Re: [gang8] Private bank relationship with central banks

["William B. Ryan" <william_b_ryan@xxxxxxxxx>]

Chris, in a sense you are correct.  Reserves can be thought of as loans from banks to the central bank.  In systems without required reserves, banks in effect purchase banknotes at full face value from the central bank.

There are required reserves in the American system.  The Fed purchases Fed notes from the Treasury, printed by its bureau of engraving, for the cost of printing, whatever that is, which is something far less than face value.  The Fed credits the Treasury's account.  It is not a loan but a credit.

The Treasury is credited at full face value for coinage.

In the American system, and it is my understanding, in most others, Fed notes (or their equivalent) held by banks, or "vault cash" is counted toward reserves.  If there is net withdrawal of notes, reserves are diminished.

This can create technical problems if there are "bank runs", as are now occurring in Argentina, and in the US at the onset of the Great Depression.  The financial system can be brought down, and with it the real economy.

It is a form of collective insanity to allow a technical problem, involving what in essence is bookkeeping, to bring down and hold down a real economy.

It is in principle simple to have contingency plans in place to rationally accommodate bank runs.  The accommodation can be accomplished without credit contraction.

What is happening in Argentina is criminal, if only morally so.  It is certainly incompetence.  They are responding by preventing withdrawals, converting certificate of deposits into government bonds, by down valuing the Peso, and on and on.  People are deprived of the money to consummate even the simplest of transactions.

They are doing lasting damage to the Argentine economy.

It will take generations to recover.

--

On Mon, 29 Apr 2002 09:13:04
 ChrisOfDulwich wrote:
>.
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>"Private banks borrow (A repo is nothing else than a debt contract) from the
>central bank and that is how money comes into existence."
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>Sorry, wrong.
>
>Private banks LEND to the central bank and THAT is now money, or strictly
>speaking, banknotes come into being.
>
>Chris
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>.
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