A Den of Thieves:
Cash Dollars In Circulation
Sam Aurelius Milam III
This
is the second article in a series of articles that I'm presenting in this
newsletter. The first article, A
Den of Thieves: Fractional Reserve Banking, appeared in the
December 2006 issue. The articles are based on my essay They
Can Fool Too Many Of The People Too Much Of The Time. Due
to the limited amount of space in this newsletter, I'm eliminating from
the articles a lot of material that's included in the essay. However,
copies of the essay are available upon request. The essay is also
available on Pharos.
I
intended, when I began the essay, to prove that fractional reserve banking
increases the number of cash dollars in circulation. Early in the
essay, I proved the opposite. However, while I was working my way
through the mechanics of fractional reserve banking, I discovered that
fractional reserve banking doesn't really exist, if it ever did.
Beyond that, I found within the existing financial system a sinister potential.
Inflation is only one of its evils. The thing that I least expected
to discover but which ought to have been the most obvious from the very
beginning is that none of it would be possible without the cooperation
of the people.
In
these articles, I've illustrated the dynamics of fractional reserve banking
with a model of the process of deposits, loans, and redeposits. The
model cycle is as follows:
1. |
|
Some number of cash dollars, in circulation
in the economy, is available for deposit in the bank. |
2. |
|
The available cash dollars are deposited
in the bank. |
3. |
|
The required number of cash dollars is
held in reserve by the bank. |
4. |
|
The difference between the number of cash
dollars deposited and the number of cash dollars held in reserve
is loaned by the bank, as cash dollars, and again enters the economy. |
5. |
|
The cash dollars loaned by the bank, circulating
in the economy, are then available to be redeposited in the bank. |
A
series of such cycles is an idealization of the process of fractional reserve
banking as it would happen in a real fractional reserve banking system.
It illustrates the ideal performance to be expected from such a system.
In the essay upon which these articles are based, I used a variety of examples
to investigate the consequences of several such cycles. Those examples
are shown in detail in appendix 1 of the essay. The various tables
used throughout these articles are based on those examples. The quantities
in appendix 1 of the essay, and in the various tables and figures shown
in the essay, can be calculated by equations that will yield the accumulated
total for any combination of parameters. Appendix 2 of the essay
contains examples of such equations, as well as their derivations.
Those equations are academically correct and ought to impress my critics
but there are easier ways to do the calculations. I used a Hewlett-Packard
HP-25 programmable calculator. The calculator programs are shown
in Appendix 3 of the essay. None of the appendices or figures shown
in the essay are presented in these articles. If you're interested
in seeing them, then you can request a printed copy of the article or you
can view it on Pharos.
When
I began the essay, I believed that cycles of fractional reserve deposits
and loans greatly increase the number of cash dollars in circulation, thereby
contributing to inflation. I'd heard that claim from various folks
who believed it to be one of the banking system's evils. It seemed
reasonable and I believed it. However, Table 1 shows that I was mistaken.
The number of cash dollars placed into circula-
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February 2007 |
Frontiersman, 1510
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