Money As Debt

this is silly, yes we are not on the gold standard anymore.

edit: look at a publicly traded bank balance sheet, banks keep actual deposits more than loans

 

I didn't watch the video but-
Not true, a bank can only lend based upon a % of deposits called reserves.
There is not a bank anywhere that has more deposits than loans.

 

you're flat out wrong, look at any publicly traded bank balance sheet. yes, sometimes banks have to borrow money from the gov't over night if they've exceeded their lending limit, but banks lend up to 90% of money lent to them in the form of deposits. you're just wrong

edit: not gov't, I should say central bank that they've deposited their reserves in

 

http://www.sec.gov/Archives/edgar/data/891098/000119312508109978/d10q.htm

this is sterling banks last balance sheet

loans: 3.5BB deposits 3.6

now some banks may be upside and have borrowed from the central bank so I shouldn't say all, but this is not a lie. all deposit are either demand: checking accounts, savings accounts and cds

 

no, on a balance sheet the deposits will always = the loans plus reserves, because that is how deposits are leveraged. All a bank has to have is a reserve amount to create a loan, the loan is the asset.

here is a simple explanation, it will help explain how a bank run destroys a bank- (I know wikipedia is lame, but it was the fastest thing I could think of to explain how a bank works the balance sheet) link -

Fractional-reserve banking
From Wikipedia, the free encyclopedia
Fractional-reserve banking is a banking practice in which banks are required to keep only a fraction of their deposits in reserve with the choice of lending out the remainder while maintaining the obligation to redeem all deposits upon demand. This practice is prevalent worldwide and is considered to be the customary form of banking system.[1][2]
History
[3] At one time, people deposited gold coins and silver coins at goldsmiths, receiving in turn a note for their deposit. Once these notes became a trusted medium of exchange an early form of paper money was born, in the form of the goldsmiths' notes.
As the notes were used directly in trade, the goldsmiths noted that people would never redeem all their notes at the same time, and saw the opportunity to invest coin reserves in interest-bearing loans and bills. This left the goldsmiths with more notes on issue than reserves to pay them with. This generated income—a process that altered their role from passive guardians of bullion charging fees for safe storage, to interest-paying and earning banks. Fractional-reserve banking was born. When creditors (note holders of gold originally deposited) lost faith in the ability of the bank to redeem (pay) their notes, many would try to redeem their notes at the same time, forcing the bank to call in loans or sell bills. This was called a bank run and many early banks either went into insolvency or defaulted on their notes.
Purpose and function
The Federal Reserve gives a summary of why fractional reserve banking is used and what its effects are:
The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds). Banks make money by charging borrowers more for a loan (a higher percentage interest rate) than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to create "money".[4]
How it works
A demand deposit at a bank (e.g. checking account) or banknote issued by a bank (bank-issued paper money) is essentially a loan to the bank, repayable on demand, which the bank uses to finance its investments in loans and interest bearing securities. The nature of fractional-reserve banking is that there is only a fraction of cash reserves available at the bank needed to repay all of the demand deposits and banknotes issued. The reason people deposit funds at a bank or hold banknotes issued by a bank is to store savings in the form of a demand claim on the bank. One important aspect of fractional-reserve banking is that the note holders and depositors still have a claim to repayment of their funds on demand even though the funds are already largely invested by the bank in interest bearing loans and securities.
For instance, you could ask to withdraw all of the money in your checking account at any time. If all of the depositors of a bank did that at the same time (a bank run), the bank could be in trouble, though this rarely happens. However, the Northern Rock crisis of 2007 in the United Kingdom is an example of such an event.
Fractional-reserve banking works because:
1. Over any typical period of time, redemption demands are largely or wholly offset by new deposits or issues of notes. The bank thus needs only to satisfy the excess amount of redemptions.
2. Only a minority of people will actually choose to withdraw their demand deposits or present their notes for payment at any given time.
3. People usually keep their funds in the bank for a prolonged period of time.
4. There are usually enough cash reserves in the bank to handle net redemptions.
If the net redemption demands are unusually large, the bank will run low on reserves and will be forced to raise new funds from additional borrowings (e.g. by borrowing from the money market or using lines of credit held with other banks), and/or sell assets, to avoid running out of reserves and defaulting on its obligations. If creditors are afraid that the bank is running out of cash, they have an incentive to redeem their deposits as soon as possible, triggering a bank run.
[edit] Money creation


The expansion of $100 of central bank money through fractional-reserve lending with a 20% reserve rate. $400 of commercial bank money is created virtually through loans.
The process of fractional-reserve banking has a cumulative effect of money creation by banks[4]. In short, there are two types of money in a fractional-reserve banking system[5][6]:
1. central bank money (physical currency such as coins and paper money)
2. commercial bank money (money created through loans) - sometimes referred to as checkbook money[7]
When a loan is supplied with central bank money, new commercial bank money is created. As a loan is paid back, the commercial bank money disappears from existence.
The table below displays how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money. An initial deposit of $100 of central bank money is lent out 10 times with a fractional-reserve rate of 20%. This means that of the initial $100, 20 percent of it, or $20, is set aside as reserves while the remaining 80 percent, or $80, is loaned out. The recipient of the $80 then spends that money. The receiver of that $80 then deposits it into a bank. The bank then sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so it then has more money to lend out.
Table:[8] Fractional-Reserve Lending Cycled 10 times with a 20 percent reserve rate (sources: The Principle of Multiple Deposit Creation[9], Federal Reserve Bank of New York[10], Bank for International Settlements[5])

individual bank amount deposited amount lent out reserves
A 100 80 20
B 80 64 16
C 64 51.20 12.80
D 51.20 40.96 10.24
E 40.96 32.77 8.19
F 32.77 26.21 6.55
G 26.21 20.97 5.24
H 20.97 16.78 4.19
I 16.78 13.42 3.36
J 13.42 10.74 2.68
K 10.74
total reserves:
89.26
total amount deposited: total amount lent out: total reserves + last amount deposited:
457.05 357.05 100

commercial bank money created + central bank money: commercial bank money created: central bank money:
457.05 357.05 100
Although no new money was physically created in addition to the initial $100 deposit, new commercial bank money is created through loans. The 2 boxes marked in red show the location of the original $100 deposit throughout the entire process. The total reserves plus the last deposit (or last loan, whichever is last) will always equal the original amount, which in this case is $100. As this process continues, more commercial bank money is created. The amounts in each step decrease towards a limit. If a graph is made showing the accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example above, the maximum amount of total deposits that can be created is $500 and the maximum amount of commercial bank money that can be created is $400.
For an individual bank, the deposit is considered a liability whereas the loan it gives out and the reserves are considered assets. The deposit will always be equal to the loan plus the reserve, since the loan and reserve are created from the deposit. This is the basis for a bank's balance sheet.
The creation and destruction of commercial bank money occurs through this process. Whether it is created or destroyed depends on what direction the process moves. When loans are given out, the process moves from the top down and money is created. When loans are paid back, the process moves from the bottom to the top and commercial bank money is canceled out, effectively erasing it from existence.
The reserves are not allowed to be used to fund any more loans. The reserves cannot be spent until the loan they back up is paid back. If someone defaults on a loan, the reserves have to remain as reserves until the bank can come up with money to cancel the commercial bank money created by the loan.[citation needed]
This table gives an outline of the makeup of money supplies worldwide. Most of the money in any given money supply consists of commercial bank money[5]. The value of commercial bank money comes from the fact that it can be exchanged at a bank for central bank money[5][6].
This is a general outline of how it works. The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some borrowers may choose to hold cash, and there may be delays or frictions in the process.[11] It may also be higher if the reserve requirement is lower or if there are no reserve requirements[12]. Government regulations may also be used to limit the money creation process by preventing banks from giving out loans even though the reserve requirements have been fulfilled[13].
[edit] Money multiplier


The expansion of $100 through fractional-reserve lending at varying rates. Each curve approaches a limit. This limit is the value that the money multiplier calculates.
The most common mechanism used to measure this increase in the money supply is typically called the money multiplier. It calculates the maximum amount of money that an initial deposit can be expanded to with a given reserve ratio.
Formula
The money multiplier, m, is the inverse of the reserve requirement, R[14]:

Example
For example, with the reserve ratio of 20 percent, this reserve ratio, R, can also be expressed as a fraction:

So then the money multiplier, m, will be calculated as:

This number is multiplied by the initial deposit to show the maximum amount of money it can be expanded to.
Reserve requirements
The reserve requirements are intended to prevent banks from:
1. generating too much money by making too many loans against the narrow money deposit base;
2. having a shortage of cash when large deposits are withdrawn (although the reserve is a legal minimum, it is understood that in a crisis or bank run, reserves may be made available on a temporary basis).
The money creation process is affected by the currency drain ratio (the propensity of the public to hold banknotes rather than deposit them with a commercial bank), and the safety reserve ratio (excess reserves beyond the legal requirement that commercial banks voluntarily hold—usually a small amount). Data for "excess" reserves and vault cash are published regularly by the Federal Reserve in the United States.[15] In practice, the actual money multiplier varies over time, and may be substantially lower than the theoretical maximum.[16]
Financial ratios
In addition to reserve requirements, there are other financial ratios that affect how many loans a bank can fund. The capital ratio is one type of ratio. It is also important to note that the term 'reserves' in the reserve ratio generally does not include all liquid assets.