"Bank Credit/Debt Money and Check Clearing/Cashing": Part 30: Monetary Reform: Series 1

Hi Ellen Brown,

I hope your healing is coming along just fine.

On banks having to borrow from each other and/or others to cover checks that are posted to accounts, per my understanding, both Joe and John are correct.

Consider: The money supply expands and contracts based upon commercial banks extending credit. If banks had to borrow to cover all of the checks that move, then that would mean the supply could not expand. It would have to be finite. Think about it.

What really happens is that the IOU's (checks) are honored for the purposes of entering credits (customer's perspective) in checking accounts over and above the 10% reserves unless cashed and not simply deposited.

A party writes a check to another party. That second party deposits it into a bank. The reserves are used to cash checks. Where there are insufficient reserves, then the bank borrows. The reserves are set at 10% by the Fed and are Federal Reserve Notes (legal tender). What's the 90% not covered by reserves at any given moment? In general, doesn't it represent money supply the banks have created as accounting entries and where parties will not draw down their new funds all at once but rather over time, will not cash out? Hence, the 10% has been seen as some sort of reasonable level based upon actual practice during more average times – not bank runs a la the 1930's.

{As John rightly knows, the banks can create money before they have the reserves (before the Fed and Treasury cause more Fed money to be released into "circulation").}

So, parties pay back bank loans. They do so via IOU's being honored. The actual cash created by the Treasury does not match the total amount of those IOU's. Neither does the Treasury "printed" money necessarily have to go up or down as the commercial bank loans are created or paid off via accounting entries where zero Federal Reserve Notes actually have to move even as commercial bank created money changes hands over and over and over. Only the 10% reserves are supposed to matter. All of this was designed with preempting bank runs (cashing out by requesting legal tender and not an "IOU"/check, etc.).

The 10% has been deemed sufficient by the Fed, but the Fed can extend money up to apparently any amount it wants, since it and it alone has been given the sovereign's power to create money: order the Treasury to create money. So, if the 10% isn't enough to avoid liquidity issues, the Fed can save banks by giving out money at even zero interest.

Only final settlement matters in terms of first liquidity but then solvency. The liquidity issue is managed primarily by the reserves and Fed lending. The solvency issue is supposed to be a matter of proper risk management, especially in light of booms and busts in the over all economy; but the 90% (plus or minus possible fudging by the Fed) money "disappears" by reversing the accounting entries. The primary earnings of the banks then is/was in interest.

Unfortunately, bankers rely upon moral hazard. They relied upon the Fed to bail them out. Due diligence went the way of the regulations killed beginning with Reagan.

What the NEED Act does is keep that (90%) money from disappearing, per se, so that the money supply won't go up or down from the applicable money (albeit debt-money) supply at the time. That money is to go where the legislature wants: to pay for the things the NEED Act calls for: infrastructure, etc., more employment, Main Street rather than Wall Street... and without much impact on inflation/deflation (provided the money is moved into the real economy properly).

The only issue I've seen with this transition process concerns anticipated profits/forecasting by banks, which would have to radically alter (not a bad thing, per se), where the banks could become overextended since their future source of revenue will have suddenly dried up. They will be able to continue making money via lending in other ways, but the transition period should be modeled where we may all see the model and stats/dollars and money of various types.

That is an extremely simplistic overview above, as you know. Commercial paper just isn't what it used to be. Exotics and all of the deregulation begun under Ronald Reagan and accelerated under Bill Clinton and then George W. Bush has made things exceedingly difficult for us to get a handle on exactly what's happening behind the scenes.

John and Joe, if I have any of the above wrong, let me know.

Tom

P.S. To Joe and John, no hard feelings – just different styles to get used to mostly.

Monetary Reform: Series 1

Donate


The following should appear at the end of every post:

According to the IRS, "Know the law: Avoid political campaign intervention":

Tax-exempt section 501(c)(3) organizations like churches, universities, and hospitals must follow the law regarding political campaigns. Unfortunately, some don't know the law.

Under the Internal Revenue Code, all section 501(c)(3) organizations are prohibited from participating in any political campaign on behalf of (or in opposition to) any candidate for elective public office. The prohibition applies to campaigns at the federal, state and local level.

Violation of this prohibition may result in denial or revocation of tax-exempt status and the imposition of certain excise taxes. Section 501(c)(3) private foundations are subject to additional restrictions.

Political Campaign Intervention

Political campaign intervention includes any activities that favor or oppose one or more candidates for public office. The prohibition extends beyond candidate endorsements.

Contributions to political campaign funds, public statements of support or opposition (verbal or written) made by or on behalf of an organization, and the distribution of materials prepared by others that support or oppose any candidate for public office all violate the prohibition on political campaign intervention.

Factors in determining whether a communication results in political campaign intervention include the following:

  • Whether the statement identifies one or more candidates for a given public office
  • Whether the statement expresses approval or disapproval of one or more candidates' positions and/or actions
  • Whether the statement is delivered close in time to the election
  • Whether the statement makes reference to voting or an election
  • Whether the issue addressed distinguishes candidates for a given office

Many religious organizations believe, as we do, that the above constitutes a violation of the First Amendment of the US Constitution.

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

That said, we make the following absolutely clear here:

  • The Real Liberal Christian Church and Christian Commons Project not only do not endorse any candidate for any secular office, we say that Christianity forbids voting in such elections.
  • Furthermore, when we discuss any public-office holder's position, policy, action or inaction, we definitely are not encouraging anyone to vote for that office holder's position.
  • We are not trying to influence secular elections but rather want people to come out from that entire fallen system.
  • When we analyze or discuss what is termed "public policy," we do it entirely from a theological standpoint with an eye to educating professing Christians and those to whom we are openly always proselytizing to convert to authentic Christianity.
  • It is impossible for us to fully evangelize and proselytize without directly discussing the pros and cons of public policy and the positions of secular-office holders, hence the unconstitutionality of the IRS code on the matter.
  • We are not rich and wouldn't be looking for a fight regardless. What we cannot do is compromise our faith (which seeks to harm nobody, quite the contrary).
  • We render unto Caesar what is Caesar's. We render unto God what is God's.
  • When Caesar says to us that unless we shut up about the unrighteousness of Caesar's policies and practices, we will lose the ability of people who donate to us to declare their donations as deductions on their federal and state income-tax returns, we say to Caesar that we cannot shut up while exercising our religion in a very reasonable way.
  • We consider the IRS code on this matter as deliberate economic duress (a form of coercion) and a direct attempt by the federal government to censor dissenting, free political and religious speech.
  • It's not freedom of religion if they tax it.

And when they were come to Capernaum, they that received tribute money came to Peter, and said, Doth not your master pay tribute? He saith, Yes. And when he was come into the house, Jesus prevented him, saying, What thinkest thou, Simon? of whom do the kings of the earth take custom or tribute? of their own children, or of strangers? Peter saith unto him, Of strangers. Jesus saith unto him, Then are the children free. (Matthew 17:24-26)

  • Subscribe


  • Tom Usher

    About Tom Usher

    Employment: 2008 - present, website developer and writer. 2015 - present, insurance broker. Education: Arizona State University, Bachelor of Science in Political Science. City University of Seattle, graduate studies in Public Administration. Volunteerism: 2007 - present, president of the Real Liberal Christian Church and Christian Commons Project.
    This entry was posted in Libertarian Capitalism, Monetary Reform, United States Notes. Bookmark the permalink.