Appendix E â Money Is Created by Banks Evidence Given by Graham Towers Some of the most frank evidence on banking practices was given by Graham F. Towers, Governor of the Central Bank of Canada (from 1934 to 1955), before the Canadian Government's Committee on Banking and Commerce, in 1939. Its proceedings cover 850 pages. (Standing Committee on Banking and Commerce, Minutes of Proceedings and Evidence Respecting the Bank of Canada, Ottawa, J.O. Patenaude, I.S.O., Printer to the King's Most Excellent Majesty, 1939.) Most of the evidence quoted was the result of interrogation by Mr. âGerryâ McGeer, K.C., a former mayor of Vancouver, who clearly understood the essentials of central banking. Here are a few excerpts: Q. But there is no question about it that banks create the medium of exchange? Mr. Towers: That is right. That is what they are for... That is the Banking business, just in the same way that a steel plant makes steel. (p. 287) The manufacturing process consists of making a pen-and-ink or typewriter entry on a card in a book. That is all. (pp. 76 and 238) Each and every time a bank makes a loan (or purchases securities), new bank credit is created â new deposits â brand new money. (pp. 113 and 238) Broadly speaking, all new money comes out of a Bank in the form of loans. As loans are debts, then under the present system all money is debt. (p. 459) Q. When $1,000,000 worth of bonds is presented (by the government) to the bank, a million dollars of new money or the equivalent is created? Mr. Towers: Yes. Q. Is it a fact that a million dollars of new money is created? Mr. Towers: That is right. Q. Now, the same thing holds true when the municipality or the province goes to the bank? Mr. Towers: Or an individual borrower. Q. Or when a private person goes to a bank? Mr. Towers: Yes. Q. When I borrow $100 from the bank as a private citizen, the bank makes a bookkeeping entry, and there is a $100 increase in the deposits of that bank, in the total deposits of that bank? Mr. Towers: Yes. (p. 238) Q. Mr. Towers, when you allow the merchant banking system to issue bank deposits which, with the practice of using the cheques as we have it in vogue today, constitutes the medium of exchange upon which I think 95 per cent of our public and private business is transacted, you virtually allow the banks to issue an effective substitute for money, do you not? Mr. Towers: The bank deposits are actual money in that sense, yes. Q. In that sense they are actual money, but, as a matter of fact, they are not actual money but credit, bookkeeping accounts, which are used as a substitute for money? Mr. Towers: Yes. Q. Then we authorize the banks to issue a substitute for money? Mr. Towers: Yes, I think that is a very fair statement of banking. (p. 285) Q. 12 per cent of the money in use in Canada is issued by the Government through the Mint and the Bank of Canada, and 88 per cent is issued by the merchant banks of Canada on the reserves issued by the Bank of Canada? Mr. Towers: Yes. Q. But if the issue of currency and money is a high prerogative of government, then that high prerogative has been transferred to the extent of 88 per cent from the Government to the merchant banking system? Mr. Towers: Yes. (p. 286) Q. Will you tell me why a government with power to create money, should give that power away to a private monopoly, and then borrow that which parliament can create itself, back at interest, to the point of national bankruptcy? Mr. Towers: If parliament wants to change the form of operating the banking system, then certainly that is within the power of parliament. (p. 394) Q. So far as war is concerned, to defend the integrity of the nation, there will be no difficulty in raising the means of financing, whatever those requirements may be? Mr. Towers: The limit of the possibilities depends on men and materials. Q. And where you have an abundance of men and materials, you have no difficulty, under our present banking system, in putting forth the medium of exchange that is necessary to put the men and materials to work in defence of the realm? Mr. Towers: That is right. (p. 649) Q. Would you admit that anything physically possible and desirable, can be made financially possible? Mr. Towers: Certainly. (p. 771)
You have just agreed with what I was saying. They can only increase the lending when the investing increases. The deposits show one side of that investment the lending shows the other. Do you not understand double entry book keeping. The reasons lending has risen is directly as a result of the increase in the deposit. The deposit increase is the investment and the loan is the other side of that investment. You need to understand how accounting works.
to be clear i define money creation has any increase in checkbook liabilities of the banking system.The Fed also uses this def.this money is available on demand by depositors. Now you may not agree, because checkbook money are liabilities that have to be taken out of bank reserves (the banks own money). But the reserves are almost always a mere fraction of the deposits created by said bank. Thus the checkbook liabilities are always greater then reserves. this does represents money in the economy. So by the ability of the bank to have far more checkbook deposits than reserves the are creating money from loan operations.(more deposits)
I think this is where we are disagreeing. The concept of money creation. I would not consider that to be money creation merely an increase in the money in the economy used to make transactions. No new money is created it is just used to make transactions. Whereas QE is money creation. Money that is not based on any asset is put into the economy diluting the value of the currency. I think the point I am making is that the money supply increases you are talking about are used to purchase some kind of asset even if it is a future cash flow. QE is not a purchase of money it is a dilution of money and thus imo the only form of money creation. The other forms of money supply increases are as a result of buying and selling of assets even if they are future cash flows.
dilution can occur with an increase of checkbook money as well. Making more money available for mortgages that would not be availably under a 100% reserve causes those assets to go up in price which is an inflation or delusion of money based on existing assets. more money same assets. the money velocity you speak of has no relevance here. or in the money supply stats given by the federal reserve.It's plian old money creation/destruction as new loans are taken out an old ones are paid off that is how the double book keeping entry system works it is true that a loan made to increase assets wouldn't be delusional. but this isn't the case. This checkbook money can also be captured by the bank and added to the reserve side. Thus a cycle of inflation occurs (dilution). Simply put the banks can loan as much money a borrower can afford to pay. So the value of an asset is determined by how much a bank lends against it. Which is determined by how much the borrower can or wants to pay for said asset. The amount of credit available by the bank determines prices and that credit can be created by the banks above and beyond their reserves. therefor we have the same dilution you speak of
What you are talking about is valuation increase. It is like saying that an increase in a handbag is money creation. It is simply the way business works barter and hagling. No new money has been created more has simply been taken from money previously made to purchase the good.
no an increase in the price of a hand bag does not increase the amount of deposits at a bank. as when a loan is taken out. Prices rise when bank loans increase and so does deposits in the banking system. i would consider this money creation. but my main point in my OP was that QE does not necessarily lead to increase money supply.If loans are being paid off or defaulted on bank Deposits go down. The question is what the net is.this is under the feds definition of money that includes deposits.
I think you are missing my point. There is a function in banking that is like buying a handbag you purcahse a good in this case a future cash flow. This form of increase in money supply is made by putting money that already exists back into the economy. The form of money creation in QE is an increase in currency. There is no asset that was realised or reintroduced to purchase a good.
I just realised that 2012 is an election year. Since the Fed likes to help the hand that feeds it, I would say QE3 starts beginning of next year, for 11 months.
so are you considering an asset any any form money? By you're definition of money. it would appear to me that money (currency as you used in this post) supply could never decrease. is this correct? if not could you describe a situation were it would Also i thing currency means actual physical dollars. which isn't happening under a QE unless you count the stock footage of the printing press every time tv mentions it thanks