Debunking fractional reserve conspiracies

[Merko]

Some of my otherwise level-headed friends appear to have been taken in by theories about how the fractional reserve banking system is somehow a major problem. Specifically, they've been impressed by the book 'Web of Debt' by Ellen Hodgson Brown. It's a thick volume, but my initial impression is that this is equal parts conspiracy thinking and financial alchemy.

Apparently, the problem is that the fractional reserve banking system allows bankers(*) to 'invent' fiat money and thereby secretly control the world. They conspire in various ways to force and/or fool governments to continue this system, even though, if it was abandoned, nobody would have to pay any taxes(!).

Since the subject of currency can be hard to get your head around, it is apparently possible for people of otherwise good judgement to be taken in by these ideas. I'd rather see them devote their time to something more productive.

So, I'm wondering if somebody knows of any good source for critical information on this subject?


(*) a different audience would probably substitute this with 'Jews', although Brown does not make this association (though she does post a favourable review from an anti-semitic magazine prominently on her webpage).

 

[cheat3]

First of all its probably better if you ready a book before `debunking´ it. second Its not really a conspiracy theory, the issues I have with fractional reserve banking mostly come from reading about money creation in the booklet modern money mechanics. Produced by the Chicago federal reserve.

The fact of the matter is that over 90% of the money created in our banking system is created by private banks, this does not nessecarily mean thateither the govenment has no control, or that we are owned by banks etc.

However the system of money creation does rely on loans, as it is in essence your (if you take out a loan) agreement to pay back the loan which is the created value. so, new value is in the system, all well and good, however about the money given to you is created at the expense of a creation of an equal ammount of debt plus interest.

so, over 90% of money creation is done so with the creation of a creater ammount of debt. This is not necesseraly a problem in the short term because before you need to repay your debt more money is created and you can draw form this to find the money for your loan repayments.

However in the long term, or when people start to default on loans there is a problem, that is when the lending stops we are left with a greater ammount of debt than money in the system and everyone wants their money back.

At this point the government has really two options (as i see it and have read) eithre print a lot mroe money to repay, or let people default, neither a desireable result.

The second problem I have with fractional reserve banking is that while it creates wealth (ostensibly at least) faster than any other money monitary system available it fundamentally requires perpetual growth on a plant with finite resources.

We need a realistic monitary system, not one that assumes that we have infinite resources on this planet, or that its ok to have more debt in a actual money.

 

[LightinDarkness]

First of all its probably better if you ready a book before `debunking´ it. second Its not really a conspiracy theory, the issues I have with fractional reserve banking mostly come from reading about money creation in the booklet modern money mechanics. Produced by the Chicago federal reserve.

No, you didn't. That is the specific "booklet" mentioned by Zeitgiest which has been completely spun out of control - it doesn't say at all what you think it says. Read it first instead of buying into conspiracy theory fantasy.

I am so tired of this federal reserve madness. So many people buying into woo.

 

[macdoc]

Cheat you only have part of the picture.

Fractional banking is designed to match money supply with wealth creation demand.

With a fixed amount of currency available a bank with a million dollars in equity can only put out a million dollars worth of mortgages - effectively starving an economy that wants to create say 1.5 million dollars worth of new wealth in the forms of homes AT COST.

It becomes a block on growth but it does not inherently require growth as once mortgages are retired the "money" becomes available to say tear down and rebuild a "past best by" date apartment block.

The ideal is to keep sufficient liquidity in the system to match economic activity.

Where it all went wrong is using the fractional advantage to fund speculative situations.

Ideally
Developer brings 20% of his own money, some labour and materials together and borrows 80% of the remainder from a bank to create new wealth in a house.

Where is goes wrong is the banks, instead of lending at 80% of the construction cost.....say $20 k from builder and $80k from bank.....the banks offer $400k nothing down to the sucker who thinks he's getting a deal on a house sure to go to $500k next year
.
$300k of bubble money with no real wealth underwriting it then flows into a huge M3 bubble which has now popped...big time.
Do that over a million homes around the world and we have the largest housing bubble in history.

Now take that - fractional lending at 10 or even 20 to one - and pile it on top of speculative share purchases at insane and often fraudulently derived multiples purchased on margin.....

of

scale.

Interesting times.

 

[cheat3]

Cheat you only have part of the picture.

Fractional banking is designed to match money supply with wealth creation demand.

With a fixed amount of currency available a bank with a million dollars in equity can only put out a million dollars worth of mortgages - effectively starving an economy that wants to create say 1.5 million dollars worth of new wealth in the forms of homes AT COST.

It becomes a block on growth but it does not inherently require growth as once mortgages are retired the "money" becomes available to say tear down and rebuild a "past best by" date apartment block.

The ideal is to keep sufficient liquidity in the system to match economic activity.

Where it all went wrong is using the fractional advantage to fund speculative situations.

Ideally
Developer brings 20% of his own money, some labour and materials together and borrows 80% of the remainder from a bank to create new wealth in a house.

Where is goes wrong is the banks, instead of lending at 80% of the construction cost.....say $20 k from builder and $80k from bank.....the banks offer $400k nothing down to the sucker who thinks he's getting a deal on a house sure to go to $500k next year
.
$300k of bubble money with no real wealth underwriting it then flows into a huge M3 bubble which has now popped...big time.
Do that over a million homes around the world and we have the largest housing bubble in history.

Now take that - fractional lending at 10 or even 20 to one - and pile it on top of speculative share purchases at insane and often fraudulently derived multiples purchased on margin.....


Interesting times.

Many thanks for the pointers, but say for example, i borrow $1000 to build a car, i build the car and create the wealth, in 10 years the money is still around, but i built a shabby car, and now its a piece of crap worth nothing but scrap, we´ve got inflation on our hands right?

 

[mikehh]

^^ but what did that 1000$ create over the 10 years. by it being spent and passed did it then go to another business? did that business create another job for a new person who turned 18 who entered the workforce? There may be more dollars in the system but would there also not be more "production" and people in the system?

 

[Free Thinkr]

No, you didn't. That is the specific "booklet" mentioned by Zeitgiest which has been completely spun out of control - it doesn't say at all what you think it says. Read it first instead of buying into conspiracy theory fantasy.

I am so tired of this federal reserve madness. So many people buying into woo.

Nothing he said was wrong.


But don't trouble yourself with this stuff; it's not like the banks have essentially strong-armed our government into handing the keys over. Oh wait...

 

[Free Thinkr]

^^ but what did that 1000$ create over the 10 years. by it being spent and passed did it then go to another business? did that business create another job for a new person who turned 18 who entered the workforce? There may be more dollars in the system but would there also not be more "production" and people in the system?

That's right. All real wealth depreciates; assuming a progressive community, however, creation of new wealth will outstrip depreciation, and there should be no problem.

macdoc has it largely right. The problem with fractional reserve is that the main reserve asset -land- is not a creation of labor that adds value at all: it's capitalized value is merely the result of anticipated future rents. As the economy grows, land values increase, which increases the expectation of future rents, which increases value.. on and on it goes, with land and fractional reserve teaming up to create a rapidly increasing debt burden. At some point, people are no longer able to take on the kind of debt required to keep purchasing mortgages, and *pop*.

All the subprime stuff and clever packaging of financial obligations, and the low interest rates pursued by central banks was merely the inevitable result of the fact that, after we recover from each bust, we do so at a greater debt burden than we did the last time: because even in the busts, the slate is never fully cleared. In other words, it's all the inevitable result of our system. The people who think all this could have been avoided with prudent management fail to understand that such management will never long obtain in a system with the structure and incentives ours has.

A system that allows private parties to monetize debt will inevitably suffer from individuals who will innovate all sorts of heretofore unimagined means of extending credit, and thereby generate personal profit.

 

[LightinDarkness]

Nothing he said was wrong.


But don't trouble yourself with this stuff; it's not like the banks have essentially strong-armed our government into handing the keys over. Oh wait...

PBS fear mongering for ratings - absolutely normal.

No matter how bad you want it, it isn't happening.

So sad.

 

[Free Thinkr]

PBS fear mongering for ratings - absolutely normal.

Ad hominem fallacy in place of reasoned arguments by those with faith in the status quo - absolutely normal.

No matter how bad you want it, it isn't happening.

So sad.

The facts are what they are. And the fact is, unless the course we're taking drastically changes in the near future, the FIRE sector of the economy will effectively be more powerful than the government.

 

[HereticHulk]

No, you didn't. That is the specific "booklet" mentioned by Zeitgiest which has been completely spun out of control - it doesn't say at all what you think it says. Read it first instead of buying into conspiracy theory fantasy.

I am so tired of this federal reserve madness. So many people buying into woo.

Woo or nay, it obviously is not working too well right now and our elected leaders are passing legislation that they haven't even read that spends (debt) money that isn't theirs.

http://seekingalpha.com/article/98769-our-coming-depression

The Catch-22 of our current economic system is that if everyone in the country lives within their means, the economy will collapse. The spending of money we do not have is what has driven our “Great” country for the last three decades. We can always count on Government to not live within its means, so deficit spending will continue and most likely accelerate. But, consumers have been dependent upon the stupidity and recklessness of banks, credit card companies, retailers, and auto makers to help them live above their means. This part of the American Dream is lying in shambles. Banks will not lend, credit card companies are cancelling credit lines, retailers are closing stores, and auto makers have stopped financing cars. Part 2 of our economic crisis has just begun. Having worked for a big box retailer and a major public homebuilder, I have witnessed first hand that faulty pie in the sky assumptions about growth will lead to dreadful strategic decisions that have huge negative financial consequences to those companies.

Even if we somehow avoid a true depression, the next few years will be extremely painful. The question is whether we come out the other side as a stronger Nation or a weaker declining Nation. The words of Congressman Ron Paul should be the rallying cry for our great country.

“The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are being looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care? When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media? Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.”

It is time for our citizens to accept the bitter medicine of bad times, but to learn from our mistakes and put this great nation back on course as the beacon of democracy that our Founding Fathers envisioned.

 

[Alex Libman]

In a free society, a bank that fails to convince others that its paper currency is trustworthy will not be in the currency business for long. No matter how a particular store lists its prices, paying with a different currency would be as simple as paying with a different credit card, and online shopping and portable electronics can make currency conversion entirely transparent.

In our society, the government has a total monopoly (as only a government can have) on the issuance of legal tender. Try to offer an alternative (ex. Liberty Dollar), and thugs with guns will come for you soon enough!

 

[Free Thinkr]

In a free society, a bank that fails to convince others that its paper currency is trustworthy will not be in the currency business for long.

In the sort of "free" society you envision, they wouldn't need to be.

We saw that sort of set-up in the US, and we know it doesn't work.

No matter how a particular store lists its prices, paying with a different currency would be as simple as paying with a different credit card, and online shopping and portable electronics can make currency conversion entirely transparent.

Garbage.

In our society, the government has a total monopoly (as only a government can have) on the issuance of legal tender. Try to offer an alternative (ex. Liberty Dollar), and thugs with guns will come for you soon enough!

And rightly so. Money is a legal construct. It's a tool, not a good.

 

[Alex Libman]

We saw that sort of set-up in the US, and we know it doesn't work.

Um, are you sure it wasn't a Sliders episode? Because in the real world the government held this monopoly for hundreds of years before digital currency transactions were even conceivable!

Good thing the Wright Brothers didn't listen to people like you, who've told them that flight was tried before and it didn't work...

Money is a legal construct. It's a tool, not a good.

Again, you're quoting slogans instead of thinking.

Money is a means of exchange. You could pay in chickens or asteroid mining rights, but that would get messy and require too much accounting overhead. Metals have been the most convenient means of exchange in antiquity, and trust in a credit-issuing institution allows for light physical tokens (i.e. paper) or digital information to take their place.

So the question you must answer is - what gives the government the "divine right" to force people to accept its currency at a point of a gun?

 

[oggiesnr]

So the question you must answer is - what gives the government the "divine right" to force people to accept its currency at a point of a gun?

Trust. Users of bank notes have to believe what it says on the front of them and after various financial crisis over the years that has come to mean they want to see the Government's name on there.

There is at least one curious exception exception which is Scotland where the notes issued by RBS, BoS and Clydesdale are techinically NOT legal tender but are accepted and used as such (BoE notes aren't legal tender in Scotland either).

Steve

 

[Free Thinkr]

Um, are you sure it wasn't a Sliders episode? Because in the real world the government held this monopoly for hundreds of years before digital currency transactions were even conceivable!

Your ignorance is staggering.

Good thing the Wright Brothers didn't listen to people like you, who've told them that flight was tried before and it didn't work...

We had free banking. It was a disaster. No one who lived through the era thought otherwise.

Again, you're quoting slogans instead of thinking.

Money is a means of exchange. You could pay in chickens or asteroid mining rights, but that would get messy and require too much accounting overhead. Metals have been the most convenient means of exchange in antiquity, and trust in a credit-issuing institution allows for light physical tokens (i.e. paper) or digital information to take their place.

Money is a legal construct. What you are talking about is credit. Credit has proved to be a poor substitute for money.

So the question you must answer is - what gives the government the "divine right" to force people to accept its currency at a point of a gun?

Name one example where the government has forced anyone to accept its currency at the point of a gun.

Thought not.

 

[macdoc]

Hawaii??
Indigenous Americans?

 

[Alex Libman]

Trust. Users of bank notes have to believe what it says on the front of them and after various financial crisis over the years that has come to mean they want to see the Government's name on there.

If everyone trusted the government, it could make currency use and even taxation voluntary. This clearly isn't the case.

Name one example where the government has forced anyone to accept its currency at the point of a gun.

I already hyperlinked an example which affected me personally in this very thread!

Look, clearly you're not even reading what I write, much less thinking about it. I'm just going to ignore you and your neo-communist propaganda from this point on.

 

[Free Thinkr]

I already hyperlinked an example which affected me personally in this very thread!

Where's that?

Look, clearly you're not even reading what I write, much less thinking about it. I'm just going to ignore you and your neo-communist propaganda from this point on.

That's rich, coming from an ancap.

 

[bobrayner]

If everyone trusted the government, it could make currency use and even taxation voluntary. This clearly isn't the case.

Trust isn't enough. You'd need to overcome the free rider problem too, which is a slightly bigger obstacle.