^NEW 1/23/2008 10:40:40 PM

This is from page 11 of America's Great Depression:


Now what happens when banks print new money (whether as
banknotes or bank deposits) and lend it to business?6 The new money poursforth on the loan market and lowers the loan rate of interest. It looksas if the supply of saved funds for investment has increased, for theeffect is the same: the supply of funds for investment apparentlyincreases, and the interest rate is lowered. Businessmen, in short, aremisled by the bank inflation into believing that the supply of savedfunds is greater than it really is. Now,
when saved funds increase, businessmen invest in “longer
processesof production,” i.e., the capital structure is lengthened, especiallyin the “higher orders” most remote from the consumer. Businessmen taketheir newly acquired funds and bid up the prices of capital and otherproducers' goods, and this stimulates a shift of investment from the“lower” (near the consumer) to the “higher” orders of production(furthest from the consumer)—from consumer
goods to capital goods industries.

my comments:

Thisis an absolutely fascinating statement, that bank credit actuallyinfluences the investor to make mistakes by causing them to mistakeborrowed funds for saved funds. It is even so now and Rothbard and theAustrians all contend that this is where government policy createsdepressions by doing what our government is doing right now, continuingto support the inflation and the perception that capital is availableat such low risk rates. The result of this is low consumer prices andhigh capital goods prices, which he describes as not only machinery,but mines and commodities. Where we might be mistaken in this market isthat we intermingle capital or production prices with what we believeto be consumer prices. Thus we are witnessing a worldwide situationwhere business is actually spending and investing itself out ofbusiness.

^NEW 1/23/2008 11:24:46 PM

From Page 15 of Americas Great Depression:

Anothercommon secondary feature of depressions is an increase in the demandfor money. This “scramble for liquidity” is the result of severalfactors: (1) people expect falling prices, due to the depression anddeflation, and will therefore hold more money and spend less on goods,awaiting the price fall; (2) borrowers will try to pay off their debts,now being called by banks and by business creditors, by liquidatingother assets in exchange for money; (3) the rash of business losses andbankruptcies makes businessmen cautious about investing until theliquidation process is over.

^NEW 1/23/2008 11:30:29 PM

footnote on page 15

11Banksare “inherently bankrupt” because they issue far more warehousereceipts to cash (nowadays in the form of “deposits” redeemable in cashon demand) than they have cash available. Hence, they are alwaysvulnerable to bank
runs. These runs are not like any other businessfailures, because they simply consist of depositors claiming their ownrightful property, which the banks do not have. “Inherent bankruptcy,”then, is an essential feature of any “fractional reserve” bankingsystem. As Frank Graham stated:
The attempt of the banks to realizethe inconsistent aims of lending cash, or merely multiplied claims tocash, and still to represent that cash is available on demand is evenmore preposterous than . . . eating one's cake and
counting on itfor future consumption. . . . The alleged convertibility is a delusiondependent upon the right's not being unduly exercised. Frank D. Graham,“Partial Reserve Money and the 100% Proposal,” American Economic Review(September, 1936): 436.

my comments; It has gotten to the pointthat pay to the order or pay on demand means nothing in banking.Keeping the books straight means very little on their part andeverything on our part. They are already on the hook for 10 times asmuch as they can produce on demand or at any point and now they need abailout. It is no wonder this stuff isn't taught in college in manyplaces.