"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.


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

Monetary Reform: Series 1

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  • 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.
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