> tomorrow which Dick then uses to repay Tom, would not the original
> $100 Tom lent Dick remain in the system? Or do you think it will all
> vanish into thin air somehow?
First understand what is meant by money remaining in the system and by money being withdrawn from from the system.
And the final one — the bank lends Dick $100 which he puts in a Swiss bank account or uses to buy an import from a country where people keep dollars in safes to hedge against inflation of their own currencies. etc.
Now let us take a look at money coming and going into “thin air” versus money being “in the system or not in the system”
Money “in the system,” I suggest, should be considered as being a deposit in a checking account or being currency in a pocket or handbag or grocery store til, or in a company’s payroll safe, but not currency in a bank (financial sector).
Now we need to consider the important notion of “first spender” and “last seller”
A man is a first spender when he writes a check on a new bank loan. He is also a first spender when grandma gives him a dollar that has been in her mattress. In either case the that new money entering circulation (entering the system of buying and selling among households, businesses and government (consider government as a branch of the household sector — collective buying and selling – however poorly managed) – that new money when first spent — is then deposited in the bank of the seller who first accepted it — from then on it will always be in someone’s checking account — jumping from person to person as check writing dictates.
That money as a rise in the water line of total checking deposits in the economy will only exit the system when the bank loan is repaid.
New money entering total national checking deposits tends to multiply after it is deposited. How much it multiplies depends on banking rules about how much deposited money must be held in reserve against the loans a bank makes. Let us look at the so-called “money multiplier” which determines how much “thin air” money will be created under fractional reserve banking rules.
Start with new banks that have no money deposited. Then Tom, Dick and Harry get a sum of money from their grandmothers’ mattresses as birthday presents and deposit them in these banks. Now the water level on all this banks together has risen to a certain level. And as Tom, Dick and Harry work taking in each other laundry paying with checks – the amount of money in checking deposits does not change. But low and behold! the bank has been given power to issue loans up to a fraction of their bank deposits. (This is a safe bet since Tom, Dick and Harry are not likely to withdraw their money from their accounts and put them in their own mattresses or to deposit them in a Swiss Bank or Cayman Island offshore bank.) If the fractional reserve ratio is 10 percent that means that the system can lend — that is create new “thin air” deposits for borrowers up to 90 percent of what they have on hand. This of course will increase the water line in the total deposits tub by 90 percent. Now this rise in the water line from the old level to the new level is new deposit that can also be considered new reserves against which new loans can be made — so 90 percent of that 90 percent of the original Tom Dick and Harry can be loaned by those banks, loaned to Tom Dick and Harry to expand their laundry facilities. But this 90 percent of 90 percent itself raises the water line of total deposits — and the additional deposits from the old water line to the newest line is also new deposits which can by the fractional reserve banking rules can back new loans up to 90 percent of that rise in the water line. And this is the money multiplier effect. Each new loan gives birth to new deposits that have a life of their own being transferred between Tom, Dick and Harry.
But we are forgetting that each of these loans must eventually be paid back to the bank. Which means taken out of the system. And that lowers the water line — and of course the total amount of loans cannot reach higher than 90 percent of water line of total deposits. So if a loan is repaid, then all of the fractional-reserve-based loans that came from thin air because of that loan must now go back into thin air because that loan is being retired. Now we have a money multiplier of contraction. Because as the reverting back to thin air of 90 percent of the repaid loan, will force loan calls of 90 percent of that amount — which in turn will lower the level of the total deposits tub once again requiring yet more loan calls. And so it goes — except it is goes even further than that — because we have so far not mentioned the interest payments that also are draining the tub.
Tom, Dick and Harry must end up turning their laundries over to the bank because while they started with their grandmas’ mattress money to stake them in their laundry business — they took out loans that were far more than that to build their laundry’s.
Each 100 from a grandma led to a 90 dollar loan which led to a .9 of 90 loan which led to a .9 of .9 of the 90 dollar loan and so on, until Tom, Dick and Harry are owing the bank far more than $100 for each $100 of grandma money they deposited. And on top of all of this that is owed in principal on multiple loans there is also interest on each of these loans. So if the bank after it is all loaned out simply collects the interest and the repayment of principal Tom, Dick and Harry will loose all of their checkbook money and their laundries will be foreclosed too — grandma’s stake and all of the work they have put into it.
And of course the bankers will own the laundries and the land they are on.
But the bankers have to save their reputations in all this — so they offer to loan the government of Tom Dick and Harry that will be used to put Tom Dick and Harry to work building wind generators to power the laundries now belonging to the banks. Of course the money loaned to the Government of Tom, Dick and Harry will have to be repaid with interest. Now since the government of Tom, Dick and Harry has no laundries what it can do is tax all of the work that Tom, Dick and Harry do as they try to dig themselves out of their hole. But as more and more interest is needed and more and more loans to make up for the net drain on money from the system — the debt slavery and tax slavery of Tom, Dick and Harry consumes all of their lives — they and their children and grand children will inherit the slavery in the form of the Government of Tom, Dick and Harry and their progeny forever.
Now of course the answer to this is social credit — which just gives every person money debt free to go out and spend and build an economy without fractional reserve banking building up their debt and then, by deflation because of interest drain, taking away everying they build and then some.
If Social Credit is the real answer, shouldn’t you learn more about it?