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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: Maurice Winn who wrote (116199)	10/4/2003 8:34:56 PM
From: Lazarus_Long	Respond to of 281500

CB, I believe, assumes that only cash - physical currency is money. But banks, because they can loan multiples of their capital, can create money. In times of prosperity they are feeling confident and loan demand is high. They run at the max permitted multiple. When things go bad, some of their loans go bad. Now they never loaned physical currencies, they loaned a bookkeeping entry. When the loan goes bad, they write it off. The money goes to Money Heaven. That eats into their capital. If their capital drops low enough, they have to stop lending. If it keeps dropping, they're insolvent.