1.0... INTRODUCTION ( Continued )
1.3 -
MONEY & MYTHS by Carmen Pirritano 5/93
( Continued )
At this point, before going on to the relationship between bank expenditures and checkbook money, the concept of 'bank reserves' needs to be addressed.
What are reserves?
"Currency [cash and coins] held in bank vaults may be counted as legal reserves as well as deposits (reserve balances) at the Federal Reserve Banks. ...Reserve balances and vault cash in banks, however, are not counted as part of the money stock held by the public." (Chicago Fed in ( 'M.M.M'.)
The maximum amount of reserves in the system, at any point in time, is a constant; it is the above definition plus all the currency in circulation, if it were to be re-deposited into banks.
This constant can only be changed by the Fed.
The first misconception concerning reserves is this:
banks must hold 10% of all their deposits as reserves.
This is actually 2 misconceptions rolled up into one. First of all, reserves are not held against the various types of savings accounts held by the public; as the SF Fed knows,
"Under the Depository Institutions Deregulation and Monetary Control Act of 1980, the checkable deposits of all depository institutions are subject to reserve requirements set by the Federal Reserve within certain ranges ... in addition, a 3 percent requirement is placed on so-called 'nonpersonal' time and savings deposits - those not held by individuals."
The second misconception is the belief that banks take 10% of their incoming deposits and squirrel them away to satisfy their reserve requirement.
This simply is not so. Now, how can 10% of a customer's deposit be put away for reserves given the first quote in the above paragraph? This would mean that the money supply would drop 10%, upon every single (transaction account) deposit.
Also, the reserves balances of commercial banks held by the Federal Reserve Banks are currency accounts (actually currency credit accounts, see 'How Currency...). Are we to believe that if you deposited a $1000 paycheck (checkbook money by definition) that the bank would take $100 of this checkbook money and have it credited to their Fed reserve balance account? Impossible! This account is for currency only - not checkbook money. Not to mention the fact that reserve accounts are held at the Fed and banks can not change these accounts.
Most importantly, reserves are not a part of a customer's deposit, because reserves are created, via a separate process that has absolutely nothing to do with the public's deposits.
As the SF Fed states,
"The Federal Reserve can change the amount of deposits banks issue ... by altering the amount of reserves available ...
The principal tool the Fed uses ... is open market operations. ... Open market operations affect nonborrowed reserves - those not provided by the Fed through loans to depository institutions. Nonborrowed reserves typically account for 96 percent or more of total reserves."
('M.P. in the US')
The SF Fed is stating that 96% of every dollar of reserves was created by the Federal Reserve and given to the banks; the other 4% were also created by the Fed, but these were loaned to the banks.
Reserves can only be created by the Fed, and not by banks for the purposes of loans and investments. ("Reserves are unchanged by the loan transactions" ,'M.M.M.') As the final nail in the coffin, consider this errant example: a bank has $10 million in transaction deposits and $1 million in reserves. They have no excess reserves. Now. you wish to transfer $100 from your saving's account into your checking account. The bank takes $10 and counts it as reserves to balance out the $100 increase in transaction accounts. The bank, now, has $10,000,010 in reserves; they have created new reserves. They have also just broken the rules. "the Fed writes and issues rules of conduct to implement banking laws."('The Federal Reserve System in Action' - Richmond Fed)
and the Fed states that only they create new reserves. Obviously then "reserves and customer deposits are two distinct entities." (from a personal letter by Dan M. Bechter - Vice-President Federal Reserve Bank of Richmond)
The final piece of the checkbook puzzle is it's most misunderstood one.
Banks have many expenses that they have to keep up with: supplies, real estate taxes, employee salaries, dividends, interest for savings and CD accounts ... Ask anyone and they will tell you that is why banks charge interest; so that they can pay for these items. It seems to make sense on the surface, but it is another myth. With excess reserves a bank can create the checkbook money needed for the above expenses. How does a bank pay for the above items? Forgetting interest on savings for the moment, a bank will issue a bank check for those expenses. All a bank needs is only 1/10 of the amount available in excess reserves. As the Chicago Fed explains,
"For individual banks, reserve accounts also serve as working balances. Banks may ... draw down these balances by writing checks on them or by authorizing a debit to them in payment for currency, customer's checks, or other funds transfers." ('M.M.M.') The Chicago Fed is telling us that whenever a bank writes a "bank check", the funds behind the check are coming from the bank's reserves, and not, from some bank checking account that holds interest paid to a bank. A bank check
"is a direct obligation of the issuing bank ... as long as the issuing bank is sound, the recipient of a cashier's check can be reasonably sure that the check will be paid. ...Cashier's checks are frequently referred to as 'bank checks', a term that applies to treasurer's checks, teller's checks, and bank money orders. ...A 'treasurer's check' is issued by a state-chartered bank, whereas a cashier's check is issued by a national bank. ...a teller's check is drawn by one bank on another bank." ('Check Rights', Boston Fed) The only type of account that a bank has with another bank is a 'correspondent bank' account and this is always a reserve account (see 'How Currency...). As far as saving's interest goes, that is a bank credit to an account which is not affected by reserve requirements.
Of course, the bank realizes that this money could be withdrawn, as cash or transferred to checking, which then would affect their reserve position. What happens if a bank has no excess reserves? Am I telling you that bank employees will not get paid then? No, because banks rarely have reserve crisis's - for two reasons:
1) The Fed is constantly giving new reserves to banks - especially to banks that need excess reserves and
2) "The Fed lends when others won't. The Federal Reserve is the lender of last resort, responsible for forestalling national liquidity crises [see point 1] and financial panics. By lending ... Reserve Banks can help protect the safety and soundness of the nation's financial system." ('The Federal Reserve System In Action' by the Richmond Fed). When the Fed lends, they lend reserves.
Again, we see that checkbook money pays the bank's bills and not their interest earnings.
Wait a second, just what purpose does interest earnings serve? For that to be true, banks would have to be lending out their depositor's money, and as previously shown, banks create the funds necessary for all of their expenditures. They can not spend interest earnings because every single dollar paid to a bank reduces the money supply! There is no interest around to use. The New York Fed explains away this misconception in
'Money: master or servant?',
"Do banks extinguish the money paid to them when borrowers repay their debts? Yes. The money paid to commercial banks goes out of existence and is extinguished out of the money supply. ... our money supply declines as bank credit is repaid."
The Staff Director of the NY Fed's Public Info Dept. verfies this,
"If, for example, the person repays the loan in cash, the removal of cash from circulation reduces the money supply, and, if the repayment is made with a check, the reduction in the amount of money in checking accounts reduces the money supply."
(personal letter from Edward I. Steinberg) The following quote is available in Senate document #23 of the 76th Congress,First session; it is made by Robert Hemphill, who served 8 years, as the credit manager for the Federal Reserve Bank of Atlanta,
"If all bank loans were repaid, no one would have a bank deposit and there would not be a dollar of coin or currency in circulation." How can a bank's profits be the difference between the interest they earn, and pay out, when they do not keep any interest payments !!!? Since banks create virtually every dollar in existence, where is the "profit" for the banking industry going to come from? Your interest payment is simply somebody else's bank created principal. As far as the purpose these unusable interest earnings serve, consider this:
1) What a loan repayment does is shift more reserves, from required, to excess, than were shifted from excess to required, when the loan was originally made.
This enables a bank to use these new excess reserves for the previously stated purposes;
2) What would happen to the money supply, if interest earnings, and bank fees, were not destroyed?
It would skyrocket, due to the interest-free bank expenditures made for salaries and the such, and this does not happen.
The destruction of interest and bank fee payments serves as the banking industry's way of "taxing" their interest-free expenditures, out of circulation, thus leaving us with a M1 that is 98% bank owed debt; and
3) If the M1 is 98% bank owed debt, then it is mathematically impossible to ever repay all the loans.
This guarantees bankruptcy.
Banks then get to keep your collateral for failing to repay money that they created at no cost or expense to themselves.
A few quick words on inflation:
Inflation has often been defined as "too many dollars chasing too few goods".
If you wish to use that argument, then you must state it properly:
Too many bank created debt dollars chasing too, few goods.
How is it possible to have "too many dollars" when every dollar is some form of a bank loan that must be repaid?
The Gross Domestic Product is over $6 trillion dollars, according to the Federal Reserve.
The M1 is just over $1 trillion.
When was the last time in this country that the M1 exceeded the GDP, or was even close to it?
A certain percentage of the public must continue borrowing, since it is impossible for everyone to get out of bank owed debt;
what do you think businesses will do with the increased interest costs that they incur?
Pass them off to consumers.
Other References:
Dr. Jacques Jaikaran -- "Debt Virus"
Dr. Peter Cook -- "Federal Reserve Fractional Reserve and interest-free Government Credit Explained"