The Essence of Money #7
>Article #98331 (98374 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Thu Nov 26 10:23:48 1998
>You argue that I contradict myself when I state that money is 
>destroyed when a loan is repaid, but then isn't really destroyed 
>because banks create deposits when they pay their operating
>expenses, pay dividends, or buy assets.
     JCT: As I previously pointed out, Flaherty's first contradiction 
is stating that money is destroyed but then isn't really destroyed.
     He contradicts his statement that "banks create deposits when 
they pay their expenses, etc" later in this post and I'll ask if 
anyone can spot the two times he contradicts this statement. 
>There is no contradiction. You insist on viewing the two transactions 
>separately, whereas I am looking at the combined effects. When a 
>customer repays a loan, the bank's balance sheets are affected in the 
>following manner:
Assets            Liabilities
----------------------------------
- loans         |  - deposits
Money is destroyed because customer deposits have declined. Any 
profits, such as interest, that the bank gets are added to its 
capital accounts. This is the first transaction.
To stop the analysis here as you do is silly. Banks must pay their 
operating expenses like any other firm. The bank now has fewer 
deposits, so it also now has more excess reserves from which it can
create new deposits. Suppose the bank pays its employees by writing 
them checks against its own reserves. The employees then deposit 
those checks back into the bank. This is the second transaction.
The bank's balance sheet is affected thusly:
Assets            Liabilities
----------------------------------
                |  + deposits
                |  - capital
 
>Money is created because customer deposits have risen... and yet 
>*there is no corresponding increase in the amount of debt owed by the
>non-bank public.*  The bank has seemingly created new money, but when 
>BOTH transactions are viewed together, the bank has only re-created 
>the money that was previously seemingly destroyed. In other words, 
>*banks MUST spend as much money back into the economy as they collect 
>in interest.*
>This demolishes the Debt Virus myth that the only source of deposit 
>money is the bank lending process. Oh, and then there's all that 
>pesky data that shows the money supply greatly exceeds the total 
>volume of bank credit. If the lending process is the only source of 
>money creation, as the DV hypothesis so strenuously asserts, then 
>where in the hell did all the extra money come from?
>------------
>In addition, allow me to offer a translation. What you call a 
>"reservoir" in your Figures 3 and 3b, economists call "excess 
>reserves." *All* deposits a bank creates are done by using these
>excess reserves. It does not matter whether the deposit is created 
>to pay operating costs, to pay dividends, to buy fixed assets, or to 
>buy another kind of asset -- loans.
     JCT: Of course, I agree that deposits are created when banks 
"buy" loans but disagree that deposits are created to pay operating 
costs since he contradicts this statement himself a little later. 
>So, in terms of your figures, everything is connected to the 
>reservoir. 
     JCT: I think that stating that new liquidity is created in a 
piggy bank without a source and that liquidity is destroyed in a piggy 
bank without a sink would get him laughed out of any engineering 
models class. Any engineer could explain that if something new is 
created, there has to be a source and if something is destroyed, there 
must be a sink. 
>When the public makes a new cash deposit, the bank's excess reserve 
>go up; that is, its reservoir rises.
>When the public makes interest payments to the bank, the bank's 
>deposits go down, but this frees up reserves which converts them to 
>excess reserves; that is, the reservoir goes up. 
     JCT: I say that when interest payments are made, the reservoir 
goes up. Flaherty states that it goes down and up. 
>When the public makes a loan principal payment the same is true.
     JCT: I say that when a loan principal payment is made, it has no 
effect on the reservoir though he thinks it goes up and down again. 
>When the public withdraws cash, the bank's total reserves and excess 
>reserves decline; that is, the reservoir falls. When the bank pays 
>its operating costs, dividends, or buys fixed assets, its excess 
>reserves decline; that is, its reservoir falls. And the same is 
>true when the bank makes a new loan.
     JCT: I have to agree that when the public takes out money or the 
banks pay its operating expenses, the reservoir falls. But I disagree 
that bank loans have any effect on the reservoir at all. 
>So congratulations, JCT, you have successfully almost illustrated a 
>bank by using a plumming analogy. Just eliminate your + and -, and 
>connect all arrows to the reservoir and you'll have it right. 
     JCT: Eliminating the + source and - sink leaves us with the piggy 
ank model in Fig. 2. Yet, without any source or sink, no engineer 
could accept that you've created or destroyed anything. 
>Article #98358 (98374 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Thu Nov 26 18:05:29 1998
>The bank has every incentive to acquire some new asset, a bond, a 
>new loan, office supplies, or whatever, rather than maintain idle 
>reserves. So my earlier statement still stands: bank income has only 
>three possible outlets: expenses, dividends, or assets -- even if 
>those assets are reserves. 
     JCT: I thought that he earlier said that it was spent on 
expenses, dividends, assets or loans.  
>Article #98359 (98374 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Thu Nov 26 18:20:58 1998
>mikcob@gte.net wrote:
>>The IMPORTANT issue is the way in which this money is "spent" back 
>>into the economy: How much of this money is spent to pay bank 
>>employees and/or to pay realistic rent for the space required for 
>>such employees.
>FDIC data indicates that about 50% of bank expenses is interest on 
>customer deposits. About 30% is employee compensation. The rest is 
>miscellaneous stuff.
     JCT: I agree that of the money spent back into the economy, 50% 
is for interest on customer deposits, 30% on salaries and 20% on other 
stuff. 
>Any "new cash deposit" made by the public came from the proceeds of 
>a loan or from the creation of dollars by the Fed in exchange for 
>extiquising a loan to the government from the public. 
     JCT: Flaherty doesn't seem to disagree with this statement. 
>Article #98409 (98413 is last):
>From: gchand4059@aol.com (GChand4059)
>Date: Fri Nov 27 17:52:55 1998
>Turmel wrote:
>>It's obvious that you can't answer the the questions and you
>>keep trying to hide that fact with evasions and insults.>
>I observe Prof. Flaherty answers questions using t-accounts. Engineer 
>Turmel explains using a plumming diagram. Engineers are not trained 
>in double-entry bookkeeping; economists are not trained in plumming 
>diagrams. 
     JCT: Actually, I have quite a lot of experience in accounting. 
Not only did I take Accounting 100 but fluked taking Accounting 200, 
"for accountants only" which just happened to a study of present 
values: interest rates. I find it an amazing fluke that I was allowed 
to take this course which should later be of such use to me in my 
current Abolish Interest Rates project. 
>However they should both lead to the same answer. 
     JCT: Sure we both get the same answer for the sum of deposits but 
the question is where those deposits come from. Flaherty insists there 
is no source of new deposits and no sink for old ones and that 
liquidity magically appears in the circuit. Any engineer would have to 
agree with me that this is silly. 
>Following t-accounts requires some accounting background. Plumming 
>diagrams take some drafting background. 
     JCT: Fortunately, I have both. So, though Prof. Flaherty's 
knowledge of engineering models may be laughable, it's not fair to 
assume that my knowledge of accounting is laughable too. 
>To make matters worse, neither t-accounts nor plumbing diagrams 
>transmit very good over the internet.
     JCT: That's why I provided both the plumbing for Flaherty's piggy 
bank model in Fig. 2 and for my chartered bank model in Fig. 3 of
http://www.cyberclass.net/turmel/bankmath.htm . I don't know why it 
would be so very difficult for people to download both graphs and 
print them out to enable them to stay with our discussions. Besides, 
the engineers use plumbing to model electrical flows accurately and 
I'd think that having an accurate plumbing model for financial flows 
could only ease the confusion and difficulties. 
>Article #98413 (98413 is last):
>From: oldnasty@mindspring.com (Grinch)
>Date: Fri Nov 27 19:52:17 1998
>If you believe that then you can hire an economist to construct a
>building for you and an engineer to manage your business's financial
>accounts. Different fields of study develop different tools of 
>analysis because they work and others *don't*.  
>You confuse them at you peril.
     JCT: The money system is not immune from systems engineering 
modelling as my models will eventually prove. 
     Finally, I hope readers have noticed the times Flaherty 
contradicted his original statement. 
     I'd also point out that it's been a week since I posted the 
original 10 questions. Though Flaherty's taken the time to make 6 
different posts to this stream, all he does is parrot his standard 
contradictions and simply refuses to deal with the questions. If he 
can't take the 10 minutes to answer the questions, then I'll assume 
that the parrot has withdrawn from the debate and answer them myself 
on Monday night. 
-------------------------------
TURMEL: The Essence of Money #8
 
>Article #98492 (98532 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Sun Nov 29 02:19:50 1998
>John Turmel wrote:
>>JCT: I think that stating that new liquidity is created in a piggy
>>bank without a source and that liquidity is destroyed in a piggy
>>bank without a sink would get him laughed out of any engineering
>>models class. Any engineer could explain that if something new is
>>created, there has to be a source and if something is destroyed, 
>>there must be a sink.
>Suppose Bank A has the following balance sheet:...
>Now suppose the borrower repays the loan with interest,.. 
>Let's start again with the original balance sheet...
>What if the bank pays $100 to its employees?...
>Suppose the borrower writes a check for $100...
 
>And this is where JCT's engineering metaphor seemingly breaks down.  
>Engineers cannot assume, say, energy magically coming from nowhere 
>when designing a system.  However, in a banking system the extra 
>$900 in liquidity can seemingly come from nowhere because it's just 
>bookentries. That is why we refer to a deposit multiplier, 
>specifically, excess reserves times (1/required reserve ratio) for 
>a banking system. Note that I used the word "seemingly."  This is 
>because that is not what really happens. The extra $900 comes from 
>the public via the voluntary loan transaction. The banking system 
>creates new deposits and gives them to the public in exchange for a 
>new financial asset, loans.
JCT: Prof. Edward "The Parrot" Flaherty insists on repeating the same 
old canards about how he thinks the creation of money works but notice 
that once again, he failed to take the few minutes necessary to answer 
the original questions. 
     I wonder how many jokes about him backing down it's going to take 
before he answers them like other have done? Frankly, I'll let him 
parrot his errors all he wants but I don't think it's fair that I 
answer him until he has answered me. 
     No matter how many pages of text he publishes, it's still fishy 
that he continues to back down from answering a few simple questions. 
     If he hasn't answered the questions by tomorrow night, I'll go 
further into discussions with those who did. If he can't answer, I 
hope he keeps his nose out of a debate he has proven he's not up to 
participating in. 
     You have to admit, he's taken some pretty substantial ridicule 
for his failure to respond and no amount of pontificating can hide 
that fact. Don't you wonder why he's so scared? Though I'm sure he 
doesn't even know how the questions could trap him, he's still so 
scared that he'll probably suffer my abuse right to the end. 
     But I'll also bet that once I publish my explanations, he'll be 
the first to try to get back into the debate. I don't think someone 
who hasn't had the nerve to deal with the actual questions deserves to 
be taken seriously. 
>Article #98514 (98532 is last):
>From: gchand4059@aol.com (GChand4059)
>Date: Sun Nov 29 13:00:50 1998
>Also, sorry for unfairness about your accounting literacy.      
     JCT: No problem about the accounting. Like I pointed out, it was 
an oversight on the part of the accounting department that a non-
accountant fluked getting into the second accounting course about 
interest rates. Still, many engineers do take accounting figuring that 
it's the most useful knowledge an engineer would need. 
>I was just trying to understand why you and Prof. Flaherty don't 
>communicate better.
     JCT: How does one communicate with a parrot. Sure it may have a 
substantial vocabulary but don't expect it to answer questions. 
>Further, I believe applying engineering thinking to economics has 
>great potential. Keep up the good work (and get the kind, gentle 
>economists on our side.)
     JCT: Actually, this discussion has not only given me a much 
better insight on how economist view the creation of money but has 
also shown me how to best explain it to them. My upcoming post will 
offer new insights I hope clear up the confusion to everyone's 
satisfaction. 
>Further, are you familiar with Piping and Instrumentation diagrams? 
     JCT: That's what the plumbing diagrams are. Perhaps if you asked 
someone with a Pentium to pick and print the two figures, you'll agree 
that Carleton University taught me my engineering modelling well. 
>If we can add some gates and valves and measuring devices to the 
>economics system we may move things forward.
     JCT: It's already been done and thing are moving forward.
-------------------------------
The Essence of Money #9
>Article #98570 (98597 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Mon Nov 30 12:36:04 1998
>John Turmel wrote:
>>JCT: Prof. Edward "The Parrot" Flaherty insists on repeating the 
>>same old canards about how he thinks the creation of money works but 
>>notice that once again, he failed to take the few minutes necessary 
>to answer the original questions.
>John, maybe you missed my post in which I said that I did not answer 
>your Ten Questions because William Hummel answered them correctly. 
>Let me spell that out for you since it was not evidently clear to 
>you: I endorse Hummel's answers.
>In other word's:
>My answers = Hummel's answers.
>Do you understand?  Should I use fewer syllables?
>How about a crayon?
     JCT: His answers are Hummell's answers but perhaps he didn't 
notice that Hummell didn't answer the questions either. Why would I 
keep challenging both Hummell and Flaherty to answer the questions if 
Hummell had answered them. 
     Anyway, I've given up waiting for Prof. Edward "The Parrot" 
Flaherty or William Hummell to answer the 10 questions at the basis of 
this discussion. After a week of prodding him and half a dozen of his 
posts, we have to admit that there's something intriguing about his 
hesitancy to respond. I'll bet that after I've published my answers 
he'll stick his nose into the discussion but I hope no one takes my 
refusal to answer him as any weakness on may part. I just don't engage 
in conversation with parrots. So here goes: 
PLUMBING
     For those who can't download Fig. 2 and Fig. 3 from 
http://www.cyberclass.net/turmel/bankmath.htm , they are actually the 
simplest of all the graphs and are quite easy to draw yourselves. 
Draw two rectangles side by side labelling the left rectangle "piggy 
bank" and the second "chartered bank."
Draw three arrows down onto the top of each rectangle to represent the 
financial flows into the system. 
From left to right, label the:
first arrow: Savings deposits IN pipe
second arrow: Interest and Fees IN pipe
third arrow: Loan payments IN pipe
Now draw three arrows from the bottom of each rectangle to represent 
the financial flows out of the system.
From left to right, label the:
first arrow: Savings withdrawals OUT pipe
second arrow: Bank expenses OUT pipe
third arrow: Loans made OUT pipe
These input and output pipes represent all the possible financial 
flows into and out of a banking system. Everyone's piggy bank works 
the same way. People can make savings deposits and can withdraw them. 
They can pay their interest and bank fees and the bank can spend those 
fees on expenses. They can borrow loans and make payments on their 
loans. All banks have the same inputs and outputs. 
     Within the first rectangle labelled "piggy bank," draw another 
large rectangle into which you may run the three input pipes and out 
of which you may run the three output pipes.  
     Professor Parrot made the point: 
>So everything is connected to the reservoir.
>Just eliminate your + and -, and connect all arrows to 
>the reservoir and you'll have it right. 
SIMMS' EXAMPLE
     Now we'll use the piggy bank model to run through the example 
given by Dr. Simms:
>Firstly, yes, you are exactly right concerning the process of credit 
>creation I described the other day. It is just like a SHARED 
>piggybank.
>Suppose Alan puts #100 in the piggy-bank. Because it's a shared 
>piggy-bank, he also puts in a note, "The PB owes Alan #100".
>Brenda needs some cash. Looking in the piggy-bank, she sees the #100 
>cash and the note "The PB owes Alan #100". She thinks, Alan won't 
>need all his cash at once, I'll take #90, and leave an IOU, "Brenda 
>owes the PB #90".
>Brenda then pays Charles for all the cleaning, cooking and shopping 
>he has done for her (when are they going to set up their LETS?!). 
>Charles doesn't want to carry #90 around with him, so he puts it in 
>the piggy-bank, together with a note "The PB owes Charles #90".
>In the piggy-bank there is now #100 cash, and three notes: Brenda 
>owes the piggy-bank #90; the piggy-bank owes Alan #100; and the 
>piggy-bank owes Charles #90.
>A few days pass and Brenda needs some more cash. She goes to the
>piggy-bank, sees the #100, and the two notes: Alan has a claim of
>#100, and Charles has a claim of #90. She thinks that she should 
>leave #10 in case Alan needs any cash, and #9 in case Charles needs 
>any cash, and she borrows #81. And so on.
>Brenda might stop borrowing cash when she sees that although there is
>#100 in the piggy-bank, there are claims for #1000, so at any one 
>time the claimants between them might need the #100. At this stage 
>there is #100 in the piggy-bank, together with loan notes totalling 
>#900, and claims on the piggy-bank of #1000.
     JCT: This is certainly how the transactions take place through 
the piggy bank plumbing. 
     At the end of all the transactions there is #100 together with 
#900 in loan notes and deposit slips claiming #1000.
     Since Economics says that money is the total of deposits, it is 
then claimed that #900 in new money has been created. Yet, I only see 
the original #100 with a bunch of deposits slips and loan notes. 
     If a man comes in to cash checks from Alan for #100 and Charles 
for #90 on the same day, the piggy bank only has #100 to pay out and I 
doubt that man seeking to cash those checks is going to accept anyone 
else's deposit slips. He wants cash. And as it's been pointed out, all 
the bank has to offer him is #100 in cash and deposit slips. 
     It's pretty clear that a piggy bank cannot create new money. 
     Yet, in reality, even though a piggy bank model does not have a 
source and cannot create new money, only new notes and deposit slips, 
when someone does come into the bank to cash those checks, the bank 
actually does pay him #190. 
     So how is this possible? Where did the new money come from to 
pay out both checks when the piggy bank only had #100 money, #900 in 
loan notes and #1000 in deposit slips? 
     The answer was provided in 1939 by the Governor of the Bank of 
Canada, Graham Towers, under questioning by Social Credit members of 
Canada's Parliament.
     Though Social Credit have always said that all Social Credit 
politicians must end up corrupted by the political process and for 
that reason condemn striving for Social Credit via the political 
process, if it had not been for those intrepid Social Crediters in 
Parliament, we would have never gotten this admission from the 
Governor of the Bank of Canada. He said: 
>"The banks, of course, do not lend out the money of their depositors' 
>funds. Each and every time a bank makes a loan, new bank credit is 
>created, new deposits, brand new money." 
     JCT: For the first time in recorded history, we have the clear 
statement that loans do not come from the piggy bank reservoir but 
come from a source of new money which now makes sense to an engineer. 
The loans out pipe is actually 
not connected to the reservoir but is actually connected to a source 
from which new liquidity emerges. 
     To get accurate plumbing therefore, draw the second rectangle 
within the second chartered bank below the first two arrows but not 
the third. As with the piggy bank, savings and withdrawals, interest 
and bank expenses go through the reservoir but loans out are 
connected to a source I have labelled (+) and loan payments are 
connected to a sink I have labelled (-). 
     This explains when the economists say that money is created when 
banks make loans and destroyed when loans are paid off. 
     This can be modelled using the same original piggy bank but also 
including a source and a sink. Now we'll go over the example again:
>Suppose Alan puts #100 in the piggy-bank. Because it's a shared 
>piggy-bank, he also puts in a note, "The PB owes Alan #100".
>Brenda needs some cash. Looking in the piggy-bank, she sees the #100 
>cash and the note "The PB owes Alan #100". She thinks, Alan won't 
>need all his cash at once, I'll take #90, and leave an IOU, "Brenda 
>owes the PB #90".
     JCT: As Graham Towers stated, Brenda did not take any of 
Alan's chips but instead drew some new chips from the casino cashier 
in exchange for her promissory note. 
>Brenda then pays Charles for all the cleaning, cooking and shopping 
>he has done for her (when are they going to set up their LETS?!). 
>Charles doesn't want to carry #90 around with him, so he puts it in 
>the piggy-bank, together with a note "The PB owes Charles #90".
>In the piggy-bank there is now #100 cash, and three notes: Brenda 
>owes the piggy-bank #90; the piggy-bank owes Alan #100; and the 
>piggy-bank owes Charles #90.
     JCT: Actually, after Charles had made his deposit, there are now 
#190 chips in the savings piggy bank, two deposit slips for that #190 
and Brenda's #90 loan note. 
>A few days pass and Brenda needs some more cash. She goes to the
>piggy-bank, sees the #100, and the two notes: Alan has a claim of
>#100, and Charles has a claim of #90. She thinks that she should 
>leave #10 in case Alan needs any cash, and #9 in case Charles needs 
>any cash, and she borrows #81. 
     JCT: Yes, but she doesn't borrow the depositors' funds from 
the savings section. She's getting new chips from the casino cashier. 
>And so on. Brenda might stop borrowing cash when she sees that 
>although there is #100 in the piggy-bank, there are claims for #1000, 
>so at any one time the claimants between them might need the #100. 
     JCT: Actually, she will see the actual currency supply go up and 
up until it reaches #1000 to match the claims for it. 
     Notice that when the man comes into the bank with both Alan's and 
Charles's checks, the bank has no problems taking their savings 
deposits and cashing his checks. 
     Since banks to create new money and are able to cash those checks 
for their full amount, I hope it's clear that the Governor of the Bank 
of Canada is correct when he states that loans do not come from 
depositors' funds or those checks could not be cashed for more than 
the original money in the piggy bank. 
     So a chartered bank has a tap and is not the pure reservoir 
system like a piggy bank model though it operates in such a way and is 
taught in such a way as to disguise that there is a source. 
     Notice that if you count the total deposits in the chartered 
bank's savings section, it does represent the total money supply but 
counting the deposits in the piggy bank does not give us the total 
money supply, it gives us the total "deposit slip" supply. 
     All economists have to do is accept Governor Towers' statement 
that loans do not come from the reservoir but from a tap of new 
liquidity and everything they teach about the creation of money will 
be true. 
     That the creation of money has been taught in such a way as to 
disguise the source and make it look like a simple piggy bank can only 
be explained with a conspiratorial view of history. As long as banking 
is taught as a piggy bank model, where money comes from must 
necessarily become a very mysterious subject, as it has always been. 
Once the source is identified and the piggy bank model exposed as a
false cover, then it becomes possible for people build their own 
sources of currency a la LETS. 
So now, I'll answer the 10 questions using Bryant's work:
BRYANT'S ANALYSIS
>>1) Where did the $90 come from?
>Already stated: It came from the non reserve deposits of the
>1st bank. 
     JCT: We know that the loan came from a source which Bryant calls 
"non-reserves" and which the Parrot calls "excess reserves." I'd 
prefer to call it "potential money" because the $100 deposit acts as a 
reserve for the creation of a new $90 though it has not yet been 
created. In reading the Parrot's statements, when a bank has deposit 
in excess of the amount of loans they are allowed to lend out, he 
calls this potential money "excess reserves." I find this confusing as 
reserves are actual money and excess reserves are not money loaned out 
yet and only become money when they are loaned out. 
>>2) How much money is now in the first bank?
>$10 (required reserves)
>+ $90 (non reserve deposits-fully loaned) = $100
     JCT: Right. This agrees with Governor Towers as the loan did not 
reduce the actual $100 on deposit. It came from the source.  
>>3) What is the total money supply after the loan?
>M1 =
>1st bank
>required reserves                          =  $10
>non reserve deposits-fully loaned          =  $90
>2nd bank
>required reserves                          =   $9
>non reserve deposits-unloaned              =  $81
>Total                                      = $190
     JCT: Again, right. It shows that the $90 was newly created and 
deposited into the second bank. Also note that this newly created $90 
does act as real reserves for the second bank allowing them the 
opportunity to create a new $81 in "unloaned non reserve deposits" or 
as the Parrot would call them "excess reserves." 
>>5) Where did the $81 come from from the second bank?
>Already stated: from the non reserve deposits of the 2nd bank 
     JCT: If the non-reserve deposits are the potential money to 
be loaned out of the tap of the second bank, right. 
>>6) How much money is now in the second bank?
>$9 required reserves
>+ $81 (non reserve deposits-fully loaned) = $90
     JCT: Right. The original $90 is still in the second bank even 
though it loaned out a new $81 to its borrower because "the bank, of 
course, did not lend out its depositor's funds." 
>>7) What is the total money supply?
>1st bank
>required reserves                      = $10
>non reserve deposits-fully loaned      = $90
>2nd bank
>required reserves                      =  $9
>non reserve deposits-fully loaned      = $81
>3rd bank
>required reserves                      =  $8.10
>non reserve deposits-unloaned          = $72.90
>Total                                  =$271.00
     JCT: Right.  
>>8) What is the final total money supply?
>Maybe the loans out = $900, not $1000???
>$100 = %10 of total deposits (required reserves + non-reserve 
>deposits-fully loaned), not the loans themselves.
>M1 =    [1/0.1 (reserve requirement)] times [$100 (initial FED
>deepest)] = $1000.
     JCT: Right. Total new loans are $900 added to the original $100 
deposit makes for a total money supply of $1000. 
     Notice that in bankmath.htm, I explain it in a very similar way:
>                                         BoC  Accts    IOUs  New$ 
>Deposit old $100: $10 BoC $90 Bank       10   90                
>     Loan out new $90 for $90 IOU                      90    90 
>Deposit new $90: $9 BoC $90 Bank         9    81             0  
>     Loan out new $81 for $81 IOU                      81    81 
>Deposit new $81: $8 BoC $73 Bank         8    73             0  
>     Loan out new $73 for $73 IOU                      73    73 
>Deposit new $73: $7 BoC $66 Bank         7    66             0  
>     Loan out new $66 for $66 IOU                      66    66 
>     [................... to infinity] 
>                                        ----  ----     ----  ----
>                                        $100  $900     $900  $0 
>                                        OLD   NEW    NEW IOUS
>
>     Where the system started with only $100, after the expansion is 
>over, the Bank of Canada is holding the original $100 as the banks' 
>10% reserves and the banks' reservoirs are holding the other $900 of 
>the savers' new deposits. So, $900 newly created dollars were added 
>to the system by the private fractional reserve banks for every $100 
>issued by the Bank of Canada. This limit is the inverse of the 
>reserve ratio. A reserve ratio of 5% would generate total new money 
>of 1/.05 = 20 times the initial high-powered Bank of Canada money. 
>This is how an ordinary bank creates new money as new loans based 
>not on the production possible but on past savings of money. 
>     Just as money is newly issued from the tap when a bank makes a 
>loan, money is destroyed down the drain when a borrower makes a 
>principal payment. Interest payments go back into the reservoir and 
>not down the drain. 
>    The injection of new money from their taps has been well hidden 
>from the public view because the Bank Act insists that before any new 
>money may be loaned into circulation, old money must be deposited 
>into their reservoirs. It's just as if a casino were to insist on old 
>chips being put into the safety deposit section before it would issue 
>new chips. By merely matching new loans to deposits, this brilliant 
>cover for the turning on of the tap misleads observers into falsely 
>concluding that a chartered bank operates like a piggy bank. With a 
>lawful reason to seek deposits before they can lend, there is no 
>outward difference between chartered bank and a piggy bank. Yet, 
>banks do not seek deposits to lend to other people. They seek them to 
>lawfully turn on the tap of new money leaving depositors' old 
>deposits in their accounts. 
>     It's a fascinatingly tricky mechanism but it's purpose is to 
>foster the impression that borrowers are getting savers' deposits 
>and that savers therefore deserve to get interest for lending 
>borrowers their money. This may have surely been true when banking 
>did operate like a piggy bank without the creation of new money but 
>it certainly is not true now that banks operate more like a casino 
>banks issuing new liquidity. The matching of loans to deposits 
>successfully hides the fact that no one is giving up the current use 
>of their money since it is new money being loaned out and therefore 
>no one is being deprived of the use of their money. 
>>9) Would anything be different if the original $100 had been
>>transferred from an out-of-state bank rather than the FED?
>Not if it is a US bank. However, if the source is foreign banks or 
>capital investment, then it will be like FED deposits and increase 
>the amount of US bank reserves.
     JCT: This is odd. He's right that it acts like the FED if the 
original $100 had come from another US bank and acts like a FED if it 
comes from a foreign bank but implies that there's a difference. 
>>10) Where will the banks "have distributed the $100 of reserves" to?
>As before, the banks in the daisy chain.
     JCT: Right. Part of each depositor's funds is "designated" as 
reserves for the FED in each bank in the daisy chain. 
 
THE PARROT'S CONTRADICTIONS
     Finally, we'll deal with Professor Parrot's recent 
contradictions. 
>You argue that I contradict myself when I state that money is 
>destroyed when a loan is repaid, but then isn't really destroyed 
>because banks create deposits when they pay their operating
>expenses, pay dividends, or buy assets.
     JCT: First of all, he argued that the money is destroyed and then 
really isn't destroyed. That's pretty funny. 
     Then he argued that when they pay their operating expenses, pay 
dividends or buy assets, they create new money from the source. 
>It does not matter whether the deposit is created to pay operating 
>costs, to pay dividends, to buy fixed assets, or to buy another kind 
>of asset -- loans.
     JCT: Again he states that the source of money for loans is the 
same as the source of money for operating expenses, etc.
>When the bank pays its operating costs, dividends, or buys fixed 
>assets, its excess reserves decline; that is, its reservoir falls. 
     JCT: But now he says that paying operating expenses comes from 
the reservoir, a clear case of double-think. He double-thinks that 
when money comes out of the tap, the reservoir of old money goes down. 
Clearly, if the bank expenses pipe is connected to the reservoir as I 
say, this is true but then the statement that they come from the tap 
must he then false. They can't both be true. What's funny is that I've 
pointed out to him many times in the past that they can't be coming 
from both but he just can't see it. That's why I wrote: 
>I have to agree that when the public takes out money or the 
>banks pay its operating expenses, the reservoir falls. But I disagree 
>that bank loans have any effect on the reservoir at all. 
     JCT: That's because loans come from the tap and expenses come 
from the reservoir. 
>bank income has only three possible outlets: expenses, dividends, 
>or assets -- even if those assets are reserves. 
     JCT: Now he's once again saying that the money to pay for 
operating expenses comes from the bank's income, not the source. 
>>The IMPORTANT issue is the way in which this money is "spent" back 
>>into the economy: How much of this money is spent to pay bank 
>>employees and/or to pay realistic rent for the space required for 
>>such employees.
>FDIC data indicates that about 50% of bank expenses is interest on 
>customer deposits. About 30% is employee compensation. The rest is 
>miscellaneous stuff.
     JCT: Here once again, he agrees that bank expenses are paid with 
money "spent back" into the economy. Not from newly created deposits. 
>JCT's persistent error is to confuse reserves with excess reserves. 
>He apparently defines his "reservoir" to include only the bank's 
>actual reserves. 
     JCT: That's right. The reservoir holds the money actually in 
circulation while excess reserves are money that may be brought into 
circulation but are not yet. 
>Following this, he argues that there must be a source for new 
>reserves if there is to be a source for new liquidity. 
     JCT: That's right and what I call the source of the potential 
money but not yet money, he calls "excess reserves." 
>His predictions on what would happen to a bank's reservoir under a 
>variety of transactions are inaccurate, but become completely correct
>when we redefine his reservoir to be excess reserves, not just 
>reserves.  
     JCT: This is completely backward. Excess reserves do not yet 
exist and have no need of a reservoir. Reserves do exist and do settle 
in the reservoir. The reservoir is properly connected and properly 
holds real reserves, not phantom "excess reserves." 
>This is what I perceive to be his mistake.
>JCT is right in that anyone in an engineering class suggesting things 
>just magically appear and disappear would be laughed at. That is not 
>what is happening here. 
     JCT: It's not laughable if you understand Governor Tower but it 
is laughable if you "understand" the Parrot. 
>The changes in deposits we observed in each transaction affected the 
>bank's excess reserves. 
     JCT: No. Only loans reduced the potential money of excess 
reserves. All other transactions deal with the reservoir. 
>This is where new bank-created deposits come from when they are 
>created and is where they go when they are destroyed. 
     JCT: So it's pretty clear that newly created money from the 
source he calls excess reserves. So if we were to use the casino 
analogy, I used to say that when the safety deposit section 
informed the cage that there was a deposit of $100 chips, the cage 
could not lend out a new $90. Imagine therefore that when the savings 
section did do this, the cashier moved $90 in chips from the vault to 
his till and only the chips in the till are available for loans. Now 
Flaherty's "excess reserves" can be thought of as being held in the 
till. If another $100 chip deposit is made to the savings section, 
another $90 in chips is added to the "excess reserves" till. Notice 
that these chips are not yet in circulation on the casino floor and 
have no effect on the actual monetary mass. Furthermore, if someone 
withdraws $100 chips from the savings section, the cashier takes $90 
from the till and returns them to the vault and it can be said that 
excess reserves have gone down. 
>In addition, allow me to offer a translation. What you call a 
>"reservoir" in your Figures 3 and 3b, economists call "excess 
>reserves." *All* deposits a bank creates are done by using these
>excess reserves. 
     JCT: Actually, this is backwards. What I call a reservoir is what 
economists call reserves, not "excess reserves." And all deposits a 
bank creates do not come from the reservoir, they do come from what you 
call "excess reserves" which are in the till and not the reservoir. 
     So that's how Flaherty manages to confuse created chips with non-
created chips. All he's got to do is admit that whether the chips 
coming from the cage are moved to till or left in the vault makes no 
difference but that in both cases they are coming from the source and 
there's no reason not to accept Governor Towers's statement that all 
loans are new money, not depositors' funds.
>Actually, his predictions do not turn out to be completely correct 
>when we redefine his reservoir. He predicted that the reservoir would 
>not be affected by bank lending,
     JCT: If the loans out to the economy come from the source and not 
the reservoir, why should the reservoir of deposits go down though the 
number of potential chips in the till may be said to go down.
>From this perspective it becomes clear that all Bank A has done is 
>convert its idle excess reserves into a performing asset: loans. 
     JCT: Pretty clear that the unissued supply of chips in the till 
are what he considers to be "idle excess reserves" which are issued 
into loans. More proof that loans do not come from actual reserves in 
the reservoir. 
>Or in the other cases, a performing asset in the form of an ATM, or 
>to pay its expenses.  
     JCT: Once again, he's saying that bank expenses come from the 
till and not the reservoir. I only wish it were so because then 
there would be supply of new money with which to pay the interest on 
the debts. Unfortunately, no matter how desirable it would be that 
banks issue new money in exchange for assets without any interest due, 
that is not the case. As he stated earlier, bank expenses are paid 
with bank income all of which go through the reservoir, not the tap or 
the drain. 
>Regardless, the source for all this liquidity creation is the bank's 
>excess reserves.
     JCT: The creation of "excess reserves" is simply moving chips 
from the vault to till but not issuing them into circulation until 
there's a loan. He confuses real reserve money with potential excess 
reserve money which isn't money yet. 
>And this is where JCT's engineering metaphor seemingly breaks down.  
>Engineers cannot assume, say, energy magically coming from nowhere 
>when designing a system. However, in a banking system the extra $900 
>in liquidity can seemingly come from nowhere because it's just 
>book entries. 
     JCT: Even though credit may be only a book entry, new credits 
cannot appear magically. Governor Towers's new deposits do not appear 
magically but have a logical basis. The collateral is simply converted 
to new tokens. I see no reason why magic should apply to the financial 
accounting system when it doesn't apply to physical systems. 
>That is why we refer to a deposit multiplier, specifically, excess 
>reserves times (1/required reserve ratio) for a banking system. Note 
>that I used the word "seemingly."  
     JCT: Yes. It's good to point out that things which seem to be 
true in Economics are not. 
>This is because that is not what really happens.  
     JCT: That's what I've been trying to point out. 
>The extra $900 comes from the public via the voluntary loan 
>transaction.  
     JCT: Of course, the extra $900 comes from the source to the 
public via loans. 
>The banking system creates new deposits and gives them to the public 
>in exchange for a new financial asset, loans.
     JCT: He can't fool us by now arguing what we've been saying all 
along. Haven't I been the one who has been arguing all along that the 
banking system's loans are newly created deposits? Now he's making my 
point for me after having formerly condemned that point numerous 
times. Talk about double-think. 
>Money is destroyed because customer deposits have declined. 
     JCT: Using the piggy bank example, if Alan withdraws #50 and 
deposits go down, money hasn't been destroyed by the piggy bank. 
That's the problem with economics. Rather than plot the financial 
flows from the tap to the drain, they simply count the deposits and 
call them money. If deposits go down, they "assume" money is 
destroyed. This is only true because there is a tap and a drain and 
cannot be true for the piggy bank model. 
>The new deposits the system can create are much greater than 
>the system's initial level of excess reserves.  
     JCT: Now he's confusing reserves with excess reserves again. 
Loanable excess reserves are always 90% of the actual deposited 
reserves, less, certainly not greater. 
>Hell, that's why they call it "leverage." 
     Speaking of Hell, Christ and Mohammed and most of the greatest 
prophets tell us to abolish interest while Flaherty says:
>I do not equate a critique of interest with an attack on capitalism.
>Nevertheless, interest is a seemingly necessary mechanism to allocate
>scarce resources and to allocate consumption patterns through time.
     JCT: Since Christ said do this without charging interest and 
Flaherty says it's okay, he'd better not speak of Hell to quickly. 
REALLY WRONG ANALYSIS
>Article #98512 (98532 is last):
>From: "Michael L. Coburn" <mikcob@gte.net>
>Date: Sun Nov 29 13:19:56 1998
>We finally arrive at the point:  When loans are repaid the money goes 
>into the checking accounts of all the people who work for the bank 
>and/or into the accounts of the shareholders of the bank, and, or 
>into the accounts of the treasury as a result of taxes.  
>In the final analysis ALL money is the result of a loan in one form 
>or another and once this money exists it is never extinguished unless 
>the government collects it as taxes. 
     JCT: No, the loan payments are destroyed. Only the interest 
and bank fees find their way into these accounts. And it is certainly 
not extinguished when government collects it in taxes. It's sad but 
this kind of erroneous thinking is still going on. 
     So I hope I've covered the creation of money by the banking 
system in a way that is acceptable to some economists. Though it's 
true that I've never been rebutted, it is also true that no economist 
other than Graham Towers has ever admitted publicly that the banks do 
not operate like piggy banks and that:
>"The banks, of course, do not lend out the money of their depositors'
>funds. Each and every time a bank makes a loan, new bank credit is 
>created, new deposits, brand new money." 
     JCT: So remember that no matter how much it looks like a piggy 
bank, a chartered bank has a source and a sink, even a till, which has 
been hidden and is now exposed. 
-------------------------------
The Essence of Money #10
>Article #98634 (98646 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Tue Dec  1 12:26:13 1998
>Ok, John, you win.
     JCT: Thank you. Enough with the parrot jokes. I regret having 
been so brutal in my remarks. I've told you before that I consider the 
top economist in the world for your public defences of the profession. 
     I've always thought that getting you on the LETS bandwagong would 
be much like St. Paul's conversion on the road to Damascus, from one 
of the greatest impediments to Christ's monetary reform movement to 
one of the greatest advocates.
>Article #98638 (98646 is last):
>From: gchand4059@aol.com (GChand4059)
>Date: Tue Dec  1 14:03:56 1998
>John Turmel wrote:
>> JCT: So remember that no matter how much it looks like a piggy
>>bank, a chartered bank has a source and a sink, even a till, which 
>>has been hidden and is now exposed. >
>Great post, once again sir. A fast scan makes me conclude you have 
>described a fractional banking system. I have copied it and will draw 
>myself the diagrams and get back to you.
>Does use of the term "till" imply something crooked? (like," till", a 
>place to dip fingers into?)
     JCT: No. It was just used to represent a place where potential 
new money resides until put into circulation in contrast to the 
infinite amount of chips available from the source. Another way of 
thinking of it would be to have a sub-reservoir below the pump where 
the limit of the new currency resides for the purpose of explaining 
the increase or decrease in "excess reserves." I've often considered 
adding such a reservoir of potential money linked to the tap though 
the fact the chips are not actually in the money supply made it seem 
overkill. 
     Still, the mere fact that a limit on new money from the pump 
exists made that addition superfluous and possibly confusing. 
>Also, in flow diagram: a box in a box? How does engineering analogy 
>use a box in a box? 
     JCT: Actually, the first box represents the outlines of the bank 
vault. The interior box represents an actual reservoir and is 
necessary when we consider that the reservoir in the second chartered 
bank is only connected to the savings/withdrawals and interest-
fees/bankexpenses pipes leaving room within the vault for the pipes 
from the loans out to be connected to a tap and the loans in to be 
connected to a drain. 
>For example, should the box in a box have in/out arrows?  
>The same "till"?
     JCT: Yes, the arrows into the bank vaults should continue to the 
reservoir and the arrows from the bank vaults should be running out of 
from the reservoir. Actually, the interior box should be labelled 
reservoir while the outside box should be labelled either "piggy bank" 
or "chartered bank." And no, there is no real use showing the 
potential liquidity in the till.  
>Also, shouldn't Flaherty's t-accounts show the same flaw? 
     JCT: I think my accounts labelled BoC, New Money and 
>                                         BoC  Accts    IOUs  New$ 
>Deposit old $100: $10 BoC $90 Bank       10   90                
>     Loan out new $90 for $90 IOU                      90    90 
>Deposit new $90: $9 BoC $90 Bank         9    81             0  
>     Loan out new $81 for $81 IOU                      81    81 
>Deposit new $81: $8 BoC $73 Bank         8    73             0  
>     Loan out new $73 for $73 IOU                      73    73 
>Deposit new $73: $7 BoC $66 Bank         7    66             0  
>     Loan out new $66 for $66 IOU                      66    66 
>     [................... to infinity] 
>                                        ----  ----     ----  ----
>                                        $100  $900     $900  $0 
>                                        OLD   NEW    NEW IOUS
     JCT: This can certainly be done with T accounts where all the 
Bank of Canada entries are debits, all the deposits to accounts are 
debits, all the IOU loans are debits and when the New$ go from $90 to 
zero, the zeros could be represented by balancing credits. 
     For those who are unfamiliar with accounting, one would think 
that debiting an account is a negative withdrawal and crediting an 
account is positive addition but it's actually reversed. So if one 
credits one's cash account, it is a reduction and if one debits one's 
account, it is an addition. Interesting that it is intuitively 
backwards but that's how accounting works. That's why T accounts are a 
very confusing explanation for the uninitiated but they certainly do 
provide the right answers. 
     Using T accounts, it would look like this
DEPOSITS             
BoC    Accts         IOUS   New Money
------- -------     ------- ------- 
10 |    90 |           |       |100*  *outside money gone down
   |       |        90 |    90 |
 9 |    81 |           |       | 90
   |       |        81 |    81 |
 8 |    73 |           |       | 81
   |       |        73 |    73 |
 7 |    66 |           |       | 73
ETC. for a total
-------------------------------------------------
100|    900|        900|       | 100* original money gone down 
   |       |           |       |
  BoC    Accts       Loans
     In line #1, of the original $100 deposit, $10 is held for the 
depositor by the Bank of Canada and the other $90 is held for the 
depositor by the bank and money outside goes down $100.  
     In line #2, loan IOUs rise by $90 and new money rises by $90. 
     In line #3, of the next $90 deposit, $9 is held for the depositor 
by the Bank of Canada and the other $81 is held for the depositor by 
the bank and the new money outside goes down $90. 
     In line #4, loan IOUs rise by $81 and new money rises by $81. 
     In line #5, of the next $81 deposit, $8 is held for the depositor 
by the Bank of Canada and the other $73 is held for the depositor by 
the bank and the new money outside goes down $81. 
     In line #6, loan IOUs rise by $73 and new money rises by $73. 
     In line #7, of the next $73 deposit, $7.3 is held for the 
depositor by the Bank of Canada and the other $65.6 is held for the 
depositor by the bank and the new money outside goes down $73. 
     This cycle continues until we're left at the end with the 
original $100 held for depositors by the Bank of Canada, a new $900 is 
held for depositors by the bank, a new $900 in loans is held by the 
bank backing up the new deposits and of course, the original $100 from 
outside remains out of outside circulation. 
     So as expected, the T accounts can handle the situation in 
exactly the same way as the plumbing though perhaps in a more 
difficult way. 
>This is gonna take some time, hope all have lots of patience.
>Thanks again, George........ 
     JCT: Once you have Fig. 3, it should all fall into place quite 
quickly. 
>I have been trying to figure out where all the confusion, inherent in 
>John Turmel's correspondence, is coming from. Both he, and the 
>economists he so vilifies, are describing the same process of banks 
>creating deposit money. At the moment I can only suppose that it is 
>stemming from a failure to communicate what all parties understand by 
>their definitions of money.
>Does this answer your questions, John, or have I missed your point 
>altogether and can join the other 99%? Regards to you all, Jonathan
     JCT: Of course, the confusion stemmed from the non-visibility of 
the source of new money. One reason I spend so much time on this is 
that Fig. 3 is actually the same plumbing as a LETS. In a world 
starved for money, identifying the source of new money has the 
potential to save our world which is dying due strictly to a lack of 
funding. 
     Read any newspaper and you'll notice that 90% of all problems 
stem from lack of funding. Our world is threatened by environmental 
catastrophe and we don't have the money to pay to save ourselves. 
Finding the source of money is critical to saving our planet. 
     A LETS bank is simply a regular chartered bank that operates 
without a reserve ratio which only collects fees and no interest. 
     Notice that when a member needs to pay another member #50, it's 
as if, without a previous deposit, he got a loan of #50 which was then 
put into the account of the other member. 
     Loans are called commitments and registered as negatives in his 
account so that when the loans commitments go up #50, the deposits 
went up. His account went negative #50 and the other member's account 
went positive #50. 
     Once economists properly identify the source of money, they will 
then see the similarity in the plumbing of LETS. It may be easier to 
accept the validity of the LETS banking system once it is recognized 
that it operates virtually exactly like an orthodox banking system.
     I must admit that I lay in bed for hours last night shocked that 
Mr. Bryant had aced my test. I wonder what school he went to. He is 
the first economist in 19 years who has ever stated that loans were 
not reserve deposits, but new non-reserve deposits. He's the first 
I've ever met who was not caught by my two question double-think test. 
It certainly bodes well for the future. 
     Of course, how the present system functions or malfunctions is 
nowhere as important as how the perfect LETS banking system operates 
and how to best get its benefits to the poorest of the world the 
quickest. 
     I've always felt like the kid who cried "Look, the king has no 
clothes" but without being believed. Having major economists come to 
the same conclusion can only enhance the message that interest-free 
money can be issued a la LETS without causing inflation and getting it 
accepted that LETS operates like a regular bank without causing 
inflation is important to the funding of the salvation of our world. 
     And I hope no underestimates the saving potential of identifying 
a source of non-inflatable money. I just hope the prestige of a few 
Economics professors may be added to the battle. I'm exhausted after 
19 years and could wish for nothing more than an interest-free credit 
line so I could take a break from the financial worries of the world. 
I don't even find playing Poker any fun anymore. It's a job. It could 
be lucrative play if I wasn't faced with monthly bills. 
     Financial Heaven's almost here. Just imagine living without the 
pressure of due dates on one's debts, just the pressure of the pride 
in being winner enough to meet them eventually. 
     So let's hope Professor Flaherty's statement induces other 
economists to take a serious look at LETS interest-free banking. We 
could sure use some high-powered support if we hope to have a Global 
Employment Trading System installed before the end of the millennium. 
     Praying for an end to debt slavery, I am, 
Sincerely yours. 
-------------------------------
The Essence of Money #11
>Article #98649 (98680 is last):
>From: "Chas" <charlesna@email.msn.com>
>Subject: Inflation 101.
>Newsgroups: sci.econ
>Date: Tue Dec  1 15:43:39 1998
>
>For those of you who by now have been completely exhausted and 
>confused by all these egotistical engineers and their crack-pot 
>banking theories, I would like to interject a little basic economics 
>into the confused muddle.  
>Article #98734 (98742 is last):
>From: wfhummel@mediaone.net (William F. Hummel)
>Date: Wed Dec  2 14:30:16 1998
>Good. Let's hope our confusion about inflation will be cleared up 
>with some basic economic theory offered by the monetarist, Anderson.
     JCT: Isn't it funny that even after Professor Flaherty 
acknowledged the presence of a source of money which he describes as 
"excess reserves, the guy who couldn't keep up with others in the 
debate and admits he's confused still has the nerve to throw insults. 
     After failing to offer one input to the debate due to his 
confusion, he has the temerity to label the advanced engineering model 
analysis which I thought had just been proven as a crack-pot theory. 
     That's what I mean when I say many economists have no integrity. 
     Same goes for Hummell. They're both perfect examples. After being 
challenged over and over comment on the debate and after backing down 
over and over again, we now hear Hummell pipe up to agree with his 
low-tech contemporary's slur. 
     I cannot fully describe the contempt I feel for these no-guts 
chickens but I'm going to tear them apart in the Inflation 101 debate 
as the continue to parrot the same old canards about inflation.
     Still, if only one or two economists have now seen the source of 
money in the bank plumbing, then it makes dealing with all the jerks 
worthwhile. 
-------------------------------
The Essence of Money #12
>Article #98979 (98984 is last):
>From: lantern002@aol.com (Lantern002)
>Date: Sat Dec  5 19:25:31 1998
>Turmel wrote:
>>JCT: So remember that no matter how much it looks like a piggy
>>bank, a chartered bank has a source and a sink, even a till, which
>>has been hidden and is now exposed.
>Your idea of a plumbing diagram to illustrate the banking system is 
>excellent. I have tried to draw your diagram from the directions in 
>Essence Post #9. One question and one suggestion:
>1. Can I draw pipes instead of arrows? (That is, three pipes into 
>piggy bank and three pipes out?) If I do this the diagram dumps the 
>contents of the bank/reservior out of the bottom three pipes onto 
>the floor. Shouldn't it be closed loop somehow?
     JCT: In my original diagrams, I did use two lines to represent 
pipes but found that one line worked out just as well and easier. 
     It may seem that the reservoir in the piggy bank dumps out of 
three pipes onto the floor but imagine that it is the floor of the 
pool representing the whole economy. Money in circulation as cash or 
checks before they get redeposited into bank accounts. So in a sense, 
since the money falls into the economic pool and comes from the 
economic pool to go into the banks, it is a closed loop. 
>2. Suggestion: Economists don't get lab courses like engineers. No 
>hands-on, work with it stuff. How about working your diagram to the 
>point we can build a plumbing system from it? 
     JCT: Sure it's possible to actually use pipes and liquidity to 
model the flows. Should be quite easy too. A few years ago, I thought 
about using two vats, each with 3 in pipes and 3 out pipes attached. 
The first represented the bank and the second representd the economy. 
The Savings pipe Into the piggy bank vat was connected to the Savings 
pipe Out of the Economy vat.
The Savings pipe Out of the piggy bank vat was connected to the 
Savings withdrawals Into the Economy vat. 
The Interest/fees pipe Into the piggy bank vat was connected to the 
Interest/fees pipe Out of the Economy vat.
The bank expenses pipe Out of the piggy bank vat was connected to the 
bank expenses paid into the Economy vat. 
The Loan payments pipe Into the piggy bank vat was connected to the 
Loans paid pipe Out of the Economy vat.
The Loan made pipe Out of the piggy bank vat was connected to the 
Loans borrowed pipe Into the Economy vat. 
Of course, in the case of the chartered bank, nothing changes but the 
fact that loans paid go to a sink rather than the reservoir and loans 
out from from a tap rather than a reservoir. 
>An Econ101 lab course then could have the students building a model 
>banking system. I can dream of a bank/plumbing system made out of 
>cheap plastic pipes and glass beakers. Kids would love it. Pour the 
>water in the top three pipes and then it would "flow". Whatcha 
>think? 
     JCT: Of course, it would work. You'd need some kind of valve and 
meter on all outlets to control flows but all you'd have to do is 
raise the Economy vat higher than the bank to let flows from the 
economy flow by gravity into the bank or raise the bank vat higher 
than the economy vat for flows bank to the economy.
>If you patent this idea I get a cut <:)
     JCT: I doubt it's patentable but it certainly would make for an 
interesting project. 
     You might even create the sub reservoir connected to the tap and 
drain to handle the potential money you'll be allowed to lend out from 
the tap, the excess reserves, so that even though no loans are made, 
savings withdrawals and savings deposits will affect this sub-
reservoir or "till" of potential liquidity available for loans. 
     Yes, such a model of a "creationary bank" is easy to construct 
and would be of great use in demonstrating how the banking system 
pumps new liquidity into circulation. 
>Article #98983 (98984 is last):
>From: LMackinnon@hotmail.com (Lauchlan Mackinnon)
>Date: Sat Dec  5 20:25:27 1998
>Didn't someone already do this in the UK to illustrate circular flow 
>in the economy? It had different coloured water that swished around 
>various glass tubes and so forth and the students could play with 
>parameters and see what happened. I cant remember who or where. LM.
     JCT: It makes sense to model a liquidity system in such a way and 
am not surprised that it may have been already done though had it been 
done right, I'd have assumed that it would be more prevalent in 
economic literature than it seems to be. So I think there's a greater 
likelihood that my plumbing model is a first though I won't be 
surprised if it is not. 
-------------------------------
The Essence of Money #13
>Date: Mon Dec  7 12:27:21 1998
>From: Roy.Davies@exeter.ac.uk (Roy Davies)
>Subject: Hydraulic Models of the Economy
>To: econ-lets@mailbase.ac.uk
>In one of John Turmel's latest postings he quotes a question about 
>hydraulic economic models and gives his opinion of their utility but 
>did not actually answer the question about their origin so I will do 
>that.
>>>From: LMackinnon@hotmail.com (Lauchlan Mackinnon)
>>>Date: Sat Dec  5 20:25:27 1998
>>>Didn't someone already do this in the UK to illustrate circular
>>>flow in the economy? It had different coloured water that swished 
>>>around various glass tubes and so forth and the students could play 
>>>with parameters and see what happened. 
>>JCT: It makes sense to model a liquidity system in such a way and I 
>>am not surprised that it may have been already done though had it 
>>been done right, I'd have assumed that it would be more prevalent in
>>economic literature than it seems to be. So I think there's a 
>>greater likelihood that my plumbing model is a first though I won't 
>>be surprised if it is not.
>The person who built the hydraulic model of the British economy was 
>A.W.H. Phillips, a New Zealander who after World War II studied 
>economics at the London School of Economics (LSE). He became 
>interested in Keynesian economics but thought that Keynes' interest 
>theory was muddled with confusion between stocks and flows and,
>according to a biographical in a volume to honour his memory, after 
>setting out the theory in mathematical form he realised that he had 
>the model of a hydraulic system and so proceeded to build one out of 
>perspex in a friend's garage in Surrey.
     JCT: Actually, modelling the economy is far more complex than 
modelling a bank. I'd be interested in finding out if he situated his 
source-pump and his sink-drain within the chartered banks or not. 
     I have given more thought as to how to model the banks in Fig 2 
and Fig. 3 of http://www.cyberclass.net/turmel/bankmath.htm  and I 
think I've come up with a workable solution which doesn't need pipes. 
Rather than send a certain volume down the pipe, we'll use cups or 
shot glasses as wallets to transfer the liquidity. To model the piggy 
bank reservoir, use a large bowl. 
PIGGY BANK
     Of course, someone has to deposit liquidity into the piggy bank 
before any can be lent out so get 10 cups of water and deposit them 
into the piggy bank bowl. Give 10 deposit slips to the saver. If the 
saver withdraws some liquidity from the bank, he gives back the right 
number of slips. 
     If someone takes out a loan, fill 9 cups from the bowl and 
exchange it for his IOU. Out in the economy, he can trade his cups of 
money to someone else to buy something and that person can deposit the 
cups of money to the piggy bank and receive deposit slips. 
     In this way, 9 new deposit slips and 9 new IOUs can be created by 
lending out the the original 9 cups of money. The cycle is repeated 
over and over with smaller and smaller loans as in the early example. 
CHARTERED BANK
     To model the chartered bank in Fig. 3, put the bowl in a sink 
with a tap. 
     Of course, bank laws insist someone deposit liquidity into the 
chartered bank reservoir before the tap can be turned on so get 10 
cups of water and deposit them into the reservoir-bowl. Give 10 
deposit slips to the saver. If the saver withdraws some liquidity from 
the bank, he gives back the right number of slips. 
     If someone takes out a loan, fill 9 cups not from the bowl but 
from the tap and exchange them for his 9 IOUs. Out in the economy, he 
can trade his cups of money to someone else to buy something and that 
person can deposit the cups of money to the bowl and receive deposit 
slips. The cycle repeats just like the piggy bank model. 
     If someone pays off their IOUs, the cups of money do not go into 
the bowl but are poured down the drain. 
     Finally, flows of interest and fees earned or expenses paid out 
of either bank come into or  out of the bowl, not the tap. 
     There you have simple a simple hydraulic models of either the 
pure reservoir piggy bank in Fig. 2 or the reservoir with tap and 
drain of a chartered bank in Fig. 3. Try them out to see how banks 
create money in a way which makes them look like piggy banks which do 
not create money. 
     Notice finally that though all the flows into both banks create 
new deposits and IOUS, only the chartered bank creates new money. 
>Leeds University became interested and bought the model. James Meade 
>persuaded Phillips to make another one for the LSE and, as interest 
>grew, a modest business emerged and a plastics firm in Finchley 
>manufactured copies of the machine. Oxford, Cambridge, Birmingham, 
>Manchester and Melbourne all bought them and at LSE two were joined
>together to problems of trade between countries. Among overseas 
>customers were Roosevelt College, Chicago, the Central Bank of 
>Guatemala, and the Ford Motor Company.  
     JCT: All I'd really like to know is whether he had placed the 
source and sink in the right place. In the chartered banks and 
connected to the loans pipes to the economy. 
>(Perhaps John Turmel should start selling hydraulic models!).
     JCT: I could certainly sell the bowls and the cups but they'd 
have to use their own sink and tap. 
>This information is taken from the book:
>Stability and inflation: a volume of essays to honour the memory of 
>A.W.H. Phillips / edited by A.R. Bergstrom ... [et al.]. Chichester: 
>Wiley for the New Zealand Association of Economists, 1978. 
>ISBN 0-471-99522-3.
>Today Phillips is probably remembered mainly for the "Phillips 
>Curve", i.e. the theory he put forward in 1958 that there is a 
>regular relationship between the rate of increase in wages and the 
>level of unemployment. Subsequently it was widely believed that 
>unemployment was a cure for inflation. Although most economists would 
>accept that there is some trade off between the two (if enough people 
>lose their jobs worry about losing theirs will make those who are 
>left in work moderate their wage demands) the relationship in later 
>years did not prove to be as regular as it had been for the period 
>Phillips studied.
     JCT: Sad because it is only true that unemployment seems a cure 
for inflation only if interest is assumed. If interest is abolished, 
thye money becomes chips backed one-to-one with collateral which are 
impossible to inflate and involuntary unemployment is eliminated. But 
if you assume interest in your model, then you're stuck with elements 
of both inflation and unemployment and reducing one aggravates the 
other. 
>Article #98993 (99039 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Sun Dec 6 01:20:47 1998
>William F. Hummel wrote:
>>Apparently you mistook Ed Flaherty's signoff as an agreement with
>>your position.
>An astute observation.
     JCT: It's not a position, it's a model. The issue was whether the 
creation of money was done with Fig 2, my piggy bank model or Fig 3., 
my chartered bank model. 
     Professor Flaherty had stated that it was Fig. 2: 
>So everything is connected to the reservoir.
>Just eliminate your + and -, and connect all arrows to 
>the reservoir and you'll have it right. 
     I pointed out that the Governor of the Bank of Canada had 
testified in 1939 that:  
>"The banks, of course, do not lend out the money of their depositors' 
>funds. Each and every time a bank makes a loan, new bank credit is 
>created, new deposits, brand new money." 
     JCT: This meant that loans and payments were not connected to 
reservoir as in Fig 2 but were connected to the source of new money, 
the tap and the drain as in Fig. 3. 
     Then Professor Flaherty wrote: 
>Article #98634 (98646 is last):
>From: Edward Flaherty <flahertye@cofc.edu>
>Date: Tue Dec  1 12:26:13 1998
>Ok, John, you win.
     JCT: Now he writes:
>>Apparently you mistook Ed Flaherty's signoff as an agreement with
>>your position.
>An astute observation.
     JCT: I don't understand what's astute about thinking that "OK, 
John, you win," was not an agreement with my position that Fig. 3 
represented the creation of money bank. 
     Are you now telling me that "OK, John, you win" really means 
"Not OK, John, you lose?"
     Or is it just that I have won because you can't argue with me but 
that you still don't believe Fig 3 to be true? Somehow, I could 
understand how you would continue to disbelieve what you can't argue 
with simply on the basis that I'm not an economist and therefore must 
be wrong. That wouldn't surprise me at all. 
     Of course, it's what I meant when I talked about integrity. No 
engineer would ever say "I can't disagree with your model but I don't 
believe it anyway." 
     And of course, the fact that's it's Hummel, the biggest chicken 
of them all making the statement that I find offensive. He backed down 
from every challenge I made to answer the questions and instead of 
hiding in shame at chickening out from a test which another economist 
aced, here he's back with his ignorant attitude. 
     Unfortunately, it seems that that his statement has now allowed 
Flaherty to conclude that I must be wrong because another economist 
says so even though the one who did was the biggest loser of them all. 
     Isn't it funny that the only time we heard from Hummel was to 
insult me though at no point did he join in the debate? Is it any 
wonder that economists are joked about with examples like these 
showing their lack of integrity in public.      
-------------------------------
The Essence of Money #14
>Date: Fri Dec 11 14:51:01 1998
>From: GHyman@compuserve.com (Geoffrey Hyman)
>I was very interested to read your remarks about the Phillips curve,
>linking inflation and unemployment. I am aware of many different 
>theories about its basis and (lack of) stability, but none of them 
>have previously referred to interest rates. So your brief remarks are 
>intriguing.... Can you expand on this topic?
     JCT: It all starts with the "Miracle Equation" derived in:
http://www.cyberclass.net/turmel/bankmath.htm . 
     I do my favorite example at the gaming table where I explain how 
to make poker chips inflate even though they are backed up one-to-one 
by collateral in the cashier's cage and never inflate as a rule.
     I simply point out that all we have to do to make usually non-
inflatable currency inflate is to charge interest and create a death-
gamble. 
     You can try it out in the same was as the example at the end of 
the bankmath.htm. 
     You're the banker and all 10 players pledge their watch as 
collateral and you "lend" them all 10 chips. At the end of the game, 
you insist that they repay you the principal and 10% interest. 
     Now, it's impossible for all 10 borrowers who each only received 
10 chips to all repay 11 chips so someone has to get knocked out of 
the game. Hence the contract bearing interest is aptly named "mort-
gage" from the Latin "Mort" meaning "death" and old English and French 
"gage" meaning "gamble." A mortgage is an elimination deathgamble. 
     You seize the watches of the ratio (I/(P+I)) of the guys who get 
knocked out of the game and then explain to the survivors (P/(P+I)) 
that their 100 chips now only buy 9 watches so that, even though there 
was no increase in money supply, their chips have suffered inflation 
and now buy less. 
     That's the easy example but it works the same way in the regular 
economy where businesses borrow new money into circulation to pay 
their costs, inflate their prices to recuperate both the principal and 
the interest, and pray they sell knowing there is insufficient money 
in circulation for all to survive. Those who cannot sell their goods 
(I/(P+I)) fail and have their businesses foreclosed upon so that the 
minimum ratio of those forced into unemployment is the same minimum 
ratio of foreclosure inflation suffered. 
     That is how the usury deathgamble generates both unemployment and 
inflation at the same time. 
     Of course, if the bankers increase loans of new money, they can 
delay the failure and inflation. So they can fiddle with the results. 
     So that is the essential relationship between inflation and 
unemployment in relation to their cause: interest. Of course, if one 
thinks one is dealing with inflation as a too much money rather than 
too much foreclosure, then I can imagine that fiddling with one may 
may seem to change the other. 
     But if inflation is properly perceived as too much foreclosure of 
watches, then the connection of unemployment and inflation to interest 
rates seem evident. 
     That an interest-free casino chip system does not suffer 
inflation but does when interest is charged and that an interest-free 
casino chips system provides enough liquidity for all to participate 
in economic activity but charging interest knocks some out of the game 
are good indications that interest is the root cause of both effects. 
>What are the appropriate stocks and flows in the capital, labour and
>product markets? How can the model be verified econometrically?
     JCT: A casino cashier doesn't worry about capital, labour or 
product markets because that is accomplished by the invisible hand. 
The cashier doesn't plan how many chips he will issue tonight. That is 
purely dependent on the amount of collateral or labor pledged. And 
since the tokens are always one-to-one with the products, the product 
markets always equal the products available for sale. Again, it is not 
up to the cashier to determine these things, it is only up to the 
cashier to issue the requisite number of chips depending on demand. 
     Read the story of the relation of the stationary engineer who 
delivers steam to the manufacturing firm written by one of Canada's 
greatest Social Crediters, Louis Even, in my Wachitsuh Hussle at:
http://www.cyberclass.net/turmel/watch80.htm . I think it is the most 
brilliant analogy for the malfunctioning money system ever written. 
He's also the one who wrote Salvation Island which explained the 
bankers scam. 
>If these questions are too tough, please supply the name of the 
>plastics firm in  Finchley, so I can order my own copy of the 
>hydraulic model! :-)  Geoff Hyman (NetReacher) >Kentish Town, London
     JCT: As I explained recently, all my model needs is a bowl and a 
cup in a sink with a tap in order to model either the piggy bank model 
or the chartered bank model. 
-------------------------------

 

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