Subject: TURMEL: Flaherty's Contradiction?
Date: 10 Nov 1997 02:24:40
TURMEL: Flaherty's Contradiction
     In your Debt Virus text, you say:
*     Banks are no different in the real world.  Commercial banks
*and savings and loans have expenses to pay just like any other
*firm.  They must pay their employees, purchase office supplies, and
*meet the other expenditures which are a part of doing business.
*When they do this banks spend money back into the economy without
*any debt being created to burden the non-bank public -- debt-free
*money as it were.  The revenues banks collect from interest on
*loans and other services do not disappear into an economic void.
*Instead, those revenues are used to meet the bank's operating
*expenses, to purchase assets to generate future income, or are paid
*to the shareholders as dividends.
     JCT: You may note that this fits in with my plumbing model of the
banking system:
Fig. 3                 FRACTIONAL RESERVE BANK

bank.JPG (22096 bytes)

     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
it. Yet:
*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.

bankflah.JPG (22292 bytes)
*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.
*Counterpoint #4:
*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

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