Money 101
>Article #104424 (104440 is last):
>From: (William F. Hummel)
>Newsgroups: sci.econ
>Subject: Money 101
>Date: Sun Mar  7 19:56:15 1999
>Here are ten key concepts that will provide a solid foundation
>for understanding money and our monetary system. A glossary is
>attached. For those who prefer a browser presentation, visit
>7. Government spending does not increase the money supply. All 
>spending is financed with funds recycled from the public via taxes 
>and/or bond sales. In extremis the government could print money to 
>cover its spending, but that has not happened since World War II.
     JCT: Isn't it funny that the solution to the government's 
deficits and shortage of money is glossed over with no in-depth 
analysis. Even though he mentions the government borrowing interest-
free money created by the Treasury here, you'll notice that in another 
stream of articles, he only considers taxing or borrowing interest-
bearing money created by licensed banks without mentioning the Third 
Way. See:
>>Article #103342 (103390 is last):
>>From: (William F. Hummel)
>>Newsgroups: sci.econ
>>Subject: Tax or Borrow -- Does it Matter?
>>Date: Fri Feb 12 18:44:44 1999
>>Most of the public views the national debt as a burden and something 
>>to be minimized. Of course that implies the government should cover 
>>its spending by taxing (the other guy) rather than borrowing. Let's 
>>examine what effect each funding method has on the financial 
>>position of the public as a whole. In both options, taxing or 
>>borrowing, the same amount ($100b) is extracted from the public. 
     JCT: So the whole stream was spent discussing the two worst 
options while ignoring the best Third Option. Of course, the 
government could print money to cover its spending and the work paid 
for by that spending would be the backing of the new money issued so 
that as long as every $10 bill is backed up by an Hour's work, it 
would work exactly like Ithaca Hours, except that it would be run by 
the government instead of Paul Glover. 
     Of course, William points out that since the solution hasn't been 
employed since World War II when it was used to successfully finance 
the war, there seems to be plenty of reason not to successfully use it 
now because it's 50 years later and present world financial system is 
already working so well. 
>10. Paying off the debt would not create additional money for either 
>the public or the government. Every dollar of debt paid off would 
>merely transfer taxpayer dollars to bond owners. 
     JCT: Of course, the end result would be much more than that but 
it's hard for economists to see the full implications. I have always 
advocated that the Treasury print up enough new money to pay off the 
national debt and I'm grateful that Hummel points out that it wouldn't 
actually create any new money because that money would be used to pay 
off the debt to the banks. So the debt would remain the same and would 
still have to be paid off. The only difference would be that 
interest-free debt would replace interest-bearing debt so that 
instead of most of the debt payments going against the interest, all 
of the debt payments would go against the principal and eventually, 
the national debt would be paid off. 
>The end result would be to dissolve the Treasury securities the 
>public uses as a savings vehicle.
     JCT: There's no reason that the Treasury securities used by the 
public would be dissolved as a savings vehicle. Treasury would still 
owe the principal of the debt which must be paid off. 
>Glossary (in order of appearance above)
>Credit money: Money issued by a bank when it creates a deposit to 
>fund a new loan. When the loan is repaid, the amount of credit money 
     JCT: What a confusing way to say that banks lend out newly 
created deposit money and loan payments retire deposit money. Just 
like a casino cashier issues lends out newly created chips and retires 
those chips with principal repayments. Still, it does contradict Prof. 
Flaherty's belief that banks lend out their depositors' old savings. 
>The total amount of credit money is several times the amount of Fed 
     JCT: Where RR=ReserveRatio, the total amount of credit money is 
exactly 1/(RR) times the amount of the Fed money. With a RR=.1, the 
total credit money is exactly 10 times the amount of Fed money. 
     May as well be precise since we can be. 
>Commercial banks: Financial institutions with a license to accept 
>deposits and to create credit money. Not to be confused with 
>investment banks and finance companies, which can only lend their own 
>money or borrowed money, not newly created credit money.
     JCT: Well put. Hummel gets so much right, I just don't understand 
why he keeps getting so much wrong. 
     This really bears repeating as I've just had volumes of 
discussions about why deposits loaned out by banks create new money 
and why deposits loaned out by piggy banks do not create money. 
Hummel rightly points out that deposits loaned out by finance 
companies and investment banks are like piggy banks, not creating new 
money. Only deposits loaned out by real banks create new money. 
>Reserve ratio: Ratio of a bank's reserves to the amount of its demand 
>deposits. The Fed sets the required minimum ratio, currently 10%.
     JCT: As I said above, the limit is 1/RR. 
>Banking system reserves: Total reserves held by all depository
>institutions. A bank must hold its reserves on deposit at the
>Fed or as vault cash. Only the Fed can create new reserves.
     JCT: Since a bank does not know whether the money being newly 
deposited by a saver came from newly created money by the FED or newly 
created money by a credit bank, and since the deposit permits the 
creation of new credit whether it came from the FED or a credit bank, 
then the statement that only the FED can create new reserves is false. 
Only the FED can create new high-powered reserves without first having 
had a deposit while all credit banks can create low-powered reserves 
which did first need to have had a savings deposit. 
>Article #104435 (104440 is last):
>From: "Michael L. Coburn" <>
>Date: Mon Mar  8 13:01:42 1999
>This short assay is about the best explanation of USA money I've ever 
>seen. There are no falsehoods or fabrications and only some very 
>minor editorial commentary which ANY person other than a academic 
>eunich will convey. I am not in agreement with the conclusions 
>alluded to but IMHO the basics of this presention are absolutely 
>correct and it deserves the "money 101" title. My own conclusions are
>left until the and of this responding article.
     JCT: Other than missing the importance of the government printing 
up its own money and paying off the debt, there is only the erroneous 
belief that only the FED can create reserves to criticize to it was a 
pretty good essay. 
>Article #104445 (104481 is last):
>From: (William F. Hummel)
>Newsgroups: sci.econ
>Subject: Re: Money 101
>Date: Mon Mar  8 16:37:15 1999
>On Mon, 08 Mar 1999, "Michael L. Coburn" <> wrote:
>>Then, therefore, deficit spending ("spending in excess of 
>>taxation"), will have indirectly increased the money supply as a 
>>result of such "fiscal policy".
>The key word here is "indirectly." Since almost everything
>*indirectly* affects everything else in the economics realm, I don't 
>think the conclusion above conveys much useful information. The money 
>supply is literally created by the banking system. Factors that 
>affect demand for credit money, and thus the amount of money created, 
>are many and diffuse. Certainly the stimulus of government spending 
>is important, but so is the consumer confidence level, the size of 
>our foreign trade, effects of natural disasters, etc. What I am 
>trying to show through the Money 101 essay is how our monetary 
>system *actually* works.
     JCT: And other than accepting that deposits created by one credit 
bank can act as reserves by another, you did a really good job for an 
economist. I really hate lumping you in with Flaherty in my criticisms 
but since you still haven't admitted the validity of the miracle 
equation predicting the minimum shift B inflation, or even the 
existence of shift B inflation itself, I have no choice. Knowing how 
the money systems works doesn't help explain how the money system 
doesn't work right. 
>So I ask once on again to see some data supporting the claims that 
>the interest on the national debt screws the little guy. 
     JCT: I think the discussion of whether the interest on the 
national screws the little guy is missing the point. It's screwing 
everyone since it is unnecessary. I know I've explained the scam 
umpteen times but I know that the explanation bangs up against the 
cognitive dissonance which has conditioned economists to reject the 
notion that anyone would lend without interest. 
When you were little, did you ever dream of printing cash?
Of filling up your wallet with some money in a flash?
Creating money accurately means TO HAVE THE PLATES,
The stamping of some paper into notes best demonstrates;
Or stamping metal into coins; or blips computerized,
Into your bank account deposits, checks now authorized.
So whether paper, metal, volts of electricity,
TO HAVE THE PLATES is printing money absolutely free.
Now if you printed to spend, the others would bewail,
They'd call it counterfeiting and send you off to jail.
But what if Crown would let you merely print it up to lend?
With only what you could collect in interest to spend?
If you could print and lend a thousand out at ten percent,
You'd make a hundred interest on printing that you lent.
But if you could print up and lend a million out you'd get,
An extra hundred thousand dollars for your fee on debt!
If Crown stops using its own money plates and comes to you,
A billion printed nets a hundred million revenue!!
With everybody being taxed to pay you interest,
Of all the scams in history, TO HAVE THE PLATES is best!!!
Though never spending, only lending, riches do await,
To all who with the plates become the loan-sharks to the state.
And though to join the few who thusly profit, one might dream,
Wake up to see we're all the victims of their greedy scheme.
While Crowns of old had ruled that "Treasury run money plates,"
Without the interest to middle-men at rip-off rates,
Today most governments to banking industry have lost,
Control of money plates so interest is now a cost.
To service debt in ninety four, Canada's request,
A hundred'n eighty billion dollars paid in interest.
We're taxed over five hundred dollars each per month to pay,
For interest to holders of our plates they gave away!!!
I'll pay the tax for army and police to handle strife;
I'll pay the tax for doctors, nurses who protect my life;
I'll pay the tax for all engaged repairing road and sewer;
I'll pay the tax for social servants helping out the poor;
I'll even pay the tax for bureaucrats with no regret;
But I'll resist the tax for any interest on debt.
     So you see, whether it's the rich guy or the poor guy who's 
paying most of the interest doesn't matter. It's the fact that we're 
all being taxed to pay interest when don't have to be that's the scam 
and the fact that there are some people who pay and who do not receive 
makes it inherently unjust. 
>Article #104447 (104481 is last):
>From: (GChand4059)
>Date: Mon Mar  8 17:43:10 1999
>Outstanding post. Required reading for all alt.politics and sci/econ
>newsgroupers? All congressmen must pass a test on Money 101 ten key 
>concepts? A required course in high school? Identify which of ten key 
>concepts crackpot posters don't understand? One big attaboy for 
     JCT: Yes, even I'd have to give it an A- objecting only to 
missing the bank created deposits also acting with FED deposits as 
reserves for new loans. I've never given an economist an A before so 
this is a first for me too. It's just too bad that a fellow who gets 
so much right can't get shift B inflation or the miracle equation 
right too. 

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