Global Politics, International High Finance, Propaganda

Wednesday, 29 April 2015

Governments Can Just Create Money out of "Nothing"

MONEY

In my opinion the two most important facts about money are:
  • Some people can just create it out of nothing and
  • It usually has no intrinsic value
These facts are so important and so little known that I'm going to try and convince you - gentle reader.

But first I'd like to present a table that summarizes what follows. Skip-over it if it seems too difficult. It will make more sense after you've read the rest of this article.

DIFFERENT KINDS OF MONEY

Commodity money Money that is actually made of something intrinsically valuable such as gold or silver, (even cigarettes can be used as this kind of money)
Receipt moneyMoney that is NOT made of something intrinsically valuable, but which can be redeemed on demand in terms of something that IS intrinsically valuable
Fiat moneyMoney not redeemable in gold or silver etc but which is deemed legal tender by law
Debt moneyThe promise of some fiat money.
Credit - which is "the promise of some Fiat money."
"I.O.Us from a bank" that are "Promises-to-pay" rather than actual hard cash.
Money that banks can create out of nothing, but only if they can find borrowers for it. (Banks can't create any money that isn't a debt, so the money that they create is always a debt.)
Fictional "loan money" which consists only of numbers in bank accounts
"Cheque Book" Money - eg Cashiers Cheques, Bankers Drafts.
Fractional moneyDebt money created several times over, reduced each time by a small fraction.


"Quantative Easing" - The government can just create money out of nothing!

If a government wants money it can just create it out of nothing. The UK government has just (2008) done so, calling the process "Quantative Easing."

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This quote from the Guardian:

"What is quantitative easing?

The Bank will make its £75bn of purchases with what is known as, "central bank money", in other words, rather than raising new funds by borrowing from the financial markets, the Bank will create the money to pay for them at the stroke of a pen."
Reference: http://www.guardian.co.uk/business/2009/mar/05/quantitative-easing-questions

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Or this quote from the Daily Telegraph 08 Jan 2009 (talking about "Quantative Easing"):

Where, one might ask, does the central bank get the money to buy all these securities? The answer is that it just waves a magic wand and creates it. It doesn't even need to turn on the printing presses. It simply increases the size of banks' accounts at the central bank

http://www.telegraph.co.uk/finance/breakingviewscom/4175704/Quantitative-easing-the-modern-way-to-print-money-or-a-therapy-of-last-resort.html

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Or this quote from a Governor of the Federal Reserve Bank - Ben Bernanke on November 21, 2002

"But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. "

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Or this quote from an employee of the Federal Reserve Bank from "How To Spend $1.25 Trillion" by David Kestenbaum and Chana Joffe-Walt - The National Public Radio, July 11, 2011

"The Fed was able to spend so much money so quickly because it has a unique power: It can create money out of thin air, whenever it decides to do so"

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FIAT MONEY

Another name for money that the government can just print is "Fiat" money - so called because it is created by government "fiat." It is money because the law says so - not because it is either "commodity money" or "receipt money". (see the Table headed "Different Kinds Of Money" shown above)

"Legal Tender" is Fiat Money

Governments have the power to create money out of nothing - to just print money! They get away with this because:
  • they have the power to write laws and
  • the law-courts are obliged to do what the law tells them to do.
The government can decree what courts of law are obliged to regard as "legal tender." These law-courts are then obliged (by law) to regard this "legal tender" as being adequate recompense for goods and services.

For example:

Suppose Person A is owed some rent and they take Person B to court to get it.

If Person B can show the court that they are willing to hand over to Person A some bits of coloured paper called "legal-tender" as payment, then the law-courts will consider Person A to have been repaid and the dispute to have been settled.

Person A is left with no legal alternative except to accept the bits of coloured paper known as legal tender as sufficient payment.

The law courts are obliged by law to consider legal-tender as legal repayment even though legal tender is just bits of coloured paper. Thus it is primarily the law that makes bits of paper valid payment for goods and services rendered. It is the law that gives "legal tender" the power of legal tender.

The government can create money "out of nothing." It can just print money and use the power of the law to force it to have value. More exactly - it can force courts of law to pretend that it has value. The value that you think Fiat currency has is really just a LEGAL FICTION"

Fiat Money Definitely Has No Intrinsic Value (Unlike Commodity Money)

It seems to me that most people believe that fiat money has an intrinsic value. Worse than that, they appear to me to think that fiat money actually was "value" But surely fiat money has no intrinsic value. It's just bits of coloured paper - you can't eat it, or wear it, or live in house made of it. The value of fiat money is only what you can buy with it. It is the goods or services that it can be exchanged-for that have the intrinsic value. In itself fiat money is worthless, valueless bits of coloured paper. It only has value when it is exchanged for something else.

The point I am trying to make is that most people seem to think that something valuable lies inside (or upon) the bits-of-coloured-paper-that-is-money. That fiat money has an intrinsic value.

However, fiat money has NO intrinsic value. If you cut it open you only find more coloured paper. Its value is entirely extrinsic.

This is such an important point that I am going to repeat it. It is an illusion that fiat money has an intrinsic value. (Only commodity money does) It is a shared collective hallucination. The intrinsic value that people think money has is made of the same thing that dreams are made of - solid imagination.



We have all been conditioned to think that the value of goods and services that we supply is the value contained in the amount of money that we can get in exchange for them.

But this is the exact opposite of the truth!

The truth is that WE give money its value - by our willingness to accept it as payment for the goods and services that WE supply in exchange for IT. The value of fiat money lies in the goods and services that it can be exchanged for - the goods and services that WE supply in exchange for IT.

Worse than our false belief that money has intrinsic value, is that we have been conditioned - right from school age when we were taught a subject called "economics" - that money-value is the primary value.

We are taught that things are ONLY really worth the amount of money that they can be exchanged for. We are conditioned to think that the primary measure of an objects value IS how much fiat money it can be exchanged  for.

We are taught not only that money IS the primary evaluation of an object's (or person's) value - but money SHOULD BE the primary evaluation of an object's (or person's) value.

I've often wondered who benefited from this bizarre point of view. Is it just a coincidence that it:
  • empowers people who have lots of money (ie the rich) and
  • dis-empowers people who have only a little (ie the poor)

DEBT MONEY

Banks can also create money - here are some quotes that I hope will convince you of that:-

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"That is, banks extend credit by creating money"
Paul Tucker - Deputy Governor of the Bank of England - from a speech at the "Monetary Policy and the Markets" Conference, London 13 December 2007

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"The process by which banks create money is so simple that the mind is repelled."
John Kenneth Galbraith, former professor of economics at Harvard , "Money: Whence it came, where it went" - 1975, p29

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"Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . .. The important thing to remember is that when banks lend money they don't necessarily take it from anyone else to lend. Thus they 'create' it."
Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964)

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"Of course, they [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."

Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion (Federal Reserve Bank of Chicago, Public Information Service, 1992, page 6.

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"[W]hen a bank makes a loan, it simply adds to the borrower's deposit account in the bank by the amount of the loan. The money is not taken from anyone else's deposit; it was not previously paid in to the bank by anyone. It's new money, created by the bank for the use of the borrower."

- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

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"Banks actually create money when they lend it." As the Federal Reserve Bank of Dallas explains on its website: http://www.dallasfed.org/assets/documents/educate/everyday/money.pdf

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"Each and every time a bank makes a loan (or purchases securities), new bank credit is created — new deposits — brand new money."
Mr Graham F. Towers, Governor of the Central Bank of Canada - (pp. 113 and 238 of Select Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence Respecting the Bank of Canada, Ottawa - 1939

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"By far the largest role in creating broad money is played by the banking sector...When banks make loans they create additional deposits for those that have borrowed the money." ‘Interpreting movements in Broad Money’, Bank of England Quarterly Bulletin 2007 Q3, p377. Available at: http://www.bankofengland.co.uk/publications/quarterlybulletin/qb070302.pdf

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The actual process of money creation takes place primarily in banks ... bankers discovered that they could make loans merely by giving their promise to pay, or bank notes, to borrowers. In this way banks began to create money.

Modern Money Mechanics: A Workbook on Bank Reserves and Deposit Expansion (Federal Reserve Bank of Chicago, Public Information Service, 1992

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Here's a direct quote on the subject from The Right Honourable Reginald McKenna P.C., British, a former Chancellor of the Exchequer (1915-16) and Chairman of the Midland Bank. This is taken from his book "Post-War Banking Policy" (1928)

"I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process."

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Here's the Bank of England on the subject:-

"... banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money."
from this PDF file http://www.bankofengland.co.uk/publications/quarterlybulletin/qb0801.pdf

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And here's the central bank of Germany :-

"4.4 Creation of the banks money
Money is created by “money creation”. Both state and private commercial banks, central banks can create money. .....

Money creation by commercial banks
The commercial banks can create money itself, the so-called bank money."

From a booklet published in August 2009 by the central bank of Germany "Deutsche Bundesbank”
(http://www.bundesbank.de/download/bildung/geld_sec2/geld2_gesamt.pdf ) (Translated by Google )

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The Credit River case

If you are still not convinced that banks can create money out of nothing - then you ought to know that it has been proven in a court of law.

It seems unbelievable that banks create the money that they lend and yet a judge and jury became convinced that they did. In the case of The First National Bank of Montgomery vs. Daly (1969) , defendant Jerome Daly opposed the bank's foreclosure on his $14,000 home mortgage loan on the ground that there was no consideration for the loan. Daly, an attorney representing himself, argued that the bank had put up no real money for his loan.

To everyone's surprise, The Bank President Mr. Morgan admitted that the bank routinely created money "out of thin air" for its loans, and that this was standard banking practice.

"It sounds like fraud to me," said Presiding Justice Martin Mahoney amid nods from the jurors.

In his court memorandum, Justice Mahoney stated:
Plaintiff admitted that it, in combination with the Federal Reserve Bank of Minneapolis, . . . did create the entire $14,000.00 in money and credit upon its own books by bookkeeping entry.
That this was the consideration used to support the Note dated May 8, 1964 and the Mortgage of the same date.
The money and credit first came into existence when they created it.
Mr. Morgan admitted that no United States Law or Statute existed which gave him the right to do this. A lawful consideration must exist and be tendered to support the Note.
The court rejected the bank's claim for foreclosure, and the defendant kept his house.

To Daly, the implications were enormous. If bankers were indeed extending credit without consideration (without backing their loans with money they actually had in their vaults) and were entitled to lend then a decision declaring their loans void could topple the power base of the world. He wrote in a local news article that:

"This decision, which is legally sound, has the effect of declaring all private mortgages on real and personal property, and all U.S. and State bonds held by the Federal Reserve, National and State banks to be null and void. This amounts to an emancipation of this Nation from personal, national and state debt purportedly owed to this banking system. Every American owes it to himself . . . to study this decision very carefully . . . for upon it hangs the question of freedom or slavery."

You can study the case file at:- http://www.lawlibrary.state.mn.us/CreditRiver/CreditRiver.html

[ Please also note:- The decision was later overturned by a higher court]
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FRACTIONAL MONEY

Fractional money is money created by the banking practice known as Fractional Reserve Banking. Banks are legally allowed to loan out money that has been deposited with them. Banking law says that they need only keep a fraction as a reserve. (Hence "Fractional Reserve")

This money that is loaned out usually becomes a deposit in another bank, and then it too is loaned out (less a fraction). Thus the same amount of money can be loaned out many times. Each time it is loaned out - new debt-money is created out of nothing.

A fractional system that kept 10% in reserve could create 9 times as much fractional money as was originally deposited. It could turn 100 units (dollars/pounds) into 1000 units thus creating 900 units out of nothing! (See "Addendum 02" of this Blog Article)

This process is sometimes called "Deposit Multiplication"

DEPOSITS FOR LOANS

An interesting feature of the fractional reserve system relates to the bank-practice of asking for a downpayment - part of the loan to be paid in advance.

Suppose a customer wants to borrow $100,000 and the bank asks for a downpayment (deposit) of $10,000 (i.e. 10%). After the customer has provided the deposit, the bank is then in possession of 10% of the loan that it wants to make. Now, it can legally create the other 90% out of nothing.

It can then lend this $90,000 to the customer. The customer now owes $90,000 plus interest.

The bank created this money out of thin air and was able to do so because the customer provided the reserve required. The bank provided nothing - not even the reserve - the customer did!

The customer paid $10,000 for the privilege of owing the bank $90,000 plus interest.

The customer paid for the shackles by which the bank enslaved him.

MOST MONEY IS DEBT MONEY

What follows is from a briefing paper supporting Early Day Motion 854 tabled in the House of Commons on March 10, 2003 by David Chaytor MP (Bury North) entitled "Publicly created money and monetary reform."

"It is commonly assumed that the government creates all money. This is not true. In fact the only money that is at present created by the government is notes and coin. According to the Bank of England there were £29.6 billion (i.e. thousand million) worth of notes and coin in issue in the UK in November 2002.

But since most transactions involve payments from one bank or building society account to another these have also to be considered money for all practical purposes, and they are.

In November 2002 the total value of such deposits exceeded £1,000 billion (or one trillion) for the first time, reaching £1,001 billion in that month. It can be seen by comparing the figure for notes and coin and the figure for all cash available in bank accounts that the government creates 2.95% of all money. Commercial banks create the rest. "

What the above text reveals is that I was 97% wrong when I thought that money was cash (or coin) In fact only 2.95% of the money in the UK in 2002 was banknotes and coins. The rest of it was bank credit (that is to say "debt money").

To repeat what I have just said:- The fiat money made by the government amounts to only 3% of the total amount of money in the UK. The vast majority of money in the UK is NOT fiat (cash or coin) it is "Debt Money" and "Fractional Money".

To say that again in a slightly different way. The banks issue most of the money in the UK. The government issue only a tiny percentage of the money. The government issue money as cash and coin. The banks issue money as Bank Credit.

What, then, is this "bank credit" made of? If it isn't made of paper like banknotes and it isn't made of metal, like coins, what is it physically made of?

The answer is - literally NOTHING. It is made of imagination - the same stuff that dreams are made of. The same stuff that "The Emperors New Clothes" were made of. The same stuff that "air guitars" are made of.

The nearest that Bank Credit comes to having a physical reality is as numbers written in bank accounts:-

"Money exists simply as a bookkeeping entry at a bank" says The Story of Money, 8th printing, 2005, Federal Reserve Bank of New York, Page 17

Do the numbers in these bank books represent anything that is physically real? No!

Bank Credit exists in the same way that dragons and unicorns do. Entirely in peoples' imagination.

Bank Credit is:- a legal fiction; a cultural artefact; a social convention; a faith-based substance. If you currently believe that Bank Credit is physically real it is because you are currently sharing a collective hallucination.

Most money is just imagined into existence! More exactly, the banks can just imagine it into existence - but if anybody else tries to do that they get arrested for fraud! Once it has been imagined into existence by the banks the rest of us use it when we pay our bills without directly using cash or coin. We use it when we make payment using a cheque, credit card or debit card.

BANK CREDIT IS AN I.O.U.

Although bank credit has no PHYSICAL reality, it does have a psychological reality. It is an "IOU." ( "I Owe You".)

Bank Credit is an IOU from the bank. It is not itself cash ("real" money) - It is an IOU for some cash  - a PROMISE to pay some ("hard") cash at some un-specified future time. - it is a promissary note.

However, because this promise-of-some-cash-in-the-future is accepted as payment by retailers as if it were hard-cash-here-and-now , they make it - effectively - cash. Bank Credit can be spent like "real" money and so - to most intents and purposes - it is money.

It is Bank CREDIT that is given in payment when you use a CREDIT card.

It is Bank Credit that is given as payment whenever you don't pay by cash or coin.

Perhaps we shouldn't call this stuff money. Perhaps we should call it "Bank Credit", measured in units called "Credits" rather than "money" which is measured in units called "pounds" or "dollars."

Or maybe we could call it "Promise" - because that is what a "Credit" is - a promise from a banker. "Promises from a Banker" could give us an imaginary substance called PFAB (pronounced "per-fab").

Or maybe we could call it "Trustme" (as in "trust me") - because that is also what a "Bank Credit" is - a request from a banker to trust a banker. "Trust me, I'm a Banker" could give us an imaginary substance called TMIAB.(pronounced "ter-me-ab")

If we called it "Credit" or "Promise" or "Trustme" or "IOU" we could more easily distinguish it from hard cash.

Most of the money in the world is IOUs issued by banks.

And most of those IOUs are fraudulent because Fractional Reserve means that banks can issue far more IOUs than they have cash to back them up with. Banks are legally allowed to issue IOUs for far more than they actually own. They are allowed to owe what they don't actually own. They are allowed to promise what they don't actually possess. If anyone else does that they are guilty of fraud.

Money is created out of thin air like this when the private banking system lends to the government.

That's right. When your government borrows money, most of that money is imaginary, created out of thin air by the banks.

Most of your countries' National Debt is Fictitious!

When governments borrow money, they issue Treasury Bills (also known as:- exchequer bonds, government stocks, government securities or gilts ) in return. These are also basically IOUs - promises by the government to repay the loan by a particular date, and to pay interest in the meantime. (Another "Promise" - but this time from a government.)

Treasury Bills are mostly bought  by banks - (but they can also be bought by individuals and investment funds.)

When banks buy Treasury Bills they are allowed to create the required money at the stroke of a pen out of nothing.

Banks are allowed to create credit out of nothing by lending it into existence to the government in very much the same way as they can lend it into existence to individuals.

The government now has new money in the form of Bank Credit. (Chiselled out of rock-hard "Promise," hewn out of solid "Trustme" and cleaved from boulders of "IOU")

Under this system the National Debt is:- "Bank Credit issued to the government"

Your National Debt is:-

Things which are:- "Promises from a Banker"
given in exchange for
Things which are:- "Promises from your Government"

As Congressman Wright Patman, Chairman of the House Banking and Currency Committee, wrote in a 1964 treatise called "A Primer on Money:"
“The Federal Reserve Banks create money out of thin air to buy Government Bonds from the U.S. Treasury . . . [creating] out of nothing a . . . debt which the American people are obliged to pay with interest.”
and he also said this in 1941:-
“When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks. I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue. I make that statement after years of study.” 

Wright Patman:- excerpts from September 29, 1941, as reported in the Congressional Record of the House of Representatives (pages 7582-7583).

The government constantly tells us that there isn't enough money to pay for public services because (it says) it knows that the cost of borrowing any money that it needs has to be passed on to the taxpayer.

So, it sells off state assets and gets the private sector to fund public services instead.

CONCLUSION and RECOMMENDATION

IT IS JUST AS EASY FOR THE GOVERNMENT TO CREATE MONEY OUT OF NOTHING AS IT IS FOR THE BANKS!

If the government created money as fiat money it wouldn't have to borrow it from the banks as debt money (Bank Credit). If the government can just print money as fiat currency why borrow it from a bank as bank credit? Especially when the bank that creates that bank credit out of nothing has the cheek to ask for it all back, plus interest.

As Thomas Edison - the famous inventor of Menlo Park said:-
"If our nation can issue a dollar bond [ie a TREASURY BILL] it can issue a dollar bill [ie cash or coin]. The element that makes the bond good, makes the bill good, also.

The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way.

It is absurd to say that our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people."

Thomas Edison, The New York Times (6 December 1921)

And, if the government did create money rather than borrow it:-
  • it wouldn't have to pay any interest on it
  • it wouldn't be in debt to anybody.
  • it wouldn't have to sell off any assets or offer them as collateral
Once the government created this money it could SPEND and LEND it into circulation.  Something that has been done in Canada, Australia and NewZealand.

It would get it all back in tax anyway. Of which more later!




Thi above video is of Richard Werner, Professor of Economics with a Chair in International Banking at the University of Southampton saying that the government should create money directly and not borrow it from the banks.

MONETARY REFORM BY UK PARLIAMENT

From 2002 to 2008, eight Early Day Motions (EDM) were put forward by MPs seeking to address the problem of fractional reserve banking. Despite these EDMs gaining signatories including such well known politicians as Nicholas Winterton, Peter Bottomley, David Chayter, Bob Marshall-Andrews and Austin Mitchell, none of these attempts at reform won the backing of the leadership of the major political parties.

EIGHT EARLY DAY MOTIONS IN UK PARLIAMENT

EDM 854 - (2002-2003) Publically Created Money and Monetary Reform
EDN 323 - (2003-2004) Public Credit for Public Purposes
EDM 327 - (2004 -2005) Use of Public Credit for Public Works
EDM 743 - (2004-2005) Interest Free Money
EDM 390 - (2005-2006) Publicly-Created Money
EDM 408 - (2006-2007) Public Credit for Public Purposes
EDM 265 - (2007-2008) Green Credit for Green Growth;
EDM 1449 - (2008-2009) Taxing the Profits of Credit Creation.

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Addendum 01:- THE BOOKKEEPING TRICK
Starting Up A Loan Account

The parliamentary briefing paper goes on to say:-

"Do banks really create money?

The simple answer is "yes" .... Is this credible? A lot of people find this hard to accept but it is actually quite possible, because double entry bookkeeping allows it to happen. What happens is that when a bank lends money they open two accounts for that person.

To lend money, all a bank has to do is make an entry of, say, £1,000 in the current account, thus creating cash the person can spend. This is what people think of as a "credit" balance.

The other side of the accounting entry is in the loan account. This will be marked as being overdrawn by £1,000, and that will show that the money is owed back to the bank. This is usually thought of as a "debit" balance

The trick of using two accounts has meant that cash has been created out of nothing, and the bank's books still balance.

The fact that there never was cash, and that the balances have been created out of nothing, is proved by adding them up.

A positive £1,000 and a negative £1,000 when added together come to zero. And yet by using this trick banks have created money, and have created for themselves the right to charge interest"

The creation of the current account IS the creation of the IOU that is the "Bank Credit."

The creation of the loan account IS the depiction of an IOU from the customer to the bank.

The opening entry in the current account is (mostly) fraudulent. Legal but still fraudulent. If, however, the customer has committed any deception on his side of the bargain the bank will likely have him prosecuted for fraud!

Starting Up a Deposit Account

When a customer deposits a bag of hard cash - the bank issues him an IOU. For some reason people accept these IOUs as payment, which makes these IOUs - effectively- money.

As Hawtrey says:-

"....the banker creates the means of payment out of nothing, whereas when he receives a bag of money from his customer, one means of payment, a bank credit, is merely substituted for another, an equal amount of cash.

Economist Ralph George Hawtrey, Currency and Credit (1919), p. 20

Those IOUs are then likely to be deposited in another bank. This next bank can, in turn, create some new IOUs based on that IOU. These IOUs refer to the previous IOU and mean "IOU another IOU" - "I promise you a previous promise." These IOUs can then be lent out.

The banking system is thus legally allowed to issue many IOUs for the same hard cash! In a fractional reserve system with a 10% ratio - the Banks could collectively issue IOUs up to a total of ten times that original deposit of real money/hard-cash.

As Fisher says:-

"Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess."

Irving Fisher - Professor Emeritus of Economics, Yale University in "100% money:" p 7.

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ADDENDUM 02

FRACTIONAL RESERVE -
In the USA some kinds of account have NO reserve requirements

As the New York Federal Reserve Bank explains on its website: (http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html)

"Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit.

If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000).

In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+...=$500).

Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity. "

The New York Federal Reserve Bank goes on to say:-

"In practice, the connection between reserve requirements and money creation is not nearly as strong as the exercise above would suggest. Reserve requirements apply only to transaction accounts, which are components of M1, a narrowly defined measure of money. Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels."

And as Steve Keen notes - citing the Federal Reserve Table 10 in “Reserve Requirement Systems in OECD Countries”, (http://www.federalreserve.gov/pubs/feds/2007/200754/index.html)

"The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

So huge swaths of loans are not subject to any reserve requirements"

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In the Euro - zone  the Reserve Ratio is Two Percent

"Since the reserve ratio is currently two percent in the Eurosystem"

From a booklet published in August 2009 by the central bank of Germany "Deutsche Bundesbank”
(http://www.bundesbank.de/download/bildung/geld_sec2/geld2_gesamt.pdf ) (Translated by Google )

This means that a deposit of 2 euros of fiat money will allow the banks to create 100 euros of debt money via the Fractional Reserve system.

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More of :"In the USA some kinds of account have NO reserve requirements"

In June of 2001, the fractional reserve requirement was $37 billion for the entire U.S. banking system.
See: http://tinyurl.com/aetno

In June of 2001, M3 was $7605 billion.
See: http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt

Therefore, in total, the reserve requirement was 37/7605, or .49%, or less than half of 1%.

The reason why it is so low is that for the first $6 million of deposits at a depository (your local branch) the reserve requirement is zero.

Then, for the next $6 million to $45 million, the amount is 3%.

Then, for amounts larger than $45 million, it is 10%.

See: http://tinyurl.com/cxhzl

Therefore, since the vast majority of deposits are small ones, the effective reserve requirement is close to zero, or , more exactly, 1/2 of 1%.
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