From: tjdoran@watserv1.uwaterloo.ca (DORAN TJ - BIOLOGY)
Subject: Re: The debt
Organization: University of Waterloo
Distribution: na
Date: Wed, 16 Dec 1992 03:29:02 GMT

In article <Bz9CH6.1vn@teleride.on.ca> stevew@teleride.on.ca (Stephen M. Webb) writes:
>In article <Bz2ooC.Hn3@watserv1.uwaterloo.ca> tjdoran@watserv1.uwaterloo.ca (DORAN TJ - BIOLOGY) writes:
>>
>>Let's say banks have to have 10% (for the sake of easy math) of the cash they 
>>loan out on hand at any one time. Imagine someone deposits $100. The bank can
>>add $100 to the 'assets' side of their ledgers and add $100 to the 'liabilities'side. They then loan you $90 (the maximum amount they can lend out).
>
>I'm glad you're not my accountant.  If I deposit $100 in the bank, I'm loaning
>the bank $100.  That means I have a $100 asset and the bank has a $100
>liability.

Actually, that $100 bill in the teller's hand is an asset. It's balanced bny
the bank's liability to you.>

>>The first bank (Bank 1) now adds $90 to its 'assets' column. New Money.       
              
Here's where I go wrong. Stay tuned.
>
>Okay, $90 asset and $100 liability.  Go on.
>
>>You take your $90 to Bank 2 and deposit it. Bank 2 then adds $90 to both sides
>>of its ledgers and proceeds to loan out $91. Again, a bank is adding money it 
>>has lent out to its 'assets' column. And so on, and so on...
>
>Bank 2 adds a $90 liability and loans out $81 (assuming you made a typo).
>This cycle continues in a negative arithmetic progression.  What is the sum
>total of net assets and liabilities?  Zero.  No money created.
>
>Okay, so when I loan $100 to Bank A, they have this $100 liability, I have
>this $100 asset, and they have $100 cash.  When they loan $90 to Bank B,
>they then have $10 cash and Bank B has $90 cash.  Cash has been neither
>created nor destroyed.
>
>If you can explain to me how a bank can add the loan I made to it to both sides
>of its leger, I'd be satisfied that loans create money.  I will also become
>very rich, since I could take a loan out of the bank, further loan the amount
>to myself at 0% interest, pay back the bank with the second loan, and come out
>ahead just by never paying off my own debt.  I could then repeat the cycle
>until I could payy of the federal debt with pocket change, doubling my assets
>every 24 hours if I choose.  I could start my own late-night paid programming
>show and tell others how to become rich using other people's money.
>
>-- 
>------- Stephen M. Webb -------
>
>Ack!  I've accidentally broken my leg!  -- Ed the Happy Clown

A little reflection on my posting...

Let's try that first paragraph again. The bank makes a loan. The person
who takes out the loan pays back a total of $100 interest. The *interest*
is new money. It simply didn't exist when the person promised the bank
they would pay it.

As for the rest of the post, I somehow got into how that $100 expansion off
the money supply could be loaned and reloaned, eventually creating a great
deal more money by the same process.

Apologies for the mixup...

TJ
>


-- 
TJ Doran  	              |"There you stand like a duck in a thunderstorm
TJDORAN@watserv1.uwaterloo.ca | again... Aren't you ever going to understand?" 
                              |                         - W.A. Mozart
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