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The People's Bank of Canada (was: Re: New Money System Proposals For Canada (Addendum))

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  • Ardeshir Mehta
    Peter, Re your objections to my previous post (quoted below for ease of reference), let me present a simple scenario for your consideration, and you can then
    Message 1 of 1 , Apr 1, 2008
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      Peter,


      Re your objections to my previous post (quoted below for ease of reference), let me present a simple scenario for your consideration, and you can then tell me if my scenario is realistic or not ... and if not, why not.

      If my scenario IS possible, though, then it ought to answer all your objections.

      Here's the scenario:

      1.

      Six citizens of Canada get together, put up $10,000 each as capital, and with the total capital of $60,000, set up a bank in a small Canadian city (say, one with a population of between 50,000 and 100,000). The bank is called "The People's Bank of Canada", or "PBC" in short. 

      Note that this happens altogether INSIDE Canada., and as a result, all the dollar figures are in Canadian dollars, and the banking regulations of Canada apply.

      This is certainly possible and legal, right? If not, can you tell me why not?

      2. 

      The PBC initially works out of small rented offices, for which they pay rent at the rate of $2,000 a month. It has a staff of two, each of which is paid $4,000 per month. So initially the PBC's total monthly expenses are $10,000. For the first month, this amount is paid up-front by the PBC out of its capital, and the remainder of the capital, namely $50,000, is deposited with the Bank of Canada as the PBC's reserves.

      This is possible and legal, right? If not, why not?

      3. 

      The day the PBC opens, it puts up a big sign in its window, which reads: 

      "WE ISSUE FULLY-SECURED LOANS AND MORTGAGES AT ZERO PERCENT INTEREST, PROVIDED YOU PUT 10% DOWN, AND PAY US A ONE-TIME FLAT FEE OF 1% OF THE LOAN - SO SWITCH YOUR LOANS AND MORTGAGES TO US NOW!!!" 

      This is possible and legal, right? If not, why not?

      (Note that in the early years of the 20th century, in the USA at least, banks who offered loans on such terms DID ACTUALLY EXIST.)

      4.

      Because of this sign, in its first month of operation, the PBC attracts 1,000 customers, each with fully-secured loans or mortgages of between $1,000 and $100,000, all of whom want to switch their loans and mortgages to the PBC. The total amount that remains to be paid on the loans and mortgages which all these customers have is $2,000,000. They give the PBC a down payment amounting to 10% of the amount that remains to be paid on their loan or mortgage (as the case may be), and as a result, that amounts to a total of $200,000. This amount of money is also deposited by the PBC with the Bank of Canada as reserves. The total amount of the PBC's reserves is, therefore, $250,000. The customers also pay the PBC the requested 1% flat fee, the total of which amounts to $20,000. This latter, the PBC treats as its gross income for the first month.

      All this is possible and legal, right?

      5.

      On the basis of the total of $250,000 in reserves, the PBC can have deposits amounting to a total of $2,500,000, or even more (given that there is no reserve ratio requirement in Canada).

      This is possible and legal, right? If not, why not?

      6.

      As mentioned above, the PBC's customers have already deposited $200,000 with the PBC. Into each of their accounts, the PBC deposits additional money which it creates out of thin air, money which amounts to an additional total of $2,000,000. This brings up the total of the PBC's deposits to $2,200,000: which is below any reasonable maximum, since the PBC's reserves are $250,000, which is 11.4% of the deposits.

      This is possible and legal, right? If not, why not?

      7.

      The bank's customers issue cheques drawn on their accounts to their previous creditors, paying off their previous loans and mortgages. The total amount of these cheques is, of course, $2,000,000. As a result, the total amount of money in all the deposits the PBC has on its books goes down to $200,000. However, its reserves remain at $250,000.

      This is possible and legal, right? If not, why not?

      8.

      In the second month of operation, because of the PBC's customers being so happy at having reduced their monthly payments by huge margins - some by as much as half of what they used to be - word of mouth encourages 1,000 additional people to switch their loans and mortgages to the PBC. The total amount remaining to be paid on their loans and mortgages is also $2,000,000, so they deposit a total of $200,000 with the PBC as down payment, pay the one-time 1% fee amounting to $20,000, and the PBC creates for them an additional total of $2,000,000 in money created out of thin air, which it deposits into their accounts.

      This is possible and legal, right? If not, why not?

      9.

      The down payment total of $200,000 is again deposited by the PBC with the Bank of Canada as reserves, bringing up the PBC's reserves to $450,000. From the $20,000 which the second month's new customers pay as a one-time flat fee, $10,000 is used to pay the second months rent and wages, the remaining $10,000 being the bank's income (before taxes) for the second month.

      This is possible and legal, right? If not, why not?

      10.

      At this point the total amount of deposits in the PBC again goes up to $2,200,000. And this is well below the amount the PBC can reasonably have as deposits, because it now has reserves of $450,000.

      This is possible and legal, right? If not, why not?

      11.

      Since the bank has a lot of excess reserves, it takes $100,000 out of its reserves and with that money, hires an ad agency to create a fetching TV ad for it, so as to attract even more customers.

      This is possible and legal, right? If not, why not?

      12.

      This brings down the bank's reserves to $350,000, which is still more than enough to cover the deposits.

      This is possible and legal, right? If not, why not?

      13.

      The second month's customers also issue cheques drawn on their accounts, paying off their creditors. The total amount withdrawn from their accounts is, of course, $2,000,000, and as a result, the deposits again go down to $200,000.

      This is possible and legal, right? If not, why not?

      14.

      The customers who came to the PBC during the first month of its operation now begin to pay back their loans, since their first monthly payments come due in the second month of operation. These payments total $15,000. The PBC uses $10,000 from this to pay the third month's rent and wages, and adds the remainder, namely $5,000, to its before-tax income.

      This is possible and legal, right? If not, why not?

      15.

      As a result of the TV ad campaign, during the third month, 5,000 new customers approach the PBC to switch their loans. The total of the loans they are granted by the PBC is $10,000,000. The total amount they give the PBC as down payment is therefore $1,000,000, which the PBC promptly puts into its reserves. The PBC's reserves now go up to $1,350,000, and on the strength of those reserves, its deposits can go up to $13,500,000 or even more (since in Canada, as we said earlier, there is no required reserve ratio). Thus the PBC can certainly increase the amounts in the deposits of its 5,000 third-month customers by a total of $10,000,000.

      This is possible and legal, right? If not, why not?

      16.

      Also, during the second month, loan repayments keep pouring in to the PBC. The total of these repayments during the second month is $30,000. From these it pays out the rent and wages for the third month, totalling $10,000, and treats the remaining $20,000 as income (before taxes).

      This is possible and legal, right? If not, why not?

      17.

      It is to be noted that ALL THE LOANS AND MORTGAGES ARE FULLY SECURED, so that in the event of any of its borrowers defaulting, the bank loses nothing.

      This is possible and legal, right? If not, why not?


      .......


      Now I could go on and on, but if the above IS possible - and I for one can't see why it wouldn't be - then what's there to prevent the People's Bank of Canada from growing, and GROWING, and G_R_O_W_I_N_G, like the Energizer Bunny, until it becomes as large as an Energized Mammoth?


      Cheers.




      +++++





      On 1-Apr-08, at 9:31 AM, Peter Hogwood wrote:
      The Bank of Ardeshir would be able to spirit up only so much money out of thin air to lend out. Demand would be high and in no time you would have lent to the max.

      Oh no; not at all. Initially the bank would ask all borrowers to put down 10% of the amount of the loan as cash, which the bank would promptly put in its vault, and treat as its reserves. On the basis of any given number of dollars as reserves, the bank can issue nine times that many dollars as loans. So it doesn't matter how many people apply for loans: they could all be issued the loans they request.

      [Reply]: A bank that doesn't charge interest on loans would hardly be in a position to pay interest on deposits or offer other inducements for deposits. Such a bank would very rapidly lose reserves to other banks, putting it rapidly out of business.  The concept of "nine times that many dollars as loans" is predicated on the assumption that every deposit created as a loan will remain on deposit in the non-interest charging bank that granted the loan, an impossibility where other banks competitively seek deposits.

      Well, I am not against banks making a reasonable amount of money for taking the trouble to issue a loan to us. Call it a "reasonable profit on a transaction", for example.

      [Reply]: Profit is one of the three components of interest. You ignore the other two. It is in fact the smallest of the three components. The next largest covers the ordinary business expenses of the banks. The largest is what is in effect an insurance premium to cover defaulted loans within the risk category.

      But does TEN TIMES as much sound reasonable to you? WHICH law firm, no matter how prestigious, will charge you five GRAND an hour? And yet banks get away with this, and more, every day of the week!

      [Reply]: Whether or not it is "ten times" depends on the rate of interest and the period of the loan. Regardless of the amount, only a small proportion of that quantity is profit to the banks. The rest goes to the banks' business expenses and default insurance premium.

      However, as an aside, I would like to mention that what is called "Islamic Banking" today is a total sham, and not at all in keeping with the spirit of Islamic teaching, which is totally against every kind of interest, by whatever name it may be called.

      [Reply]:  

      "The Quran forbids usury, not interest. Quite a few states in USA have laws against usury. Usury is defined as excessive interest. A Dictionary defines usury as 'an excessive or inordinate premium for the use of money borrowed', 'extortionate interest', or 'the practice of taking exorbitant or excessive interest.' The Arabic language also makes distinction between interest (Fa'eda) and usury (Reba). The Quran forbids Reba or usury."


      Which is perfectly consistent with the modern Jewish and Christian perspectives on the matter:

      "John Calvin's letter on usury of 1545 made it clear that when Christ said 'lend hoping for nothing in return,' He meant that we should help the poor freely. Following the rule of equity, we should judge people by their circumstances, not by legal definitions. Humanist that he was, Calvin knew there were two Hebrew words translated as 'usury.' One, neshek, meant 'to bite'; the other, tarbit, meant 'to take legitimate increase.' Based on these distinctions, Calvin argued that only 'biting' loans were forbidden. Thus, one could lend at interest to business people who would make a profit using the money. To the working poor one could lend without interest, but expect the loan to be repaid. To the impoverished one should give without expecting repayment." http://eh.net/encyclopedia/article/jones.usury

      Peter Hogwood



















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