Money, Taxes, and Corporations |
They Can Fool Too Many of the People by
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They Can Fool Too Many of the People
Too Much of the Time |
They Can Fool Too Many of the People Too
Much of the Time If you once forfeit the confidence of your fellow citizens, you can never regain their respect and esteem. It is true that you may fool all the people some of the time; you can even fool some of the people all the time; but you can't fool all of the people all the time.I intended, when I began this essay, to prove that fractional reserve banking increases the amount of cash in circulation. Early in the essay, I proved the opposite. However, while I was working my way through the mechanics of fractional reserve banking, I discovered that fractional reserve banking doesn't really exist, if it ever did. A true fractional reserve banking system would be inherently self-destructive. Beyond that, I found within the existing system a sinister potential. Inflation is only one of its evils. The thing that I least expected to discover but that ought to have been the most obvious from the very beginning is that none of it would be possible without the cooperation of the people. Money An understanding of money is a prerequisite to understanding fractional reserve banking. Such an understanding must begin with the rules of money. To work well as money, a thing must be durable, portable, divisible without loss, available in limited quantity, generally accepted as money, and it must have intrinsic value as money.1 Nothing in use today satisfies those rules very well. Much of what passes for money doesn't satisfy them at all and, therefore, isn't money. Throughout this essay, I've tried to avoid the word money. Instead, I've used the word dollars. Even that isn't quite right because a dollar is a unit of measure of money. A transaction might involve a certain number of dollars of money just like it might involve a certain number of gallons of ice cream. If the ice cream melted on the way home and I say that I brought home some gallons because the ice cream went away, that's pretty much like talking about dollars in today's economy. The Model Bank In my analysis of fractional reserve banking, I've treated the banking system as if it was a single bank. That model simplifies the essay, which is already complicated enough without worrying about which bank is which. One bank is a reasonable model for understanding fractional reserve banking and illustrates the dynamics of the process very nicely. When I refer to "the bank" in this essay, then I'm talking about the model. When I talk about a bank as a part of the banking system that exists in the real world, and if I think that my meaning might not be clear, then I refer to it as a "real bank." There are only two relevant locations for dollars in this analysis: in the bank or not in the bank. I've therefore considered all of the rest of the economy to behave as a unit with regard to its interaction with the bank. In terms of the consequences of fractional reserve banking, it doesn't matter what the dollars do while they're out of the bank. What matters is the consequences of their leaving the bank and entering the bank.
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They Can Fool Too Many of the People
Too Much of the Time The Reserve When someone makes a deposit into a real bank, the real bank must be prepared to return the same amount of the same thing that was deposited. If the deposit is cash, then the real bank must be prepared to return the same amount of cash. The real bank assumes that people won't all want their cash at the same time and keeps in its possession only a fraction of the cash that was actually deposited. That cash is called the fractional reserve, which is a subtle deception. It should more properly be called the cash reserve. When someone deposits cash into a real bank, a record of the deposit is made. The real bank then uses most of the deposited cash for some purpose of its own and keeps on hand only the cash reserve. The record of deposit isn't changed when the dollars are used for something else. That is, the real bank has a few dollars on hand (the cash reserve) but a record indicating that it has many more dollars on deposit. The cash on hand is real, tangible cash. I call those cash dollars. The dollars on deposit are mostly not really there. I call those deposit dollars. They're only the record of the cash dollars that were deposited and then mostly used for something else. When someone deposits a check into a real bank, cash doesn't cross the
counter. Cash doesn't enter the vault. The checks are all processed
through a clearing house, a correspondent bank (real bank), or a Federal
Reserve Bank (real bank again), and net settlement is made not by transferring
cash but by electronic messages in deposit balances. That means that
when a deposit is made by check, it's impossible for a real bank to keep
a cash reserve because the real bank doesn't receive cash as a result of
the deposit. The very concept of a cash reserve requires that deposits
be made in cash, of which a fraction can be kept on reserve. Checks
do not deposit cash. That's why it's deceptive to refer to the cash
reserve as a fractional reserve. The real bank can measure a fraction
of anything, but it can keep a cash reserve only if it receives a cash
deposit.
A real bank takes the dollars deposited and loans them and you can be sure that the dollars people borrow will eventually be redeposited into another real bank. That is guaranteed by people's fear of losing cash. If the dollars are to be redeposited as cash, then they must be borrowed as cash.2 Remember, if a deposit is made by check, then cash doesn't go into the real bank. For cycles of fractional reserve deposits and loans to occur, dollars loaned as well as dollars deposited must be in cash. 0
At this point, you can see that the real banking system is only approximately a fractional reserve banking system. Few transactions are made with cash. The cash on reserve in the real banks must be a fraction of something, but I seriously doubt if it's the required fraction based on all deposits.
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They Can Fool Too Many of the People Too
Much of the Time The Cycles In this essay, I've illustrated the dynamics of fractional reserve banking with a model of the process of deposits, loans, and redeposits. The model cycle is as follows:
Calculations The quantities in appendix 1, and in the various tables shown in this essay, can be calculated by equations which will yield the accumulated total for any combination of parameters. Appendix 2 contains examples of such equations, as well as their derivations. Those equations are academically correct and should impress my critics, but there are easier ways to do the calculations. I used a Hewlett-Packard HP-25 programmable calculator. The calculator programs are presented in Appendix 3. Fractional Reserve Banking I believed, when I began this essay, that cycles of fractional reserve
deposits and loans greatly increase the number of cash dollars in circulation,
thereby contributing to inflation. I'd heard that claim from various
folks who believed it to be one of the banking system's evils. It
seemed reasonable and I believed it. However, Table 1 shows that
I was mistaken. The number of cash
dollars placed in circulation by fractional reserve banking, in that example,
will never equal the initial deposit, by which cash was removed from circulation.
The example is shown graphically in Figure 1.
Table 2 and Figure 2 show that the greater the fraction of cash dollars redeposited, the greater is the tendency for cash dollars to be removed from circulation. That's so logical that I wonder why I never thought of it before. 0
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They
Can Fool Too Many of the People Too Much of the Time Table 3 and Figure 3 show that the number of cash dollars in circulation varies inversely with the fraction held on reserve. That is, the lower the fractional reserve requirement, the more cash dollars will be in circulation. 0 It's apparent that fractional reserve banking doesn't increase the number of cash dollars in circulation. However, neither does it remove cash dollars from circulation. Deposits remove cash dollars from circulation. Thus, it isn't the bank, but the people, who are responsible. Fractional reserve banking gives a few of the dollars back. Deposits and Loans It's
interesting to look at the number of dollars recorded as on deposit in
the bank. I call those deposit dollars. The number of deposit
dollars increases with successive deposit and loan cycles, as shown in
Table 4. In that example, 1818.18 deposit dollars accumulate from
an original deposit of only 1000 cash dollars. That happens when
the bank loans cash dollars out of someone's account and then receives
them back again as a deposit of cash dollars into another account.
Although they're the same cash dollars, they're on deposit in two accounts.
That happens over and over again, creating a record of deposits of cash
dollars that are not really there. It might seem superfluous to make
a distinction between cash dollars and deposit dollars, but the distinction
is important because of a third kind of dollars. Those are deposit
dollars that don't correspond to anything. I call them fictional
dollars. At first, this might not be obvious. Here's what happens.
When the bank receives the initial deposit, those are cash dollars.
They exist physically, even if they are only green paper. When the
bank makes its first loan, it loans a portion of those cash dollars and
no longer has them in its possession. After the first loan, the bank
has (see the first example in Appendix 1) 100 cash dollars, but it still
claims 1000 deposit dollars. The difference between those two amounts
represents fictional dollars, which the bank says that it has on deposit
but which it really doesn't have. When the bank receives the second
deposit (the previously loaned cash dollars being redeposited), there are
550 cash dollars in the bank (450 from the new deposit + 100 held on reserve
from the first deposit). Also, the bank claims 1450 deposit dollars
(450 from the new deposit + 1000 from the first deposit). The second
deposit thus causes an increase in both cash dollars and deposit dollars.
After the second loan, however, the number of cash dollars in the
bank decreases but the number of deposit dollars doesn't. Thus, the
number of fictional dollars (deposit dollars cash
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They Can Fool Too Many of the People Too
Much of the Time dollars) changes from 900 to 1305. The point is that the number of fictional dollars doesn't change after a deposit. It changes after a loan. The fictional dollars are created when the bank loans cash dollars while continuing to claim possession of them. Obviously, deposit dollars cannot be loaned by the bank. They're
nothing more than the record of deposits, and the bank can't arbitrarily
reduce the depositors' records of deposits. Neither can fictional
dollars be loaned. Their existence
is even more abstract than that of deposit dollars. When the bank
loans dollars, within the context of fractional reserve lending, it can
loan only cash dollars.3 Since deposit dollars and fictional dollars can't leave the bank, they're available only for transactions that can be made without removing dollars from the bank. That's the origin of checkbook transactions and electronic transactions. Think about it. Dollars don't leave the bank when those kinds of transactions are made. Someone writes a check because he has a record of deposit dollars in his account at the bank. Someone receives the check, passes it through the system, and numbers change in both accounts. Cash doesn't change hands. The result is that fractional reserve banking creates a large number of dollars that can't be used as cash, because they can't be withdrawn. They're useful only for checkbook or electronic transactions, because they don't need to be withdrawn for those transactions. Consider the example of Tables 1 and 4. In that example, the number of cash dollars available for transactions (that is, cash dollars in circulation) was reduced by deposits to approximately 80% of its previous value. Simultaneously, the number of deposit dollars was increased to over 180% of the original amount of available cash. That's an increase in available dollars of approximately 260% (817.56 cash dollars in circulation + 1818.18 deposit dollars), but the bulk of it is available only for checkbook or electronic transactions. That provides a great incentive for the use of non-cash transactions and discourages cash transactions. 0 Debt During cycles of fractional reserve deposits and loans, an indebtedness to the bank accumulates. Tables 5, 6, and 7 reveal several interesting features of that debt. First (Table 5), the fewer dollars the bank holds on reserve, the greater will be the eventual indebtedness to it. That gives the bank an incentive to lower the cash reserve requirement. Second (Table 6), the more times the bank re-loans the same dollars, the greater will be the indebtedness to the bank. That gives the bank an incentive to make loans. And finally (Tables 5 and 7), the more conscientiously people deposit their cash dollars in the bank, the more they enable it to make them indebted to it.
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They Can Fool Too Many of the People
Too Much of the Time
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They Can Fool Too Many of the People Too
Much of the Time Summary
The growing predominance of checkbook transactions and electronic transactions, and the fear of using cash, verify the tendency toward a cashless economy. That economy will, I believe, be inherently more vulnerable to instability than a cash economy.5 However, to understand the implications of a cashless economy requires more than arithmetic. Its undesirability derives not only from economic considerations, but from political ones.
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They Can Fool Too Many of the People
Too Much of the Time titudes toward those activities. We don't have any control over those attitudes and we can't even guess what they'll be tomorrow. Even so, it might still seem innocent enough if we suppose that everyone is honest, that the institutions are there for our benefit, and that the business of government is to protect us. However, I can't ignore the long history of tyranny, the present state of the world, the vulnerability of the people, and the persecutions to which they have usually been subjected. Information is power and the cashless economy makes all of the details of our lives available to the government. The ironic part is that nobody is (yet) required by legislation to use the banks. It's entirely voluntary, yet people keep doing it. The present political system claims to derive its just powers from the consent of the governed but remains mute with regard to the pedigree of its unjust powers. The most noteworthy result of that claim is to place upon the governed a responsibility for the actions of government, just or otherwise. There's enough truth to the theory to make it barely plausible. In this particular case, the banks can't make loans unless people borrow from the banks. Checkbook transactions will not occur unless people write checks. If enough people demand their dollars in cash, then they'll get them that way, at least until the banks are bankrupt.7 And most important of all, the banks couldn't function AT ALL if people would refuse to deposit their cash in the banks. The entire banking system as it exists today rests upon the solid support of the people. No one has yet determined if it's possible to fool all of the people
all of the time but the Federal Reserve System has shown that it can fool
too many of them too much of the time. Whatever happens, the people
will be getting exactly what they deserve.
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They Can
Fool Too Many of the People Too Much of the Time
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They Can Fool Too Many of the People
Too Much of the Time
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Appendix 1. Examples ^ I did these calculations by bringing forward for each deposit and loan cycle the complete history of previous cycles and updating each item for the current cycle according to the transaction taking place. It's tedious and it used a lot of paper but it has the virtue of being unambiguous. You can see the current total for each item at the end of each cycle. You can also see, at each total, the entire history of the cycles that got you there. Fraction withheld from initial deposit = 0
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They Can Fool Too Many of the People
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They Can Fool Too Many of the People Too
Much of the Time
Fraction withheld from initial deposit = 0 Fraction held on reserve = 10% Fraction withheld from redeposit = 25% Fraction redeposited = 75% 0
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They Can Fool Too Many of the People
Too Much of the Time
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They Can Fool Too Many of the People Too
Much of the Time
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They Can Fool Too Many of the People
Too Much of the Time
Fraction withheld from initial deposit = .25 Fraction held on reserve = .1 Fraction withheld from redeposit = .25 Fraction redeposited = .75 0
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They Can Fool Too Many of the People Too
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They Can Fool Too Many of the People
Too Much of the Time
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They Can Fool Too Many of the People Too
Much of the Time
Fraction withheld from initial deposit = 0 Fraction held on reserve = .1 Fraction withheld from redeposit = 0 Fraction redeposited = 1.0 0
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They Can Fool Too Many of the People
Too Much of the Time
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They Can Fool Too Many of the People Too
Much of the Time
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They Can Fool Too Many of the People
Too Much of the Time
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Appendix 2. Equations ^ Dollars in Circulation - Cash Dollars
dollars available for deposit 1 = $1000 the fraction withheld at deposit 1 = 0 fraction held on reserve = .10 fraction withheld from redeposit i = 0 the total dollars in circulation after the fourth deposit can be found by setting n = 4 $cn = W1$c1 + (Wi($di-1
- R$di-1)) i=2,n
Upon reflection, this answer is obvious. That is, if 100% is redeposited, then none remains in circulation. If the fraction withheld from redeposit at each deposit i is .25, then $cn = W1$c1 + (Wi($di-1
- R$di-1)) i=2,n
If the fraction withheld from redeposit at each deposit i is .50, then $cn = W1$c1 + (Wi($di-1
- R$di-1)) i=2,n
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They Can Fool Too Many of the People
Too Much of the Time Dollars in the Bank - Deposit Dollars ^ The accumulated number of dollars on deposit can be calculated for any number n of deposits by the following equations.
initial deposit = $1000
the total accumulated deposits after the fourth deposit can be found by setting n = 4 $d4 = $d1 + D($d(2-1)-R$d(2-1)) + D($d(3-1)-R$d(3-1)) + D($d(4-1)-R$d(4-1))
If the fraction redeposited = .75, then $d4 = $d1 + D($d(2-1)-R$d(2-1)) + D($d(3-1)-R$d(3-1)) + D($d(4-1)-R$d(4-1))
If the fraction redeposited = .50, then $d4 = $d1 + D($d(2-1)-R$d(2-1)) + D($d(3-1)-R$d(3-1)) + D($d(4-1)-R$d(4-1))
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They Can Fool Too Many of the People Too
Much of the Time Dollars Owed to the Bank - Repayment Dollars ^ The accumulated number of dollars loaned by the bank, and owed to the bank (repayment dollars), can be calculated after any number n of loans by the following equations. 1. $Ln = $L1 + ($Li)
i=2,n
initial deposit = $1000
the total accumulated deposits after the fourth deposit can be found by setting n = 4 $Ln = A$d1 + (ADi$Li-1)
i=2,n
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They Can Fool Too Many of the People
Too Much of the Time Since L1 = 900, $Ln = 900 + .9x.5x900 + AD3$L2 + AD4$L2
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Appendix 3. HP-25 Calculator Programs ^ The HP-25 program shown below will calculate the accumulated number of dollars in circulation for any combination of the following parameters: 1. number of cash dollars available for initial deposit.
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They Can Fool Too Many of the People
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Press CLEAR STK. Press CLEAR REG. Press CLEAR PRGM. Place the amount available for the initial deposit in register 1. Place the fraction held on reserve in register 2. Place the fraction withheld from deposit 1 in register 3. Place the fraction withheld from redeposit in register 4. Press R/S. The calculator will show the deposit number and the amount withheld from deposit (cash dollars). Starting with deposit 2, it will also show the accumulating number of cash dollars.
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They Can Fool Too Many of the People Too
Much of the Time The HP-25 program shown below will calculate the accumulated number of dollars recorded as on deposit for any combination of the following parameters: 1. number of cash dollars available for initial deposit.
Switch the calculator to RUN. Press CLEAR STK, CLEAR REG, and CLEAR PRGM. Place the amount of the initial actual deposit in register 1. Place the percent held on reserve in register 2. Place the percent redeposited in register 3. Press R/S. ^
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They Can Fool Too Many of the People
Too Much of the Time The calculator will show the deposit number, the amount deposited (deposit dollars), and the accumulating number of deposit dollars.
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They Can Fool Too Many of the People Too
Much of the Time This program will calculate the number of dollars owed to the bank for any combination of: 1. the number of dollars initially deposited,
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They Can Fool Too Many of the People
Too Much of the Time Switch the calculator to RUN. Press CLEAR STK, CLEAR REG, and CLEAR PRGM. Place the amount of the initial actual deposit in register 1. Place the fraction not held on reserve in register 2. Place the fraction redeposited in register 3. Press R/S. The calculator will show the number of the current loan, and then the amount of the current loan, and the accumulating amount owed to the bank.
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They Can Fool Too Many of the People Too
Much of the Time References
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They Can Fool Too Many of the People
Too Much of the Time
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Money, Taxes, and Corporations |