25 Responses to “Banking 4: Multiplier effect and the money supply”

1. 

   addrriannna March 8th, 2009 at 7:46 am

   Thank you!!

2. 

   dpod916 March 8th, 2009 at 7:46 am

   That is why we have the FDIC in the USA, if you have an FDIC insured account then your money is insured against insolvency, or a bank not being able to pay its debts, up to a certain amount i believe its 150,000 or something. This is why our banking system is so screwed up coming from the fractional reserve system because this system not only inflates the money supply but its very risky and creates boom and bust cycles through malinvesment and bubbles.

3. 

   dpod916 March 8th, 2009 at 7:46 am

   Boxman:
   Thats what we call a bank run, that is when people all rush to withdraw their money from the banks so what the bank is forced to do is call in all of its loans normally ending in like you started saying a payout of 1000 pieces of gold and then the bank would declare bankruptcy and unable to pay the remaining 1710 it has in liabilities.

   cont…

4. 

   Boxmanboxman March 8th, 2009 at 7:46 am

   Thank you for this very enlightening video, however what happens when all the people in village demand their 2710 gold pieces when only 1000 gold pieces exist? I’m assuming you write them bank notes.

5. 

   Achilles033 March 8th, 2009 at 7:46 am

   To all you sceptics fractional reserve banking works in that the money that comes from PROFITS from these investments goes to pay off the loans PLUS the interest payments on those loans. The payments are MONTHLY and are factored into the GROSS PROFITS the company makes each MONTH. A company that makes enough money can pay off the loan payments, the wages of the workers and still yeild DIVIDENDS…

6. 

   sinner212121 March 8th, 2009 at 7:46 am

   In the assets it is 810g for the build factory and 90 remains in the assets not 900 that you miscorrect later i think.

7. 

   thtrgremlin March 8th, 2009 at 7:46 am

   The federal reserve is just a clever way of getting around the Constitution. I think Madison was very shortsighted on many issues, but even he could understand how banks worked.

8. 

   thtrgremlin March 8th, 2009 at 7:46 am

   well duh, when usury is going to bankrupt you before you can even do anything with it, might as well start making as much fake money and spend it quick before the system collapses upon itself. The system today means the American Revolution was pointless because we have exactly the same system the founders tried to free us from.

9. 

   thtrgremlin March 8th, 2009 at 7:46 am

   Agreed. That and usury are evil. Stocks paying dividends? cool, but flat out usury should be illegal. It is pathetic that of the many things ignored in the bible that the evils of usury went with it. FRB allows private companies to effectively print money at will, and people actually buy the BS that it is ok because it stimulates the economy.

10. 

    Loveseekingmissile March 8th, 2009 at 7:46 am

    This doesn’t work. Where is the gold coming from to pay off the loans+interest? How can these projects generate gold coins? From where? Maybe you should check out “Money as Debt” a video that clearly shows how fraudulent fractional reserve banking is.

11. 

    weazle1991 March 8th, 2009 at 7:46 am

    your the biggest idiot in economic history!

12. 

    luke2468013579 March 8th, 2009 at 7:46 am

    You obviously have no idea of the functions of the financial system at all

13. 

    Mlajen March 8th, 2009 at 7:46 am

    Fractional reserve banking is the biggest scam in economic history.

14. 

    hami36 March 8th, 2009 at 7:46 am

    Under a TRB (total reserve banking..) system, the original 1000 dollars lent out would come from a timed deposit account instead of a demand deposit account. You could loan more originally (1000 vs. 900), and FRB requires the money to be paid back just like TRB would. So the second loan in TRB could also be 1000 while it was only 810 in FRB. I would argue that production would have increased more in a TRB system. The difference is two people cannot demand the same gold pieces.

15. 

    rfhawaii March 8th, 2009 at 7:46 am

    Without fractional reserve banking the projects would not have gotten funding, the ‘irrigation ditch and factories’ would not have been made and so the efficiency that came with these innovations would not have been seen. The amount of apples in the system would have remained at 1000 and the economy would basically stagnate.

16. 

    bweazel March 8th, 2009 at 7:46 am

    Also, why not try and explain the real estate market in these terms or all the money that is being created now to fund this bailout. These bailouts are definatly black holes. Fractional reserve banking is a scam and a cheat. This is very misleading since you oversimplify the fractional reserve system with this example. You just pulled the “apple” wealth out of thin air. You’re right. This is a very positive example you’ve made here. Very unrealistic, but positive. Wish the world worked this way

17. 

    bweazel March 8th, 2009 at 7:46 am

    So pretty much this fake money is only fake in the short term, granted the debtor doesn’t default. Khan. That is ridiculous that you say that these things are not shell games. How can it not be? You say it is not as long as every project is a good project. The reality of things is every project is not a good project and that default is built in to this system. It’s almost like a bounced check. If a person defaults it affects all the subsequent borrowers after.

18. 

    KommanderWill March 8th, 2009 at 7:46 am

    Gold is a commodity. Gold has many uses, most often jewelry. It is and was more than a barter tool. There is a reason Gold emerged as money, it was the most superior commodity out there in terms of value, portability, and divisibility.

19. 

    spitius March 8th, 2009 at 7:46 am

    thanks , mate, you’re really good at explaining. I’ve been looking for such an explanation for a long time.

20. 

    purenirvana March 8th, 2009 at 7:46 am

    Ah, I think I understand it now. The whole thing is based on people not withdrawing their money at the same time. Thanks for the video.

21. 

    thoughtchallenge March 8th, 2009 at 7:46 am

    I would say that most debt is for frivolous spending with investors making their money on that spending. One question I have for you is “How do you think the proliferation of debit cards has impacted the current crisis, since there is no paper currency or credit involved in the transactions?”

22. 

    hami36 March 8th, 2009 at 7:46 am

    Inflation and deflation have nothing to do with productive capacity or prices. The original definition has been perverted to hide the fact that bankers and govt create money out of thin air. Inflation is inflating the money supply. What happens when you need that “money” to purchase something other than apples, like oil perhaps? If the value of that “money” decreases, then prices rise, and wages never seem to increase as quickly as prices.

23. 

    hami36 March 8th, 2009 at 7:46 am

    Under a TRB (total reserve banking..) system, the original 1000 dollars lent out would come from a timed deposit account instead of a demand deposit account. You could loan more originally (1000 vs. 900), and FRB requires the money to be paid back just like TRB would. So the second loan in TRB could also be 1000 while it was only 810 in FRB. I would argue that production would have increased more in a TRB system. The difference is two people cannot demand the same gold pieces.

24. 

    khanacademy March 8th, 2009 at 7:46 am

    Without FRB, there wouldn’t have been as many investments made with the same capital/gold base so the total productive capacity of the hypothetical world would have increased by a lower amount. The “magic” of FRB is that it allows banks to create “bank-money” to fund positive (hopefully) return-investments (go over this a few videos further down the playlist). Inflation/deflation is dictated by the money supply AND total productive capacity. However, prices are easier to measure.

25. 

    hami36 March 8th, 2009 at 7:46 am

    Any economist worth their salt knows inflation and deflation has to do with money supply, not prices. You say that due to FRB, there is 2710 gold pieces and 3000 apples. Well, with a 100 percent reserve system, there would be 1000 gold pieces and 3000 apples. The price of apples decreased due to innovation, not increasing the money supply. As you can see, if the money supply remained the same, apples would be significantly cheaper than with fractional reserve banking.