Banking 4: Multiplier effect and the money supply


Let’s think a little
bit about what happened in the last video. I’ll review again
these different notions of money supply. And then let’s talk about
whether it’s fair for people to think that they really have
the money that they have. So in the original video, after
the crop was harvested, the farmers deposited 1,000
gold pieces in my bank. Then I lent out 900 of those. I had to keep some reserves in
case those farmers wanted some of their money back. And I figured they would never
need more than 10% at a time. I lend it out. Someone has a great idea to
build an irrigation canal, so that more fields become usable
and get access to water. To build that irritation canal,
they take those 900 gold pieces, and they pay
a bunch of workers. Those workers now have
the gold pieces. They need someplace
safe to put it. They put it back in my bank. Now I get 900 gold pieces
of deposits. I put 10% aside again. And now I lend out
810 gold pieces. Let’s say I lend it out for an
entrepreneur who wants to build a factory to build some
type of tools that might make the apple harvest more
efficient, or faster, or need less labor, or whatever. That entrepreneur takes those
810 gold pieces and pays the builder in the town. And then the builder now has 810
gold pieces, and then he gives the money back
to me in my bank. Because I’m the safest
place to keep it. I stop the chain there. You can keep going on and on. Although there is some end. Notice that these values
get smaller and smaller every time. And we’ll do a little bit of
math on that to figure out how far it can go. But then I take the builder’s
money, and I said, well, you know, this banking idea’s
a new idea to me. I’m just going to leave
it all as reserves. I want to see how it all plays
out first. So then we said, how much money is
in the system? And it all depends on how
you define money. And we made one definition
of money called m0. In m0 we said– we’ll call this
our narrowest definition. And this is literally,
how much gold is there in the system. Or how much stuff is there in
the system that could be immediately used for conducting
a transaction. And I’m assuming, for the sake
of this argument, that none of these players actually kept any
gold in their pockets, or kept some cash in their wallets
for a rainy day. Although if they did, we would
included it in this calculation. I assume that everyone always
deposits their gold with Bank of Sal. So when we did that calculation
there was this 100 gold pieces of reserve that
we had set aside at first. Then 900 here. And then 810 here. And if you add those up,
you get 1,000 gold pieces in the system. Which makes a lot of sense,
because we originally had 1,000 gold pieces
in the system. In the example, at least as I
described it, we didn’t have anyone discovering
any new gold. Nor was any a gold eaten or
destroyed in some way. So it makes sense that there
are 1,000 gold pieces. But then there’s a more
interesting question. If you went around the city
and you asked everyone how much money they had, they’ll
say, I have this much in my checking account with
the Bank of Sal. If you ask me how much money I
had, I would tell you how much is in my checking account. I actually have very little cash
in my wallet right now, if any of you are thinking
of mugging me. All of my money is in
a checking account. So if someone asked me how much
money do you have, I’d give that number. So if you went around the town,
and you asked everyone, how much money do you have, and
you added it up, you would get the total of the of their
checking accounts. And so we had 810 gold pieces
from the contractors, 900 gold pieces from the ditch diggers,
and then 1,000 gold pieces from the farmers. Let’s see, 1,900 plus 810. You get 2,710 gold pieces collectively in checking accounts. And since I’m the only bank,
that’s the total of my liabilities here. And we call that m1. And I’m calling these that for a
reason because these are the actual words that are used
by economists and our government officials. There’s a couple of really
interesting questions here. One is how did a 1,000 gold
pieces get turned into 2,710. And then, this 2,710, does it
represent real wealth, or was this some kind of weird shell
game we played, and it represents some type of
weird pyramid scheme? How it got created– we went
through the mechanics, right? Every time I set a little aside,
I lent some out, and then they deposited,
et cetera. That’s how it got created. The interesting question is,
does it represent real wealth? The answer is it represents real
wealth if each of these investments were real
investments. So if this 900 gold pieces that
were used to build this irrigation ditch or whatever
it is, if that project actually does generate at
least 900 gold pieces of future wealth– essentially you
could at least pay back the 900 gold pieces. It’ll probably generate more
if it’s a good project. But if it generates at least
900 gold pieces of future wealth, then this is a
real asset, right? This is a real asset. Likewise, if this factory really
does generate at least 810 gold pieces of future
wealth, if it really will allow us produce that much
more apples or gold or whatever, this is a
real asset here. So these people, this wealth,
really does exist. This 2,710 gold pieces of, quote unquote
wealth, really does exist as long as the projects that were
the justification for borrowing the money actually
do generate future wealth. So there’s a couple of
things to realize. There are not 2,710 gold
pieces in this world. There only 1,000 physical
gold pieces. But if these projects are real
projects that are actually not mismanaged, they’re not just
some type of pouring money into a hole type of project,
then we do have 2,710 gold pieces worth of wealth. And I really want to
stress this point. Remember gold isn’t wealth
in of itself. Gold is used to represent
wealth. You cannot eat gold. You cannot live under gold. Gold will not transport
you someplace. Gold will not improve
your health. It’s something that’s used
to represent wealth. Sometimes people think it is
wealth itself, and that’s actually a misconception. So this 2,710 perceived gold
pieces, that does represent real wealth, although
it doesn’t represent real gold pieces. And once again you might say, oh
boy, this is some type of a shell game. But it’s really not. As long as these investments
are good investments. Remember, these are wealth
generating investments. And notice, the money supply–
at least as we defined it with this m1– it expanded to
facilitate real economic production. So as long as this factory does
generate wealth, or this irrigation ditch does generate
wealth, then the money supply did not grow faster than the
amount of wealth out there. If before a gold piece bought an
apple, now hopefully a gold piece will still buy an apple. In fact, and this is an
important thing to realize, if these investments are very good,
you’re actually going to have– let’s say that
we used to produce 1,000 apples per year. Notice apples are real wealth. Apples are something that
you can consume. They will keep you living. And you can also view them as a
form of investment, because by eating them you’re
able to do work. But anyway, let’s say before all
of this investment started happening, our economy could
produce 1,000 apples. Now let’s say that after this
irrigation ditch was produced, we go from being able to produce
1,000 apples to being able to produce 2,000
apples a year. And once again, a lot of
wealth was created. Remember, we only took 900 gold
pieces to build this. And all of a sudden
we’re doubling. We’re able to produce
another incremental 1,000 apples a year. Which, in our old economy, was
worth 1,000 gold pieces. So that actually will
definitely pay off. You borrowed 900 gold pieces
and this project will generate, not 1,000 gold
pieces in total, it’ll actually generate the equivalent
of 1,000 gold pieces per year. It increases our production
of 1,000 apples per year. And likewise, let’s say that
this takes us from 2,000 apples a year to 3,000. So let’s think about it. Now in a a given year, how many apples are being produced? We used to only have 1,000
apples being produced. Now we have 3,000 apples being
produced, because these were really good investments. They really improved
our productivity. So now, if you say everyone in
the economy thinks that they have 2,710 gold pieces, or some
equivalent of them, and we can produce 3,000 apples, now
the money supply, 2,710, actually grew slower
than our wealth. Let me let me draw that out. Let’s say money. Wealth. I think it’s really important to
separate the two concepts. Money is used to transact wealth
or represent wealth. It is not wealth in
and of itself. And that has some important
philosophical underpinnings to it. It’ll probably make you live
happier if you realize this difference. But before we had 1,000 gold
pieces, before the banking and this fractional reserve
system existed. And we had 1,000 apples
of wealth per year. And I’ll go more into the
velocity of money. But after all this stuff
happened later, we had 2,710 perceived gold pieces. This was our m1 definition. Our m0, the actual physical
gold, was still 1,000. But how many apple do
we produce a year? We now produce 3,000 apples. So notice, the ratio
of gold to apples has actually improved. And now, if you think about it,
an apple is actually going to cost less gold. Before roughly you had one
gold piece per apple. Now you have less than one
gold piece per apple. So because of our
innovation, we actually experienced deflation. So you might have said,
all of this money was created out of nowhere. This money doesn’t exist. This
will lead to inflation. But no, this is a very important
point, because the money was put to work in actual
productive investments that create wealth, that make
the pie bigger, or the pie of apples bigger, we actually
experience deflation. And our economy actually grew. And this was actually a very
very positive example. I’ll see you in the
next video.

, ,

Post navigation

100 thoughts on “Banking 4: Multiplier effect and the money supply

  1. @nahsirah
    Not at all.
    All activity generated MUST be backed UP with previous savings, if not problems arise sooner or later.

    Cause we did not stop consume so that all that extra activity can take place, sooner or later it is detected that the new projects are MORE expensive it was thought they will be and they will be less valued that expected, loans can't be repayed and banks collapse…

  2. @josvazg I don't get your point. You can assume that the investments in Salman's example complete immediately. Suppose the investments take 1 year to complete, what is the impact of having 2710 M1 and 1000 apples in the first year?

  3. @Anduy
    NO you can't ASSUME that investments take ZERO time to complete. That is precisely the point.

    Even if the investments take ONE year to complete (and succeed, imagine that it was a failure…) people will start to spend as if they were already 2719M1 but there are just 1000apples, as nahsirah pointed out. The "knock on that happens" and he/she thinks is a good thing is what will bring up the problem.

  4. @Anduy
    For more detail you can go to Huerta de Soto's videos (there are some in Spanish) but using one simple example he used:
    Suppose you are in an island and your life support are some "berries" you costly collect from high up in the trees.
    Your investment is save enough berries to stop collecting them for a few days so you have time to prepare/build a long stick/handle to get the berries easily.

  5. Going back to the example here and the 2710M for 1000apples, the loan on 'new money NOT backed by savings' would be the same as stopping looking for berries when you may not have saved enough to be able to afford your project.

  6. You are incorrect about the definition of M1. It includes M0, and therefore would be 3,710. Also, you are incorrect about gold not having intrinsic value. You can make it into jewelry, put in fillings, use it in electronics, etc. It also represents a store of wealth. A miner and minter had to put labor into extracting and minting it into a coin. Paper money takes much less labor. I applaud your effort, but you need to learn more about sound-money principles.

  7. @79eXistenZ It would debase other products like oranges if the productivity capacity didn't increase, but an increasing price signals for more production and in a perfectly competitive world, the supply would increase so the purchasing power is the same again.

  8. @chrstsldr Since the real estate was overvalued, it would mean that the actual wealth goes down (I think). But there's still the same number of gold pieces. So what you end up with is inflation (same number of gold pieces, but less wealth). In the real world there are a lot more factors that come into play, but in this diagram, that's how it would probably look.

  9. the reality is that pyramid keeps on going up and up and up…. return of investment takes time. But when people needs money, lets say there's a big event took place… that pyramid is not going to hold. Because the taller it goes the thinner it would be.

  10. 'Irritation canal' at 0.33… 🙂 That's what you feel after taking a bad dump…

    'It will probably make you live happier if you realize this difference' (9.35) Nice said!

  11. Thank you for making this video! I want to point out – the whole system is entirely dependent on the banks having perfect lending practices; if there is ever mal-investment, it creates bubbles in the economy when the borrowers do not pay back their loans. This system of banking is immoral because no bank is perfect in its lending practices. Make no mistake: FRB is theft – the gold cannot be exclusively owned simultaneously by the borrowers and depositors. That is impossible.

  12. Communism looks good on paper, too… In the real world, power-hungry Jews hold on to the money, or give it to their friends… Unless you are Illuminati, FRB will be responsible for you starving to death. Y'all better make sure you're prepared, because when shit goes down, you will die if you believe the mainstream.

  13. @mikek241 One point of disagreement from me. In a free banking system, you can still lend out that 900 pieces, but the lender's account SHOULD be 100 pieces after that. Likewise, the workers can deposit the 900 pieces, and the bank can lend out 810, but the workers accounts SHOULD be 90 after that.

    You make it sound like these lendings suddenly wouldn't exist without FRB. They still would and the economy would still grow. Not as fast since lenders would be somewhat more scarce, but more stable.

  14. Khanacademy is technically correct, but he gives us the assumption that the loans would not exist under free banking, and hence the economy would be stagnant otherwise. Don't be so easily duped. Loans still would exist without fractional reserve banking, though not quite as many because depositors would face reality and have to restrict their present consumption to make the investment

    Another major omission is not everything inflates simultaneously, which is the cause of miscalculated loans.

  15. Isn't this creation of "real"money only creating inflation? Im just learning about finance, but if money that does not have any backing in physical goods (gold and silver) is moving around the economy then prices can go higher.

  16. Oh, now I know that the point is not about there's too much money supply,the point is if the growing of real wealth can catch up with the money supply, it depends on those investments are good or bad.
    In the past,I only look at the money supply and I always think there's are bubbles and bubbles,but now I realize that I never consider the real wealth.
    Thank you for your amazing lesson, I love it so much!

  17. in the real world this is done on a scale of billiion of dollars eg: FED prints $10,000,000 therefore you can say in a way this is an infinite money supply increase because that money will go to various banks and whatever project is funded those workers will go to there bank and so on… In Sal World you can say this is an increase in wealth if everyone was smart with money… but in the real world you FRB benefits the banks and the top tier wealthy.

  18. @Nooby1357 Get down and polish my shoes you swat. Its clearly a typo, he finished the '0' yet the machine didn't recognise this and left the left side of the '0' out. You can even see the middle curve of the '0' before it got chopped off.

  19. @metalguitar311 unless the borrowers and followers had one identity, a number of things could fix this or lead to this example.
    a) borrow from the bank you deposit in. (less probably esp if borrowing amount is more than deposited)
    b) man deposits, woman borrows, they marry, money is simultaneously owned in unison
    c) man borrows money, man deposits money, they live in a state where gay marriage is illegal, LEGALIZE GAY MARRIAGE so those men can be out of debt and have happy lives!

  20. I have a QUESTION.I will be happy if someone culd answor it.
    What if everyone want to teak out there money at sametime. What happend then?

  21. @metalguitar311 "FRB is theft – the gold cannot be exclusively owned simultaneously by the borrowers and depositors"
    Yes, exactly! They're creating money by duplicating 90% of the deposits. Thing is, it's all digital now, so the money supply expansion is real, as opposed to Sal's model where the money supply remains at 1000 coins. The bank in his scenario lied to it's depositors about how much they have!! Theoretically ALL depositors should be able to close their accounts slowly, but they can't

  22. I just started watching this series of videos on banking. I saw at the end of this video deflation takes place. Keep in mind- between 1913 and 2010 there was about 8,458.10% inflation. And between 2005 and 2010 it was 14.29% inflation. That’s a big difference between this video and the real world.

  23. along generate real wealth there is no inflation. but if loan are not use produce real wealth see asset bubble and inflation will start to leak to other assets. good monetary policy the central bank increases interest rate with inflation form curtain set point for asset. biggest problem with inflation that government spend too much and central bank keep giving it loans out of nothing.

  24. Well the first 1000G can be payed instantly and the remaining 1610G will have to wait until the loans are repayed. For as long as people can repay their loans everyone can get all of there gold pieces. If people can't repay the loans the assets they bought with the loaned money is given to the bank who sells it to repay the 1610G owing. So technically speeking if the bank only made safe loans everyone would get their money, which would be the full 2710G…

  25. What are you talking about? The borrower is borrowing it and the lender is lending it. At no point is there any "simultaneous ownership". The defintion of borrow since you seem to have yet to learn it: Take and use (something that belongs to someone else) with the intention of returning it.

  26. 10:55: "the pie of apples got bigger." I wish my apple pie got bigger lol. Great explanation here, Sal.

    For those wondering about the deflationary pressure due to a system that's running better than before, don't forget that the original depositors, the bank, and the borrowers are all making profits that never showed up in the picture.

  27. Hello, have you tried "Forex ReturnMAX" (google it)? There you will find a nice free video. It helped Mike to double the revenue within his trading account in under three month quite easily. Hopefully it helps you too.

  28. Keeping in mind that M1 grew 2710G, your farmers only have 1000G of the 2710G.THUS, whereas they had total possession of the monetary wealth before, their wealth has been diluted to 46% of the present total. Hence, they are able to buy fewer goods from others, spend less on capital goods for increased productivity, etc. The apples analogy, and the gravely flawed assumption on which it is based, is misleading. This video has overtones of ‘look at all of the prosperity FRB creates!’

  29. What are YOU talking about? In order to lend something to someone, you need to surrender any and all access to that item (money). For example, you cannot lend an item of clothing to a friend and still expect to receive some of its utility (heat insulation) while they're wearing it. How can one have access to all of their funds, while the 'borrower' ALSO has access to a majority of the exact same funds? FRB permits the simultaneous ownership of deposits by multiple bank clients.

  30. Sal you say that the M1 is real as long this investments generate enough to pay de loans. But where that money to pay the loans comes from?. Wasnt this money created from the same fractional system? Thus adding more to de M1 in the economy.

  31. Possible confusing error at 02:26 – its 90g NOT 900g
    This would be much more excellent if you editted out your errors that could confuse novices

  32. Wrong,all wrong! Wealth can neither be created nor destroyed.It is only transferred! In your example there can only be 1,000 apples of wealth represented by 1,000 gold pieces. In order for the irrigation system to be successful its services needed to be acquired.The only wealth in the model is 1,000 apples. So,if the farmers go back to the bank to acquire their wealth (1,000 gold pieces) to buy the services of the irrigation system the bank only has 100 gold pieces to return and the model fails.

  33. What are the construction workers and others who got jobs from the loans of investors doing before this. Surely they were producing goods and services and getting money in return or they would only be living off whatever taxation you can get from the farmers. IF they were working, surely their share of gold coins would also be in the bank?

  34. Point. That's why making money out of thin air, or lending what you don't actually have are all fraudulent practices.

  35. How is the irrigation company making gold to pay back its loans? It's not. The system described here is an unstable system. The banks give us the illusion of stability by printing notes or 'money', but that note itself is a form of IOU or debt. Because banks lend money they don't have, the amount of money in circulation is way less than the total amount of debt. So there are always people who lose out and their properties are claimed by the banks. This will explain better:
    watch?v=0K5_JE_gOys

  36. This model also has to assume that money comes 'in' from outside the system. This will allow the the interest to be paid off. There are more things that could be discussed, but for a simple model, this is good.

  37. Oh, man… you even don't understand that M1 money never exist, and you make "educational" videos… Some simple questions:
    – what happens if the loans are paid from the very same bank?
    – Even if they are paid from "other" bank, what happens with the new money?
    – If you produce 10x more apples, does it mean you can sell them?
    – Where the interest come from?
    – What happens if the investment doesn't pay back?
    The last question leads to the answer why bankers use FIAT, not gold.

  38. Let us say that all those investments were being well-managed, and a surplus of 2000 apples is produced (as mentioned). Now, my question is how all those apples are going to be sold out since we don’t have its equivalent money in the market? Or is it the reason why the FED print out money? Thx

  39. The only part I do not understand is when the bank lent money to the projects, you showed how the money comes back via deposits, but nothing was shown about them repaying the loan with interest. So not only would you get the capital back, in the form of deposit, but also the payment on the loan, Only some of the payment applies to the principle, and the rest is put in the reserve or lent again.

  40. As he said, if the ratio of gold to apples decreases then the economy will experience deflation – which means that your money is worth more and hence prices fall, although it's important to note that deflation isn't really as desirable a phenomena as it at first sounds.

    However, the most likely scenario would be that the excess apples produced would be exported (assuming the existence of other economies in this example) which would lead to a further increase in GDP.

  41. couldn't of said it better myself…also he is not including the interest aspect that the banks charge per loan.. the interest that the banks are charging per loan does not exist…the people who asked for the loans have to pay off the principle and essentially take money out of other peoples pockets to pay off the interest… if money comes from banks, how can they charge more money than they lent out…where does the extra money come from? from nowhere…it doesn't exist.

  42. from 1800-1899 the aggregate price of everything dropped over time as a function of production. Since the reward for increased productive capacity is … lower prices.

    Now, with that fact stated… how do you explain the biggest boom in production & quality of living during the industrial boom?

    "That Hurt the economy" is about as subjective as vitamins and minerals hurting the body.

  43. Deflation not being a desirable account is a Keynesian Scam. The free market would never allow it to get out of hand, it is what kept the gold minor employed while society enjoyed the fruits of slowly declining price in goods & services.

  44. You stating "deflation" as the cause is like saying you caught a cold because you're sneezing. Deflation was a result of credit expansion.

    The issue was first originated through too much credit being issued along with Govt policy that led to tons a run on the bank given the lack of faith in dollars not being backed by enough gold.

  45. while you can't eat gold or sleep in gold … It does provide a service, this is where the author of this Video is wrong. If a rare Rembrandt painting represents wealth, then so can gold given its inherent characteristics…

    Such as… a store of value, jewelery, safety from counterfeiting.

    Dollars produce no such application, they're just promises that will inevitably through human action, be broken.

  46. HERE IS HOW TOP CLICKBANK AFFILIATES MAKE MONEY!

    GET your Clickbank affiliate link to any product

    Go signup with Eleavers.com OR StudAds.com and sign as advertiser, compose ad to your affiliate link.

    DONE!

    Money will start rolling in you clickbank account.

    How ?

    With StudAds.com or Eleavers.com you pay $1 for 1000 visitors, in which you get 10 sales,

    each sale commission about $20 so you get $200 for each $1 you spend.

    Spend $100 you end making about $20,000

  47. This video, like most, totally misses the point. We can start by simply reading the Federal Reserves own publications, whic clearly show the situation described here is totally misleading. Fed rules do in fact require a 10% set aside of deposits but what is being left out here is the second part of that rule: the reserve amount has a dual meaning and use. First, it is to estabilsh a reserve as shown …
    (continued)

  48. The second part of that Fed rule is that the fraction of the deposit as 0.1 * x = loan amount AUTHORIZES a monetary expansion in the bank transactions that occur as a consequence of the loan. and the money supply is increased by 0.1*x for each transaction. (continued)

  49. And the beuaty of it is that these transaction are handled by the FEDERAL RESERVE, not WITHIN the bank, making it hard to observe this. The Fed is the clearinghouse of all bank transactions. And this is how the FED expands currency because this is 0.1*x money out of thin air. The reserve is 0.1*x AND the receivers account is credited ANOTHER 0.1*x. Read the actual Fed rules.

  50. Could you explain what you mean by this?: "AUTHORIZES a monetary expansion in the bank transactions that occur as a consequence of the loan."

  51. There is a public myth out there that banks pay loan proceeds from the actual deposit money. They do not. The fractional rule merely says that banks may loan out an AMOUNT equal to the deposits on hand minus 1/10 of the deposits on hand. Once the loan is processed, the loan proceeds inevitably get deposited in some other bank. Call that bank B. When bank B collects on that amount, it does so by the federal reserve crediting the borrower's account with an amount equal to the loan.

  52. This crediting is called an interbank settlement and it happens only within the federal reserve. The banks themselves never see it directly. But the point is that these credits are de novo, electronic creations of currency and that money does not come from any particular source, it is just created. Once you know this the rest of the problem is self-evident. It's a fraud built on the public misperception that loans are paid out of deposits. I'm working on a video that will explain all this.

  53. My math below has an error. It isn't 0.1 * x, where x is the total deposit amount. The banks are authorized to loan out 0.9 * x of their total deposits but, it is, in fact, not a loan at all. Because that 0.9 * x is simply created de novo in the bank settlement that follows.

  54. 1. But the original value of the total REAL gold was determined by the real wealth in the system. Isn`t that practice of artificial money creation send false signals to the entrepreneurs who would be fooled to think that there is correct relationship between gold and real capital?

  55. 2. In that example if we keep our physical gold home it will become many times more valuable than the perceived gold in the bank (money), which implies some sort of THEFT of value is occurring with the money printing.

  56. The fractional rule is a way to put a governor on money creation. So, it authorizes banks to loan out an amount that the fed is willing to create when the "borrower" redeems a loan proceed in a bank for, say, cash. When the bank where the deposit is made receives that check for cashing the fed electronically creates he money and reimburses the bank for paying it out.

  57. Loaning out money from other peoples accounts is not justified its thievery. Every investment you make is a risk that will not guarantee deflation and even if it did, the majority of the profit on that investment should go to the ones who deposit in your bank. A bank's personal finances should be the ONLY source from which it loans out money. Federal reserve banking is a ponzi scheme.

    The purpose of a bank is to secure finances not risk them for anyone's gain.

  58. This lecture should be deleted form the Banking course, after the Bank of England stated that "reserves are not mechanically multiplied
    up into new loans and new deposits as predicted by the money
    multiplier theory". (Quarterly Bulletin 2014 Q1)

  59. This is assuming if the people who receives the money keeps putting the money back in the bank right? What about those that they spend away?

  60. It's not just about apples per dollar on average.  The average dollar is worth less, and overall there is inflation.  What has really happened is the gap between rich and poor has just expanded, so those making money off the apples get richer than they would have otherwise, while those buying the apples get a worse deal.  Without bank fiat money, the price of apples would natually go down, but purchasing power wouldn't have to suffer because of it.

  61. Unfortunately, it is a bit of a shell game. The part of the analysis lacking here is that while there is more 'money' available from 1000g in physical deposits, this money did not arrive by deferred consumption. The so-called "deposits" (actually loans) at every stage may be used as money, it doesn't represent overall purchasing power of 1000g.

    Without this fundamental restraint you end up both consuming for now and the future (low savings and rates of interest), and a bust becomes inevitable first in the form of higher rates quickly followed by the unravelling of the money multiplier. 

  62. Personally, I thinks this is an incomplete model to illustrate the example. 1. For the ending result, the WEALTH is not just ONLY apples. Ditches and tools have been created and they are not assets? 2. For the ditch construction company and tool-making companies, their equities MUST have grown. And these workers who get paid can't pop up from nowhere and they must possess some kind of WEALTH before they finish the new work. Anyway, I'm getting more and more confused as I'm typing. Someone please help me! Thanks!

  63. this theory can be explained under 3 assumptions
    1- currency in circulation = Zero ( people don't keep money on hand )
    2- banks keep only the required reserve
    3- all deposits are checkable deposits ( no interest is paid by bank)

  64. The problem with this scenario is that the extra 1,710 gold pieces don't actually exist. Sure you say there is more wealth in the village, and you're measuring wealth in apples in this simple scenario. But M1 is counting the money (ie, the gold) that people think they have. The people in this village think they have a total 2,710 gold pieces. But they don't. They cannot withdraw that much from the bank because those investments did not create more gold pieces out of thin air.

    And this is the fallacy of fractional reserve banking. It earmarks the same money for multiple uses, and as such if enough people want their money back, that money simply is not there. The bank just told the people that money was there, but it really doesn't exist. This is what leads to runs on the bank, which absolutely astounds me that you didn't even mention is a very real threat when using the fractional reserve scheme. Just like a classic Ponzi scheme, it only works if people don't want their money back (beyond whatever the tiny fraction of reserves is).

  65. Bank no longer create money in this manner. This is outdated information. What banks do is to have the customers seeking loans sign promissory notes. The bank take these promissory notes and deposit them in a transaction account. The bank then converts this promissory note into endogenous money which is then used to create a check, or exchange for cash. THE MONEY DID NOT COME FROM ANY EXISTING DEPOSIT. It was created based on a signature. Once the promissory note is paid off the promissory note is void, and the money supply shrink accordingly.

    The proof of what i am saying is in the empirical data in 2007. Bank reserves were in the tens of billions and consequently if you follow this model it should be in the hundred billion (about 200 billion if you follow this video). But instead we have credit upwards of 7 trillion. BANKS DO NOT LEND FROM DEPOSITS, THEY CREATE THEIR OWN MONEY BASED ON A DEBTORS SIGNATURE.

  66. unfortunately, banks love to invest in real estates (speculation) causing only rich to grow richer while the banks dont like to invest in productive activities of the economy

Leave a Reply

Your email address will not be published. Required fields are marked *