Fig. 3 is the interior plumbing of a chartered bank which shows
that the revenues banks collect through the Interest(in) pipe from
loans and other services are used to meet the bank's operating
expenses, to purchase assets to generate future income, or are paid
to the shareholders as dividends through the Bank Expenses pipe. And
it is true that these funds go back to the economy free of debt though
I call it splashing in the pool.
* In Dr. Jaikaran's model, the only interaction a bank has with the
*economy is to extend a loan and to collect on it.
JCT: More precisely, the plumbing shows that the only interaction
a bank has with the economy through the tap of new money in the
pumphouse is to extend a loan and collect the principal payments on
*In the real world banks must pay their employees, pay interest
*to their depositors, meet their other expenses, and purchase
*equipment. When the banking system does this, it spends into existence
*new "debt-free" money (debt-free in the sense that no one outside the
*banking system is required to obtain a new loan). In other words, the
*system creates a new demand deposit out of nothing, adding to the
*money supply without the creation of any additional bank credit (loans
*plus bank-held bonds) being necessary.
JCT: This says that the Bank Expenses tube is connected to a tap.
Fig 3b FRACTIONAL RESERVE BANK
*Summarizing the first counterpoint, the banking system creates new
*"debt-free" money in the form of new deposits whenever it pays its
*expenses or purchases fixed assets. These deposits do not represent
*loan principal or interest which the non-bank public must eventually
*repay. Contrary to the Debt Virus thesis, new bank credit is not the
*only source of new money.
JCT: Your contention that the Bank Expenses pipe is
connected to the tap is contradicted by your statements that it's
connected to the reservoir of bank revenues. I believe that only the
Loans(out) pipe is connected to tap of new money and Bank Expenses are
as you yourself say: "banks spend money back into the economy.." The
money spent back into the economy is the money first taken out before
being put back.
*Federal Reserve Earnings Go To the Treasury
*The Debt Virus explanation for how Federal Reserve Notes enter the
*economy is correct, but it neglects two very important points. First,
*like a commercial bank, the Federal Reserve system has expenses which
*are met by spending the interest income it collects from the Treasury.
JCT: Same contradiction. The FED can't be paying for expenses
with already-existing revenues from the reservoir and with newly-
created money in the pumphouse at the same time.
So, Ed, before I continue parsing your words for my Nov 12
presentation at Rensselaer Polytechnical Institute, I'd like you to
indicate what the Bank Expenses Out pipe is connected to, the
reservoir of revenues as in Fig 3 or the tap of new money as in Fig
a comment to John Turmel