Does this chart provided by the Federal Reserve demonstrate that money is created out of thin air (new money is added to the money supply by virtue of bookkeeping entries)?:
http://www.federalreserveeducation.o...itCreation.pdf
Please Note that the URL clearly indicates that this chart was prepared and provided by the Federal Reserve itself, for educational purposes, and that the chart itself is labeled:
The Principle of Multiple Deposit Creation
Also see Note at the bottom of the chart indicating that N1, N2, N3, etc. are defined as “individuals”, and “B1, B2, B3” are defined as "Depository Institutions". I presume “depository institutions” are the entities commonly known as “banks”, and are not the Federal Reserve itself.
Analysis of chart:
N1 sells a T-bill to the Fed for $10,000. B1 receives the $10,000 deposit from N1. B1 then lends out 90% of that deposit, or $9,000. That $9,000 is then deposited in B2, which lends out 90% of that $9,000, or $8,100, which ends up deposited in B3. B3 then lends out 90% of that deposit - $7,290, which ends up deposited in B2, etc.
Newly created money is “lent” to a customer and then deposited at another bank, where it is then treated as reserves at that bank, and 90% of that amount is lent out. That amount becomes another deposit, which is then treated as the basis for another 90% “loan”. Thus a series of deposits are created and then loans are piggy-backed one upon the other.
The bottom line of the chart clearly indicates that based upon the first, original $10,000 deposit in B1, $90,000 of new money will be created. It obviously was
not all created by the Fed itself - the lending of 90% of each subsequent deposit occurred at each of the various banks (B1; B2; B3, etc).
Note that after the first $10,000, all subsequent deposits consisted of newly created “lent” funds… which were then deposited in a different account (sometimes at a different bank, and sometimes at the same bank at which a previous deposit was made) and then used as the basis for lending out
another 90% of
that amount, and so on. Truly a “house of cards”… or more like a pyramid of balloons filled with … guess what? Thin air.
Out of curiosity, I went ahead and calculated this process… all the way down to less than 10 cents. And before someone remarks that loans that tiny are never actually made, I submit that banks base their lending upon the
aggregate amount of all deposits present in their branch. Therefore, cumulative deposits of small amounts
would count.
We can see if the process actually results in $90,000 of newly created money:
10,000 x 90% = 9000
9000 x 90% = 8100
8100 x 90% = 7290
This is where the Fed Res chart stops doing the calculating for us, and the total amount of money created is already:
Sub Total -01 = 24,390 – already more than double the original 10K.
I’ve continued on from there:
7290 x 90% = 6561
6561 x 90% = 5904.90
5904.90 x 90% = 5314.41
5314.41 x 90% = 4782.969
Sub Total – 02 = 22,563.28
4782.969 x 90% = 4304.6721
4304.6721 x 90% = 3874.205
3874.20489 x 90% = 3486.78
3486.7844 x 90% = 3138.106
3138 x 90% = 2824.20
2824.20 x 90% = 2541.78
Sub Total – 03 = 20,169.74
Running Total = 67,123.02
2541.78 x 90% = 2287.602
2287.6 x 90% = 2058.84
2058.84 x 90% = 1852.956
1852.956 x 90% = 1667.6604
1667.66 x 90% = 1500.894
1500.894 x 90% = 1350.8046
Sub Total – 04 =10,718.76
1350.8 x 90% = 1215.72
1215.72 x 90% = 1094.148
1094.148 x 90% = 984.7332
984.7332 x 90% = 886.26
886.25988 x 90% = 797.63
797.63 x 90% = 717.867
717.867 x 90% = 646.08
646.08 x 90% = 581.47
581.472 x 90% = 523.325
523.3248 x 90% = 470.99
471 x 90% = 423.9
423.9 x 90% = 381.51
381.51 x 90% = 343.359
343.359 x 90% = 309.023
309 x 90% = 278.1
278.1 x 90% = 250.29
250.29 x 90% = 225.26
Sub Total – 05 = 10,129.67
Running Total = 87,971.45
225.261 x 90% = 202.7349
202.7349 x 90% = 182.46
182.46 x 90% = 164.214
164.2 x 90% = 147.78
147.78 x 90% = 133.002
133 x 90% = 119.7
119.7 x 90% = 107.73
Sub Total – 06 = 1,057.62
107.73 x 90% = 96.957
96.957 x 90% = 87.26
87.26 x 90% = 78.534
78.534 x 90% = 70.68
70.68 x 90% = 63.612
63.6 x 90% = 57.24
57.24 x 90% = 51.516
Sub Total – 07 = 505.80
Running Total = 89,534.87
51.5 x 90% = 46.35
46.35 x 90% = 41.715
41.7 x 90% = 37.53
37.53 x 90% = 33.777
33.777 x 90% = 30.399
30.3993 x 90% = 27.36
27.35937 x 90% = 24.62
24.62 x 90% = 22.158
22 x 90% = 19.8
19.8 x 90% = 17.82
17.82 x 90% = 16.038
16 x 90% = 14.4
14.4 x 90% = 12.96
12.96 x 90% = 11.664
11.664 x 90% = 10.4976
10.4976 x 90% = 9.45
9.44784 x 90% = 8.50
8.5 x 90% = 7.65
7.65 x 90% = 6.885
6.885 x 90% = 6.1965
6 x 90% = 5.4
5.4 x 90% = 4.86
4.86 x 90% = 4.374
4.374 x 90% = 3.9366
3.9366 x 90% = 3.54
3.54 x 90% = 3.186
3.186 x 90% = 2.8674
2.8674 x 90% = 2.58
2.58 x 90% = 2.322
2.322 x 90% = 2.0898
2 x 90% = 1.8
1.8 x 90% = 1.62
1.62 x 90% = 1.458
1.458 x 90% = 1.3122
1.3 x 90% = 1.17
1.17 x 90% = 1.053
Sub Total – 08 = 449.34
Running Total = 89,984.21
1 x 90% = 0.9
0.9 x 90% = 0.81
0.81 x 90% = 0.729
0.729 x 90% = 0.6561
0.6561 x 90% = 0.59049
0.59 x 90% = 0.531
0.53 x 90% = 0.477
0.477 x 90% = 0.4293
0.4293 x 90% = 0.3864
0.3864 x 90% = 0.3477
0.3477 x 90% = 0.313
Sub total – 09 = 6.17
Running Total - 89,990.38
0.313 x 90% = 0.282
0.282 x 90% = 0.254
0.254 x 90% = 0.2286
0.2286 x 90% = 0.20574
0.20574 x 90% = 0.185166
0.185166 x 90% = 0.1666494
0.1666494 x 90% = 0.1499844
0.1499844 x 90% =0.135
0.135 x 90% = 0.1215
0.1215 x 90% = 0.10935
0.10935 x 90% = 0.098415
Sub Total – 10 = 1.94
Running Total = 89,992.32
Obviously, it would take many more tiny calculations in order to eventually arrive at the total amount of $90,000, but you get the idea. The chart is truthful.
I had to repeatedly round numbers off along the way. Many times the number of decimal places went beyond the capacity of my calculator. Nevertheless, we can see that this repeating process of lending 90% of each successive deposited amount will eventually result in the creation of an additional $90,000 based upon the first deposit of $10,000.
It appears to me that each bank which receives a subsequent deposit creates the next 90% in newly created money to lend… and so forth.
Therefore, I believe Redcloud is incorrect when he states that only the Federal Reserve actually creates new money, and Bill Smith is also incorrect when he claims that the “vapor money theory” AKA “Money Created out of Thin Air theory” is false, or stupid, or whatever other pejorative he has frequently used.
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