money they don't have -- they can't.

> This loaning out of non-existant money inflates the money supply.

You made two magical jumps here. The first was the notion that they
are loaning out non-existant money. That is false. They only loan out
money that they have on hand, and the value of their assets in the
form of loans + reserves is always higher than the value of their
debts to depositors. It is true that they don't have the value of all
their assets on hand to give to creditors if they demand it, but then
again you probably don't have all your assets in a liquid form either.
The second magical leap you make here is that this is somehow
inflationary, which of course it isn't.

> There is far more money in demand deposits (i.e. figures on a computer)
> than there is currency (i.e. green stuff).

It is true enough that the total sum of demand deposits exceeds the
total value of outstanding currency. So what?

> The Federal Reserve also controls the expansion of the money supply by
> buying and selling federal securities as well as setting interest rates on
> its "loans of last resort" it makes to member banks. 

You are correct that the fed creates and destroys money. You are not
correct that ordinary banks do, or in your assertion that the fed
substantially controls the expansion of the money supply through the
discount rate.

Perry

[only relevant in terms of ecash lending and counterfeiting effect on the 
money supply]

On Fri, 12 Apr 1996, Perry E. Metzger wrote:

> You are correct that the fed creates and destroys money. You are not
> correct that ordinary banks do, or in your assertion that the fed
> substantially controls the expansion of the money supply through the
> discount rate.

We may be talking about different definitions of "making money."

I'll quote from "Secrets of the Temple" by Wiliam Greider... 

"New money was created not only by the Federal Reserve but also by private
commercial banks.  They did it by new lending, by expanding the
outstanding loans on their books.  Routinely, a bank borrowed money from
one group, the depositors, and lent it to someone else, the borrowers, a
straightforward function as intermediary.  But, if that was all that 
occurred, then credit would be frozen in size, unable to expand with new 
economic growth.  On the margins, therefore, bankers expanded their 
lending on their own and the overall pool of credit grew - and the bank 
turned credit into money."

If the Fed was the only organization that create or destroyed money
(through sales and purchases of federal securities), then the money supply
could be finely controlled.  The reality is that the money supply can only
be slightly controled by the Fed. 

The challenge of the Fed, though, is that banks create money with 
credit.  If the Fed makes $1 billion through the purchase of securities, 
that $1 billion injection will be multiplied by bank lending and credit 
up to $5 billion of new deposits, which would now be counted in the M1 
money supply.  

The banks would loan out $840 million of new loans (keeping 16% for
reserves), creating $840 in new deposits.  Those new deposits would enable
banks to loan out $706 million, and so on, and so on, until around $5
billion would be created.

-Thomas

Thomas Grant Edwards writes:
> If the Fed was the only organization that create or destroyed money
> (through sales and purchases of federal securities), then the money supply
> could be finely controlled.  The reality is that the money supply can only
> be slightly controled by the Fed. 

You are confusing "Money Supply" with "Money". "Money Supply" is a
technical term and it doesn't even have a single definition -- there
are M1, M2, M3...

If you meant the activities of banks lead to expansion of the amount
of demand deposits in the world, yes, you are correct. However, at no
time do commercial banks loan out money that they do not have on
hand. If they give you a loan for $100, they have $100 available and
they can expect that if you don't deposit the $100 with them, that
they will have the $100 to give to the bank that you deposit the check
in. Now, because of fractional reserve banking, a bank will only have
a fairly small percentage of deposits in cash, but that is different
from a bank loaning out money that it doesn't have or creating
money. Only the fed gets to create money.

Perry

PM:
>Thomas Grant Edwards writes:
>> Banks "invent" money on a daily basis.
>
>Really? Since when?

since we left standards that tie money to things physical with
value. i.e.-- the federal reserve was created, supposedly moving
to a gold standard, but which was given up, and then we moved
to silver, which was then thrown away by Nixon or whoever.

TGE was obviously referring to the way that all banks are authorized to
lend money that they don't actually have in assets based on our
banking system. they are all "tentacles" of the federal reserve,
so to speak. <g>

people say, "so what if we don't use gold. money is just an abstraction".
perhaps so, but think of this: if an economy collapsed such that
money no longer had any psychological value, would you like to go to your 
bank and have them say, "sorry, we don't guarantee our money"? or would
you like to go pick up your few pounds of gold or whatever that the
money represented? I can guarantee you this: the latter scenario is
not possible in our current system, and if you think it is, perhaps
you will encounter a reality check (like the crash of '29 was).

a long time ago a "banknote" referred to gold, and that banknote could
be traded for that gold. manipulations in our system caused us to lose
that standard. few people will understand this, and those that control
the money supply and benefit therefrom would prefer it that way.

the power of printing and creating money is far more significant than
most people understand. again, those that do understand it would
prefer that it stays this way.

a somewhat amusing book called "Last Waltz of the Tyrants" might
interest some. there are many more substantial books on the subject
as well. 

these issues are going to come to the forefront if digital money
ever gets off the ground. again, I expect that there are a lot
of people secretly working against digital money because it has
the potential to interfere with monomaniacal power structures already
in place.

sure, I'll be flamed by some for writing this, but what is the
cpunk list without a little delicious conspiracy theory?

"Vladimir Z. Nuri" writes:
> >Thomas Grant Edwards writes:
> >> Banks "invent" money on a daily basis.
> >
> >Really? Since when?
> 
> since we left standards that tie money to things physical with
> value.

That means, Mr. Detweiler, that the Fed invents money, which is true
enough. However, banks in general aren't so empowered.

This isn't cypherpunks material any longer so I'll much more happily
discuss it in private mail. I feel bad about discussing it this much
already...

Perry