Where money comes from: fractional reserve and debts


In this 47-minute video, Paul Grignon lays out the workings of the fractional reserve system, explaining how banks are able to create money and then collect interest on it. He's highly critical of the system (which I have a hard time getting my head around), and he makes a good case for the idea that the deck is stacked against everyone except bankers.

Money As Debt (Thanks, Chris!)

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  1. Zeitgeist!

    Zeitgeist: Addendum!

    The latter more than the former gives a pretty great (if somewhat tinfoil hat wearing) explanation of how and why and wherefrom we have fractional reserve banking.

  2. I was explaining this to somebody just the other day. Most people have a hard time believing that banks can just make money on a whim.

  3. Well, of course, money is debt. Or not, depending on which side of the debt you stand. That doesn’t make it a bad thing. It’s a damn good thing when you’re the one making the loans. I prefer to be on that side.

  4. Ignoring the rhetoric, can someone explain what parts of this video are false or misleading? Like many internet videos, I take this one with a lump of salt, but also given the relevance of the topic in relation to the ‘credit crunch’ I would just like more background.

  5. Is this different than the usual “Money: it’s weird and scary, and I demand that people only do things I understand” screed? The one that usually ends up demanding a gold standard?

    Because as far as I can tell, that’s the economic equivalent of young-earth creationism.

  6. Did you ever get to be the banker in Monopoly? If you got to be the banker ALL the time, eventually you’d stash a 20 here or there.

  7. Didn’t Einstein write (or say) that compound interest is the most powerful force in the universe. Combine that with fractional reserve banking and you’ve got a wormhole right in your wallet.

  8. “Money is the Schrodinger’s Cat of Economics”

    Yup, it’s bOingbOing’s favourite patron saint, Robert Anton Wilson. It’s well worth reading his various stories about money and where it comes from. My favourite is that the Feds have a special “Magic Wand” they wave over money to turn it from bits of printed paper into Real Dollars ™.

  9. #9 TREQ

    I listened to half of the 1st podcast link and I got nothing insightful out of it, just useless NPR “newsy” banter. Considering the information provided in the video link from this article, I can’t see what prompted the recommendation other than they both use the word “money” in their titles.

  10. #6 William, no, this video is in many ways the opposite of the “money is weird/scary” thing. Instead, it does a great job of demystifying the monetary system.

    It’s been a while since I watched it, but as I recall, it doesn’t advocate the gold standard or any particular solution to the problems of fiat currency and fractional-reserve banking, although it does mention LETS (Local Exchange Trading Systems) favorably.

  11. If this video has sparked your interest in the subject, I highly recommend “Money, Banking, and the Federal Reserve” from the Von Mises Institute. It explains the history of fractional reserve banking, the alternatives, and how the Federal Reserve system came in to power in the US.

  12. I am not an economist (though I was actually required to take economics in school), but a lot of things in this video seem misleading to me. Creating money out of nothing is not something that only eeeevil bankers can do. You can try it at home with family and friends. Borrow ten bucks from your mom for something that couldn’t possibly cost more than three or four. Give the money to your dad for safekeeping, and let him lend half of it to your little brother. Congratulations, you’ve just created fifteen dollars of credit from ten dollars of physical money.

    I can’t help but imagine that disallowing interest on loans and expecting the government to directly regulate the money supply would lead to a clumsy system that responded slowly and heavy-handedly to the needs of the economy. (Have you ever tried to calculate the GDP or inflation? It’s hard, and rather more open to interpretation than one might expect.) Letting the banks do so much of the work allows the free market to do most of the regulating on its own.

    One of the positive points of our current loan system is that, when government intervention is required, it allows the Fed to regulate the money supply in a less drastic fashion. As mentioned in the video, if a bank faces too many withdrawals it borrows money from a central bank, which is the Federal Reserve in our current system. When the Fed announces that it’s changing its rate, that’s what it’s changing: the interest rate for banks to borrow money from it to cover unexpected withdrawals.

    If the Fed thinks there’s too much inflation it can shrink the money supply by raising its rate. Banks, not wanting to pay the high interest rate, will tend to want to play it safe by keeping more money on hand for unexpected withdrawals, so they will issue fewer loans and the money supply will shrink. If the economy is slow, the Fed can try to stimulate it by making money more affordable. (The Great Depression was not an example of the existence of money depending on debt so much as the affordability of money depending on the size of the money supply.) It lowers the interest rate, encouraging banks to make more loans because they know it won’t cost them a ton if unexpected withdrawals force them to borrow.

    This still ends up being a bit heavy-handed in practice. Luckily, the Fed can control the money supply more subtly by buying and selling securities. If the economy is slow, the Fed buys securities. It makes the purchase not because it really cares about owning securities, but as an excuse to give money to the sellers. It knows the sellers are likely to keep most of that money (where else?) in a bank. That increases the bank’s on-hand money, allowing it to make more loans, which increases the money supply. If inflation becomes a problem, the Fed can sell some of the securities it bought. Since most people don’t store their savings in the mattress these days, most of the money the Fed gets paid for the sale will come out of the buyers’ bank accounts. The banks have less on-hand money, so they can make fewer loans. The money supply contracts.

    Most of our more spectacular economic failures, such as the Great Depression, became spectacular because of misguided government interference based on economic theories that turned out not to reflect reality. Economics is not a science that’s easy to test. We’re making it up as we go along. That’s why, for now at least, I think our current system is our best bet.

  13. Bankers make the payment of the troops/cops/prison guards possible, so rulers are always sweet on them. They are essentially agents of the powerful, always have been.

  14. Doctrow<--Way to go perpetuating another internet meme encouraging paranoia about the global banking system! This video has so many problems I don't know where to begin. It's surprising that Grignon doesn't include the Illuminati or blame Jews.

  15. There are all kinds of idiotic conspiracy theories about this concept.

    There is absolutely NOTHING wrong with fractional reserve banking. It’s been used for, literally, thousands of years and has been fuel for many an economy.

    The problem is not in the concept of fractional reserve banking. The problem is in the MULTIPLE that’s lent out.

    The key is to find a reasonable multiple.

    And for those who want a gold standard, just research what life was like when we did have a gold standard. Recessions and depressions were quite common (like the depression of the 1890s).

  16. 22: What if we had a gold standard AND no fractional reserve?

    19: Maybe I missed something in your example, but I see $5 with dad and $5 with little brother, not $15.

    21: what’s with the insinuation that Grignon should be racist?

  17. Pduggie: possibly the insinuation comes from having seen these arguments many times come from anti-semitic publications that – among other things – blame the author’s economic problems on Teh Jews ™.

    When you’ve only ever seen a particular economi position espoused by scapegoating bigots who advocate change back to a system that their ancestors were able to control / be on top of, it’s difficult to weigh the position on its’ own merits.

    I agree with Alexeck @#22 : There is nothing wrong with fractional reserve market banking – the question is finding the proper multiple, as is finding the proper base interest rate, etcetera. We need decent regulators who are able to balance the engine instead of providing enormous incentive for greedy crooks to pump, dump, and run.

    Lately, every time I read someone advocate Free Market / Von Mises positions, I also hear a high-pitched whine in my right ear. I suspect my synaesthesia is playing a pun on my consciousness.

  18. And for those who want a gold standard, just research what life was like when we did have a gold standard.

    Sigh. Yet another who has not watched the video.

    We have never had a real gold standard. We have used fractional reserve banking for as long as our current civilisations have existed. The supposed “gold standard” from last century was a work of fiction to make people feel better, it had no practical effects – that’s why they scrapped it.

    We never had one because there is no practical way to build an economy on a gold standard. It’s a myth.

    This does not change the fact that fractional reserve banking is a destructive and pretty much evil system.

    Borrow ten bucks from your mom for something that couldn’t possibly cost more than three or four. Give the money to your dad for safekeeping, and let him lend half of it to your little brother. Congratulations, you’ve just created fifteen dollars of credit from ten dollars of physical money.

    This is using Enron accounting. You are ignoring debts when computing the net gains of each person. No actual credit has been created here.

  19. I disagree with #22 and #24. There IS a problem with fractional reserve banking. Money is created from nothing. Whether you do it a little, or a lot, it doesn’t matter. Banks, in general, are parasites. They make money simply by having money. They have contributed nothing and gained everything. I understand that there is risk to the system, but that risk is offset many times over by the interest they charge. My favorite point to make is that the act of charging interest on a loan, usury, used to be a crime.

    The problem with the current system is that it is so ingrained in our culture that any challenge of the idea becomes a personal attack on anyone who lives underneath it.

  20. Wow… I guess I shouldn’t be too surprised at some of these clueless comments on our banking system – for a fascinating glimpse at the history of the Federal Reserve, check out the Money Masters documentary now on google video – see link below. Everyone should take the time and learn the basics, at the very least, on HOW the money controllers operate. Knowledge is Power.

    Highlights of the video –

    -Origins of the Corrupt Central Banking System
    -President Andrew Jackson’s fierce battle with the Central banks… he won (lasting 72 years)
    -The Rise of the Rothschilds, former gold merchants funding both sides of the war of 1812 and beyond
    -The deceptive 1913 Federal Reserve Act
    -The Federal Reserve is a PRIVATE bank – nothing federal about it
    -The looting of fort knox – our former gold storehouse
    -Some fascinating insights from former presidents, bankers, and economists on WHY the central banking system stinks

    Money Masters – http://video.google.com/videoplay?docid=-515319560256183936

  21. There were problems with the video, especially when he hints at conspiracies and the power of banks to quash any attempt at reform, and most notably when he takes quotations decrying banking from Lincoln and Garfield, both cited as assassinated presidents. Mentioning their assassinations makes the insinuation that bankers were responsible.

    There is also a mention toward the end of America struggling against “international bankers”, which to some is code for “secret Jewish cabal that controls the world”. But I can’t tell: does he have a point here, or is it a dog whistle?

    That said, I thought there were a couple of cogent questions raised: how can interest be sustainable? And why isn’t monetary creation more democratic?

    And Raya, to make your example relevant to the creation of money akin to our current system, it would be as if your mother, having lent you ten dollars, uses your IOU as if it were actually ten dollars. At this point, there are twenty dollars in existence: ten “real” dollars that she had on hand to lend you, and the ten virtual dollars that exist in your debt. But they’re only virtual dollars if someone accepts them; the point made in the video, if I understood correctly, is that the government supports treating this debt as currency.

  22. “Ignoring the rhetoric, can someone explain what parts of this video are false or misleading? Like many internet videos, I take this one with a lump of salt, but also given the relevance of the topic in relation to the ‘credit crunch’ I would just like more background.”

    – the woodrow wilson quote “I am an unhappy man…” is pieced together from separate speeches (this fact is listed on moneyasdebt.net)

    Also, most bankers are not that rich. They still have to work. Making complicated issues into good guy / bad guy dichotomies is a silly way to communicate otherwise helpful information.

  23. It seems somewhat ironic that the Galbraith quote at the beginning of the video is taken from his book “Money”, which is on the whole in favor of the development of the banking system–though of the respect generally accorded to bankers somewhat less so.

  24. The video shows that the problem started because people with lots of valuables could afford to build the impregnable vaults of their time. Everyone around them was afraid that their valuables would get stolen, so they basically started renting space in the impregnable vault.

    In other words, people were afraid their valuables would be stolen by amateur thieves, so they turned instead to the professionals…

  25. #23 – tinfoil hat conspiracies boil down into three distinct varieties of bollocks:

    1) the bavarian death cults: the secret [WASP] societies of the world (the illuminati, templars, masons, skull and bones, bohemian grove, etc.) are all secretly working together to manipulate world events and the media and to enslave everyone.

    2) the jews: the [jewish] financial institutions of the world [the world bank, federal reserve, etc.] are all secretly working together to manipulate world events and the media to enslave everyone.

    3) the new world order: the world’s wealthy elite (g8, UN, council on foreign relations, financial institutions, secret societies) are not so secretly working together to form a one world government to manipulate world events and the media to enslave everyone.

    conspiracy theories are great entertainment, but they are pretty much just entertainment.

  26. There’s nothing inherently wrong with creating money out of nothing. Money is a useful tool and it doesn’t exist in nature, so we have to create it at some point.

    The problem comes in when money creation gets out of control, or isn’t properly accounted for, facilitating fraud and damaging money’s usefulness as a marker for value. Wage, pricing, and loan calculations get complicated (if not impossible) when inflation/deflation is rampant or unpredictable. If prices change every day, all of a sudden you need an army of stock boys just to update the prices on the shelves, at which point a particular currency becomes more trouble to use than it’s worth.

    A commodity standard provides a brake on some of the worst tendencies of governments and banks to issue money without controls. It’s not perfect, but I think it’s fairly clear that leaving it up to “the smartest guys in the room” doesn’t work.

    I’m in favor of a hemp standard. When a recession happens, hang the head bankers. Eventually natural selection will give us some honest ones who don’t need gold to keep them in line.

  27. Fellow BoingBoingers:

    Here’s a summary of an idea I’ve taken serious interest in.

    The premise of the idea is that money is one of the fundamental elements of today’s society, so changing how money is created and used will change society at a fundamental level.

    The following are the main propositions of a model of a Renewable-Energy-Backed ‘P2P’ Currency that I’ve been working on, and the intention, for now, is ti turn it into a game, like Monopoly, but with altruistic game play and socially/ecologically/environmentally conscious world view.

    1. Enable a lending system that rewards lender, without charging interest to borrower, and that motivates lenders to become producers of goods and services. This is achieved by moving from a time value of money to a peer production value of money. Peer credits accumulated through lending are convertible to monetary reward (for those lending peers who also happen to be producers of goods and services) by having the peers with most credit point rank higher as sellers of goods and services. The peer credits accumulated by a given peer (through lending) are also used to determine how much money they can borrow.

    2. Direct the flow of money towards socially conscious producers of goods and services. This is done using the affinity matrix described in this paper.

    3. Enable a distributed model for money creation by tying money creation to peer energy production, such that those who produce energy locally (from natural, abundant sources like solar and wind) and feed the extra energy they don’t need into the common grid get the then-equivalent in energy-backed P2P currency.

    4. Make available cheap and abundant renewable energy which should enable the production of more goods and services (i.e. higher productivity) and drive economic growth.

    The full paper describing this model can be found at:

    P2P Foundation Wiki:

    http://tinyurl.com/66bux2

    Evolving Trends blog (for comments):

    http://tinyurl.com/5q3z4v

    AND AT CHANGE.ORG (So Vote If You Like It):

    ********

    Click here to vote: http://www.change.org/ideas/view/renewable-energy-backed_p2p_currency

    ********

  28. Money is supposed to stand in for value.

    Value is constantly being created and lost, both because it’s subject to opinion (you’ll buy some ink marks on a slip of paper if Martin Luther King Jr. made them in the process of signing his name) and because it’s tied to physical things that themselves either grow (crops are usually worth more than seeds) or decay (a building is usually worth more than its ruins).

    We get 750 petawatts of fusion power from that great reactor in the sky, and using everything everybody has bothered to learn and pass on, use our time to create things we value.

    The problem with a commodity standard is that either the fraction in the fractional reserve has to get smaller or you need to constantly find more commodity, because value is going up all the time. There are more people, and they’re learning and doing more and more things.

    Money exists at all because it’s a way of distributing that value beyond the extent of human relationships and face-to-face trust. (If you do your business entirely in local barter, what happens if you want to move?)

    Interest is ultimately a way of abstracting the societal obligation to provide value. As a quantitative measure of a qualitative idea, it can be gamed, and society will suffer for it. (see: ancient Rome, also see: outside right now) But the alternative is relying on trust, which is no less gameable. (see: Ponzi)

  29. Nobody posted a link to Zeitgeist: Addendum yet?

    Some people say this video is wrong or false, but don’t explain what exactly is false or non-factual about it. Please, do tell.

    Nothing wrong with fractional reserve banking? Been living in a cave lately?

  30. Although this is a pretty cool tutorial it has two fundamental misleading facts,

    1) The Fractional Reserve is a % of deposits not just any amount you want place in the Fed. And, while loans are assets and deposits are liabilities for banks, it is not the amount of equity or assets that determines how much they can lend by the amount of deposits. However, this is the part that they tried to get to, most of those deposits are probably loans themselves (from other banks or even the same bank). But, they are still deposits. If you made the money, borrowed it from another bank or your cousin Vinny with 9 fingers and you deposit it, the bank will treat it as a deposit making “money creation” possible, which depending on the reserve requirement system wide can be a very substantial multiple.

    2. “They don’t tell the people” argument. Frankly, that’s a (sorry to be offensive)a red state argument, all you have to do is take any accounting or macro economic course. Any textbook on economics will tell you that there is Fiscal Policy which is a responsibility/power of the Government (i.e. taxes and gov spending) and there is Monetary policy run by the Fed or a central bank in most if not all countries (i.e bank rates and reserve requirements).

    Monetary policy consists of two remedial actions, change the bank rate or change the reserve requirement. These tools restraint money creation and stave off inflation (and despite the popular belief are not there to make the stock market go up). The Fed like any other central bank is there to exercise independent monetary policy for the purpose of fighting inflation, and changing the reserve requirement or the bank rate, are pretty much the two tools they have. And, they work because of the “money creation.” Which is a whole section in every economics text book there is, it is not a secret for people who want to know…

    The one thing people don’t always realize (but probably should) the money creation depends on lending and if there is no lending there is not growth of capital and no jobs no production and the machine comes to a slow and steady halt. That is why so many economists and econ policy people were panicking when the banks began to fail and stopped lending. If there no lending there is no growth, and for better or for worse this is how we have food, shelter, fiber optics, and gadgets…

    By the way the Reserve Requirement is also the reason why we have short term funds market. This is where banks borrow from each other over night to make sure they meet their requirement if they lend too much (and vice versa if they dont lend to the reserve and have extra cash on hand). Short term market make payroll funding possible for every medium to large company (including banks) in the western world. Sort of like a credit line on your checking account… and if GE can’t make payroll tomorrow because they have no one to borrow from and their books are tied up, imagine what happens next…

    I guess this is by way of saying that money creation is not the problem, the problem is regulating bank activities and realizing that all banks are part of a system and are not just private companies, they have to be tighter regulated and separated from more risky tiers of the financial world i.e. Glass-Stiegal,(I probably misspelled it, again). By letting bank companies compete with investment banks and hedge funds the government has lit a long fuse over ten years ago. And, the current administration’s de-emphasis on regulation probably made it even shorter. It’s really sort of like saying bicycles and trucks should fit on the same street all of them have wheels.

    This crisis was not born on Wall Street, but rather on the Capitol. Wall Street will naturally look for ways to score a goal, it’s their game, its up to the umpire to set the rules. And, every time they umpire is not looking and anticipating these situations, these things will happen, bet on it…

  31. Whether “International Bankers” or the practice of Usury was historically or currently practiced by Jews, or any other ethnic group, is irrelevant.

    Just as it is frequently said by boing boingers that they “hate the religion, not the people” in reference to Christianity (or any other religion), it should be fair game to say one disagrees with a Private Federal Reserve, and debt based economy without having to suffer accusations of racism.

    As for Raya’s example of the wonders of the Federal Reserve, it was neglected to mention that the Federal Reserve is not Federal, but a privately owned corporation of a few Banks that conspired to have it founded under Woodrow Wilson.

    Whether you like Fractional Reserve Banking and a Federal Reserve or not, I think in the age of Open Source, Creative Commons, etc, we should look long and hard at the power we grant to the government to dictate what is legal tender.

    The video recommends Local Economic/Exchange Trading Systems, but neglects to mention that in the U.S. at least, the government frequently tries to quash these as they are a competitor to the mandated legal tender, and are also difficult to tax.

    1. boing boingers that they “hate the religion, not the people” in reference to Christianity (or any other religion)

      I’ll let you keep your vowels if you link to that quote.

  32. #30
    “Also, most bankers are not that rich. They still have to work.”

    Do the owners of the banks have to work? BTW, who are the owners? Who owns, let’s say, Bank of America, UBS or Mitsubishi Bank, etc.? Not who sits on the board mind you, but who is single largest holder of class A shares of these corporations? Like the largest publishers and media companies, the control of these, our society’s masters of information, is not easily definitively answered.

  33. Hmmmmm… roasting a banker’s decapitated head on a stick. Perhaps that’s the solution to our current banking woes? Love the video and it does a great job of explaining why we are so totally screwed right now.

  34. Whether “International Bankers” or the practice of Usury was historically or currently practiced by Jews, or any other ethnic group, is irrelevant.

    Of course it is irrelevant as it pertains to the economic questions about fractional reserve banking and the Fed. But just as “intelligent design” is gussied-up creationism, religion masquerading as science, trying to hoodwink the credulous, is this screed against the greed of bankers something more? We can look not only at the message, which should of course be debated at face value, but also at the intentions of the author.

    From Paul Grignon’s notes about the production, his original animation received significant exposure from the Canadian Action Party, which describes itself as “first and foremost a Nationalist party…”, and from the American Monetary Institue, the latter also aiding in funding his expanded project and consulting on the script. Grignon admits to having “had a strong feeling that banking was a scam designed to benefit bankers at the expense of everyone else”, since high school.

    I think that part of the problem is that critiquing the banking system has long been viewed as a wingnut issue, and is wrapped up with all sorts of other wingnut ideas, including anti-Semitism– hence, Witczak’s response. The anti-banking wingnuts can have a field day with the current economic crisis, and we should be vigilant that it does not deteriorate into scapegoating, whether against all “bankers” as greedy evil geniuses bent on controlling the world, or, once again, against the Jews– who, to many ignorant folk, are exactly the same as the evil “bankers”.

  35. Boingers who are skeptical of ‘Debt as Money’ may also want to review the ‘Modern Money Mechanics’ from the Federal Reserve Bank of Chicago. It says pretty much the same thing, though without the entertaining monster on a treadmill.

    For those who are skeptical about the value or utility of fractional reserve banking or who speculate about potential replacements, please do some research about how the history and mechanics of international settlement systems before you spend too much time thinking up new systems.

    Like most problems this one is bigger and more complicated than it seems from the outside (or even the inside). Unlike most problems, this one is really fraking hairy and can get tangled up in a bind moggling variety of unexpected and unintended ways even when you just poke at it a little. Kicking it over for an idealistic model isn’t something to be taken lightly.

  36. Try these comics sponsored by the Federal Reserve. I just had to scan these and share a glimpse at how our banking and financial systems work.

    If anyone would like to see a few inside pages let me know. The covers are funny enough.

  37. As a non-economist, I appreciated Grignon’s clear explanation of fractional reserve banking, which is something I’d previously tried and failed to get my head around. But the film seems to also say that the interest banks charge is somehow removed from the general supply of money when paid. I suspect that’s wrong, but could someone elucidate?

  38. This video does jump the rails when it starts talking about interest.

    Yes, if the money supply didn’t change, people would have to pay the interest on their loans with the money that already existed.

    And the money supply does increase, so people have more money to pay the interest.

    But from there it drifts off into cloud-cuckoo land.

    You know what the difference is between somebody who gets a mortgage and somebody who pays his mortgage off in 30 years?

    They worked for 30 years.

    Presumably in that time they actually did things worth something to somebody.

    And were paid for them.

    If you try to take the calculations this video provides for default rates ( I / (P + I) ) and apply them to something like, oh, say, mortgages, you’ll quickly see that there’s something wrong somewhere.

    When the mortgage crisis started to develop, everybody was all a-twitter that the foreclosure rate had gotten up to a whole 0.54 percent. That is not a typo. 0.0054 of the total mortgage pool had defaulted.

    Historic mortgage default rates are even lower.

    Anybody out there think that the interest charged on a mortgage over its entire lifetime adds up to 0.0054 of the total amount paid back?

    Anyone?

    Anyone?

    Bueller?

    So either this video is wrong in that regard or some unknown agent is warping reality.

    Interest doesn’t magically vanish, it’s either front-loaded into existing assets on the initial creation of the loan (see: amortization) or folded in whenever the bank computes it. This is why banks will often not let $10,000 turn into $100,000, say – they need some of that “extra” $9,000 in reserves to absorb the growth of their existing loans through interest. Similarly, people paying off loans frees up more reserves to lend out.

    How can so many people make their interest payments? The expansion of the money supply is supposed to parallel the creation of value, and as people work to create or even maintain things, they create value.

    Interest is not the means by which bankers own the world, but a reflection (albeit perhaps distorted) of a social obligation to provide value.

  39. The reason people seemingly uninvolved into this process are suffering is, that banks which are vital organs in the international money flow, participated in a pyramid scheme. Instead of private “players”, the entire economy shouldered the risk of this “game”. The ones responsible are taking our economy hostage, so we all have to pay for the mistakes of few individuals.

    Americans seem to like comparing government regulation to Communism and therefore to restrictions in freedom and variety. Ironically, in this case, it is Capitalism that restricts freedom and variety by allowing the overarching negative effects of a monoculture to spread and become unavoidable. Just as Communism spreads the wealth, Capitalism now spreads the debt.

    I believe that the government (as the best representation of public consciousness we have) should take the role of the regulator here. Even if it’s not as “dynamic” as a totally privatised institution. The lack of dynamism might even be the balancing buffer that could have prevented the irresponsible, high-level risk-taking.

    It’s like the Titanic – trusting so much into the big ship’s abilities that you forget regulating the lifeboats. Money-creation should be the lifeboat, not the main vessel. Economists desperately try fixing a sinking ship because they know their lives depend on it and they have nowhere else to go. It is sad to see. I cannot provide a solution, but I’m pretty confident that the current system needs a MAJOR overhaul and cannot be built upon calculated optimism or fine-tuning a failing machine.

  40. The system isn’t sinking because of anything inherent in it.

    The system is sinking because the people we paid to make repairs instead knocked holes in the hull.

    And they continue to do so because, frankly, they’re idiots.

    What part of “hey guys, let’s increase our earnings by selling off our assets but pretending they still exist anyway!” is smart? (see: Citigroup first, and all the banks that lemminged after them)

    What part of “hey guys, let’s increase our stock price, which fell because we didn’t earn as much money as we should have, by using our profits to buy our own stock, thereby reducing our future potential to earn more money!” makes any sense at all? (see: Exxon most notably)

    The solution is not to outlaw hammers but to take them away from incompetent workmen.

  41. why do people persist in calling successful thieves “incompetent”? I know all I need is few million in cash socked away and I’d never miss a meal regardless of any depression. How much more so those who bagged tens or hundreds of millions before it hit the fan?

  42. (1)
    The video does not deal adequately with inflation. Inflation ensures that the real money supply keeps pace with the economy over time. The economy doesn’t race to catch up to money, money increases along with the economy.

    In short, the video falls for “the number of zeros” fallacy. When banks try to create money out of “nothing,” inflation results. Money supply can only grow if the real economy grows.

    If the money supply did increase more quickly than the economy, it would lose value. The real purchasing power of money matters, not the number of zeros.

    Fractional reserve banking does not require perpetual growth. Banks are enormously profitable in growing times, and their lending money is an attempt to spur more economic growth. But if the growth doesn’t happen before the lending, the money lent is useless. (This is obviously simplifying.)

    Economic growth always precedes money supply increases. Credit reduces friction, but real growth happens because of real stuff going on in the world.

    (2)

    Economic growth leads to fewer births, less pollution, and new technology that can get more from less. Perhaps it can lead to less energy consumption– no one has really tried yet.

    (There’s no law that technology will always magically appear and solve our problems, but there’s also no law that says that technology to solve our problems is impossible. Utopians and Kunstler both just make assumptions.)

    (3)

    Wealth is created from free transactions. If I give you a dollar for a candy bar we both walk away richer, because we each have something we wanted more.

    Economic growth depends on wealth creation, and there is no physical limit to wealth creation. Wealth is in your mind; if you have things you value, you’re rich.

    (4)

    In the end, money is not backed by “fiat,” but by guns that force people to do what they said they would do.

    @ PresterJohn

    You write,

    “As for Raya’s example of the wonders of the Federal Reserve, it was neglected to mention that the Federal Reserve is not Federal, but a privately owned corporation”

    The Federal Reserve is indeed quasi-private. But it is run by the government, and the government always has the last say. And it has to work closely with the Treasury, which is 100% public, and not even an independent agency.

    Even if it weren’t for that, in the end, the guys with the Army are in charge.

  43. They weren’t any good at the job they were hired to do, in the same way that a security guard who empties one shelf at the jewelry store and then leaves the door open so people can pick the other 11 clean to cover his tracks is an incompetent but rich security guard.

  44. “Money supply can only grow if the real economy grows.

    Manifestly not the case, as Zimbabwe is vividly demonstrating. (Just in case the world has forgotten the Weimar Republic.) Ideally, the growth of the money supply should match the growth of the real economy, thereby keeping prices stable and making it possible to plan for the long term. Which in turn creates efficiencies that help the economy grow even more.

    But there’s no natural law that says the two must go together in lockstep. It usually doesn’t.

    In fact, one could make an argument that bankers are naturally inclined to print money at a rate that exceeds the growth of the economy, since that allows them to transfer real wealth to themselves and their immediate associates. It’s really no different than the urge to counterfeit, except that it’s even easier. A banker needs no artistic skill to create money. And runs a much lower risk of going to prison.

  45. Yes, this video correctly explains fractional reserve banking. Yes, it really is that simple.

    It’s amazing how we have given a class of people (“bankers”) the ability to create money out of thin air…and then we wonder why those people run everything.

    Furthermore, it’s amazing how we are currently witnessing the collapse of the entire world economy, as the unserviceable tower of debt created by fractional reserve banking collapses – just as this video explains – yet some people still insist on treating it as a conspiracy theory.

    Fractional reserve banking is the best con game ever developed…its originators have managed to convince most of us that being continually swindled is natural, good, and necessary for a stable society. Yes, it’s necessary – for the bankers.

    yesno: “The video does not deal adequately with inflation. Inflation ensures that the real money supply keeps pace with the economy over time. The economy doesn’t race to catch up to money, money increases along with the economy.”

    Please explain, then, why today’s dollar is worth approximately six cents in 1912 dollars. Hint: it’s because when you give a group of people the power to create money, they can’t restrain themselves from enriching themselves by creating more and more of it. Result: a massive increase in the money supply, and consequent destruction of everyone’s savings, wages, and purchasing power. The video addresses this directly.

    glazius: “And the money supply does increase, so people have more money to pay the interest.

    But from there it drifts off into cloud-cuckoo land.”

    You are making no sense, because you still don’t understand the fundamental concept. As the money supply increases, >> every new dollar that is created also creates an interest obligation, because every new dollar is debt. << This is, obviously, an endless treadmill, because each new dollar you create to pay existing interest creates even more interest. The only way off the treadmill is to default on debt. That is exactly what is happening right now, and why the world economy is in crisis: we've created too many debt dollars (and pounds, and Euros, and ...) that we cannot pay back, and we are defaulting on our debt. This causes the money supply to shrink, which makes it even harder to pay off the remaining debt, which causes more defaults... Since money is debt, the only way to create more money is for people to borrow more money...but people are already heavily indebted, so even interest rates at zero won't force them to borrow more. The vicious cycle continues. The only way to avoid these wider and wider boom/bust cycles is to not get in so much debt - which is only possible if your money is not based on debt in the first place. More and more violent cycles of boom and bust are an inevitable consequence of fractional reserve lending.

  46. I think that the immediate dismissal and ridicule of so called “conspiracy theories” pertains to closed minded ignorance at best and blinkered indoctrination at worst, both are potentially dangerous states of mind.

    con⋅spire   

    1. to agree together, esp. secretly, to do something wrong, evil, or illegal: They conspired to kill the king.
    2. to act or work together toward the same result or goal.
    –verb (used with object)
    3. to plot (something wrong, evil, or illegal)

    It is logical and reasonable to assume that different forms of conspiracy take place all of the time. Like it or not, it will always be part of life. Most conspiracies are relatively harmless, for instance; the cool kids at school agreeing to “forget” to invite the weird kid to a party. (sounds like a rubbish party to me anyway!) Others are more serious, for instance Hitler’s firebombing of his own city hall which he promptly blamed on Communists.

    I also think that anyone who makes the suggestion that a critique of the banking system is anti-Semetic degrades the real issues of racism and is possibly even verging on racism themselves by immediately associating money to jews.

    George W. Bush’s grandfather, Prescott Sheldon Bush, was head of the Union Banking Corp, whose assets were seized under the Trading with the Enemy Act due to ownership by “enemy nationals”. These enemy nationals where, yup, you guessed it, the Nazi party. After the war millions of dollars of nazi money, the assets and money stolen from the personal bank accounts of murdered jews, was discovered in the Union Trading Corp vaults.

    Open mindedness doesn’t come easily, but I think it is a valuable thing.

  47. This video is akin to making one about doctors who inject our children with diseases. It sounds really scary until you realize that in normal terms its called a vaccine.

    There is nothing inherently wrong with the fractional reserve system of banking.

    The first half of the video says nothing that isn’t taught in a Money & Banking course at the undergraduate level of any university (although they make it sound much more sinister than it really is, akin to my vaccine analogy). Its not some big secret.

    There are about a thousand ways in which this video misrepresents the facts and about a thousand good arguments against the gold standard or any other such nonsense. People shouldn’t believe that everything they need to know about a subject can be summed up in a 50 minute cartoon.

    We have a population that grows exponentially and we need exponential money growth to keep up with that. I don’t see how that can jive with using a very limited shiny yellow metal (that has better uses) that requires insane amounts of environmental damage in the extraction process.

  48. Surely if all currency had to be backed by gold, then no one would start any wars over gold, right?

    Its not like the struggle for rare commodities ever results in bloodshed, right?

    With a growing population and every dollar worth a certain amount of gold, the production of gold would either have to increase exponentially (which is impossible giving its limited supply and drastic extraction costs), or each dollar would become progressively worth less and less gold. Eventually, limiting down towards zero gold per piece of paper. At that point, whats the difference? Or, you use an ever decreasing proportion of money/population, which would lead to a liquidity trap.

    You simply can’t base exponentially increasing populations with exponentially increasing economies on a very rare and limited supply of metal and you would certainly have to scrap the many practical uses of gold. It would inevitably lead to massive bank runs and unemployment. Maintaining a gold standard has proven to be a disaster many times in the course of human history, the Great Depression being one good example of how a gold standard only made things worse when things went wrong.

    As long as the government does not abuse the printing presses, the current system is vastly superior.

  49. pretty late to the party here, but I had to say something about Zeitgeist.

    I watched about the first half of Zeitgeist, the part about Religion and 9-11, and I know a good amount about religion specifically.

    I’m an atheist, and by no means a defender of Christianity. But Zeitgeist is NOT a good source for information about religion, and I’d assume it’s equally wrong about the other things.

    It’s not that Zeitgeist is factually “wrong” (it does have a few facts wrong, but that’s beside the point). It’s how it’s misleading, and it cherry picks the facts it does display, and the ways it treats those facts. For example, a long section of George Carlin’s rant about religion is in there, unsourced in the film. The viewer is given no indication as they’re watching that this is from a comedic sketch, it’s presented as if Carlin (who is not mentioned by name) has some sort of special above and beyond insight.

    Zeitgeist takes the bad fact checking, cherrypicking and propagandizing that’s all over the worst of new age medicine and Fox News.

    If you really want to learn about money go read a book by Greenspan, at least then you’ll know where your info comes from.

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