Money Owed and Owned

We have developed a slide presentation we call "Money Owed and Owned" which is approximately 75 minutes in length. It is described in more mathematical detail in Part II of The Two Faces of Money.

The money creation system (which is "debt-free" at point of issue) that we focus upon in both our slide presentation and our book is based on the "Public Credit Money System" as laid out by Thoren and Warner in The Truth In Money Book.

Slides 22 through 34 of our slide presentation as well as our book The Two Faces of Money describes fractional reserve deposit expansion which most textbooks and experts even today say is part of our "credit-as-money" system. Relatively recent changes in banking practices requires a bit of additional discussion concerning "fractional reserve deposit expansion" which was laid out decades ago in Modern Money Mechanics, an informational workbook put out by the Federal Reserve Bank of Chicago published in May of 1961. The opening paragraph is key to understanding the "deposit expansion" concept as it has been understood historically:

The purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system. The approach taken illustrates the changes in bank balance sheets that occur when deposits in banks change as a result of monetary action by the Federal Reserve System the central bank of the United States. The relationships shown are based on simplifying assumptions. For the sake of simplicity, the relationships are shown as if they were mechanical, but they are not, as is described later in the booklet. Thus, they should not be interpreted to imply a close and predictable relationship between a specific central bank transaction and the quantity of money.

Then on page 6, the following excerpt is related to the "Deposit Model" of the fractional reserve deposit expansion system, dispelling the common assumption that commercial banks withhold a portion of any deposit or group of deposits and lend the balance:

...[commercial banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise [by the same amount.]

Page 37 of the same booklet addresses the "Multiplier Model" of fractional reserve deposit expansion, with the "money multiplier" being defined here as "the ratio of broad money (i.e. bankmoney) to central bank money (i.e. reserves)":

In the real world, a bank's lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather, loans are made, or not made, depending on the bank's credit policies and its expectations about its ability to obtain the funds necessary to pay its customers' checks and maintain required reserves in a timely fashion.

Former IMF economist Dr. Michael Kumhof cites numerous sources going back to 1969 stating that banks create loans first and look for reserves later. Kumhof concludes, "the quantity of reserves in modern banking has become a consequence and not a cause of bank lending and money creation." Kumhof explains in this presentation how this works. More recently, a landmark paper was published by Richard A. Werner (who is a professor in economics and banking at Oxford) showing that individual banks can and do create "money out of nothing" independent of the fractional reserve system [as we have come to understand that system]. See Can Banks Individually Create Money Out of Nothing? The Theories and the Empirical Evidence.

The Federal Reserve System utilizes two different interest rate mechanisms through which it ostensibly controls the availability/accessibility of credit aka "bank money". The first is the Fed Funds Rate which is "The interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis." The Fed Funds rate in turn "can be viewed as the base rate that determines the level of all other interest rates in the U.S. economy." (It goes without saying that loan demand - and therefore debt/money creation - goes down as interest rates go up. However, with respect to our current (2022) round of rate hikes to "slow inflation", devastating currency devaluation will continue to accelerate ----thanks in part to uncontrolled government spending which is itself dependent on debt. (Contrary to what we are toldinflation properly defined is debt-induced currency devaluation.)

The second interest rate tool employed by the Fed is the Discount Rate, which is "the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--the discount window." A Federal Reserve essay on monetary policy explains that "When the Federal Reserve lends [through its discount window], all else equal, the total amount of deposits of depository institutions increases."

This same essay also says that "an increase in the Federal Reserve's holdings of securities also raises the level of deposits [reserves] of depository institutions."

By January of 2019, the Federal Reserve proposed and then adopted an "Ample-reserves regime" in which "active management of the supply of reserves is not required."

Professor Joseph Huber, who is considered by many to be among the top monetary reform economists in the world, has added another element to discussions about fractional reserve deposit expansion. The traditional explanation he says is dead wrong because it conceals an important fact about how the two tier structure actually now involves a "split circuit" of money circulation.

Echoing Dr. Kumhof and others, Huber asserts that "money" (or what he calls bank money) creation has been increasingly bank led, with the central bank adding reserves only when needed by the commercial banks. This trend has been developing over the last 40 or so years as improving technology allows for speedier transfers of money.

As Dr. Huber explains it, reserves represent the first tier or circuit of money circulation and which is known as "wholesale money". This first tier is completely separate from the second tier, or circuit, involving "demand deposits" (short term savings, checking accounts and so forth). The second tier is often referred to as "retail money." Each circuit operates completely independently of the other, although the 2nd tier or circuit is, as of old, dependent on the first tier, or circuit, where "reserves" circulate back and forth between banks as they settle their accounts each day, this due to increased velocity permitted by modern technology.

Since the money represented by the first circuit (reserves) circulates much faster than "bank money" which is often parked in savings accounts, etc. in the second circuit, fewer reserves are needed to settle accounts than previously. Bottom line though is that what Huber calls "bank money" has over the past one to two centuries very nearly driven out sovereign money. Huber's discussion, which includes a chart showing the gradual increase of "bank money" versus "sovereign money" over the last 100 years, is well worth watching.

The truth of the matter is that this system is built on the leveraging of real assets, requiring ever-expanding levels of debt/deposit expansion. It is a house of cards.