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Sep 3, 2022Liked by Jim Brown

Growing up, I took may trips in the old brown Dodge down to the bank (and Dairy Queen) with your dad, and this article brings me right back to those days. He taught me the gist of this article on one such trip, and I remember it very well. I was too young to really "get it" back then, because it would be decades before I had to get a loan, or pay it back, but the lesson stayed with me. Thanks for these articles, Jim. I will surely be passing on the knowledge and wisdom to my own children as they come of age.

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Sep 7, 2022·edited Sep 7, 2022Liked by Jim Brown

Have you ever hard the joke explanation of the fractional reserve banking system?

It goes along the lines of... Squirrel works really hard for Jacob and earns 10 acorns. So he puts 10 acorns in the bank. The bank loans Jim 1,000 acorns (10:1) ratio. Jim needs a new fence so he pays Squirrel, 100 acorns to build it. Squirrel uses 20 to cover his living expenses and puts 80 in the bank. The bank loans 8,000 acorns to Sarah who buys a used car with 7,980 and pays Squirrel 20 to clean it.

Squirrel deposits that 20 acorns in the bank and is really excited he's saved 110 acorns in just a week's time. What Squirrel doesn't realize, is all 9,100 acorns were created in the last week and are digital/fake promissory acorns. There are only a total of '110' printed/real acorns in existence. So what happens if everyone tries to take their "money' out of the bank at once?

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Thanks, PD!

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Thanks for this article. It's a tough subject with a lot of confusing, conflicting opinions. As you pointed out, it's no wonder Chat GPT got it wrong.

I realize that this post may have been completed in haste due to the family medical issue you mentioned. The deft shoot-down of all the wrong answers from Chat GPT was good to see. When time permits, I hope that you give us a clear, positive answer to the question, "How is money created?"

AI has no way of knowing an implicit context without being explicitly programmed for human implicit context. Humans need further information also.

My go-to text, once recommended by Ayn Rand, is University Economics by Alchian & Allen, 1964. They support your view that banks create money through loans, writing, "Money consists of currency in circulation plus demand deposits in commercial banks, and no person in the community now has less cash or smaller deposits than before the loan." p. 661.

The distinct difference between money, wealth, and currency would help seat the answer to this question in the complex hierarchy of financial concepts. I would like an answer that sets both the genus and the differentia, in addition to the mechanism of money creation. In other words, "What is money? How is it created? Why is money created?" Thanks.

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Great post! When I read about the requisite need for "political candidates committed to sound money..." I wonder if that's as likely as storks delivering babies. In alternative currency realms like crypto, rules can be built into encrypted algorithms to prevent abuse. But in a system where politicians control the outcome and write the rules, it feels like abuse is to be expected and occurs until there is a system collapse. From a personal standpoint, I'm very interested to read your future post where you explore "ensuring our economic survival." Cheers!

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