As one of their conceptual tools in diagnosing production ills and prescribing cures, economists frequently rely on the rule of "money multiplication" to describe how a recessed economy can be stimulated. A recessed economy is viewed as lacking sufficient demand for goods and services which an additional amount of money can revive. Through deficit spending or by the Federal Reserve System creating money, demand can be increased.

The government injects money into the recessed economy which will stimulate production many times the nominal value of money: $100 will eventually become hundreds of dollars. This multiplication concept is basically correct, but an errant cog in the mechanism of implementation results in the opposite of money multiplying production. Production is divided and reduced through the lending practices of banks.

A mathematical explanation of the money multiplication is as follows. Suppose the government lends a bank $100 from the Federal Reserve which has freshly printed the money. The bank will lend the money to someone who will use it to buy some goods or services. The person selling the products will eventually deposit the money into the banking system in the form of savings or checking. Upon receiving this $100, the bank will relend a portion of it up to the maximum allowed by law since a bank keeps a required reserve of its deposits. With a reserve requirement of 10%, the bank could relend $90 of the original $100 which would result in additional stimulation of the economy.

At this point the money is conceptually viewed as having stimulated production a total of $190, that is, multiplied itself. Eventually the $90 will return to the bank and be relent minus 10% for the reserve, e.g., $81; the money will have multiplied itself to a total of $271.

After numerous cycles of relending and redepositing, the original $100 will have stimulated production many times its face value, theoretically. The multiplication factor is sometimes given as six to seven. In the end, the $100 is no longer stimulating production as it sits in the banks vaults as reserves. Given the central role of banks in being the roundhouse to which the money repeatedly returns and being the final resting place for the injected money, a more apt description of this process would be the "Bankers Law of Money Multi plication."

The Actual Rate Of Money Multiplication

As a useful tool for stimulating recoveries and preventing recessions, the Bankers' Law has theoretical and practical short-comings. Theoretically, money--as an economic stimulant--multiplies production each time that it changes hands. If a $100 changes hands 10 times before it reaches the bank again, a $1000 worth of goods and services has been transacted, stimulated or facilitated by the injection of the original $100 into the economy. The involvement of banks limits the multiplication production to a factor of six or seven. More production of goods and services would occur if money never multiplied itself through banking, for the bank retires 10%--or whatever the reserve requirement is--each time that the bank handles the money.

In addition, the value of the money in producing non-financial goods and services is diluted by a "handling charge," better known as the interest on the loan. As the handling charges consumed by bankers increases, the availability of money for non-financial activities decreases. Record interest rates finance bank acquisitions, bank branching and bank headquarters, which comes at the expense of new homes, production jobs and improved manufacturing.

An indication of record bank income is the percentage of corporate earnings that are earmarked for interest payment on carrying inventory. Between 1961 and 1981, the interest costs of non- financial corporate profits increased by a five-fold factor: 9.5% to 45%. The increased loan costs on carrying inventory has been blamed for parts shortages. Or, the cost of the financial services can be viewed in terms of the Gross National Product, which nearly doubled between 1975 (5.3%) and 1982 (9.2%). As of 1982, the dollar value of all forms of interest are estimated at $900 billion.

Despite all this "hefty" income, bankers seem determined to kill the goose that is laying the golden egg, for they are increasing the fees that they charge. In summary, the banking industry is highly inflationary, for it is offering the same basic service as it did decades ago while charging a higher price for handling the nation's money. This inflation shows up most clearly in the form of sinflation: fewer houses, autos and spare parts.

Not only are the theoretical aspects questionable, but the practical consequences of the Bankers' Law does not fulfill the conceptual intent of multiplying production. A philosophical question has relevance to the true nature of the Banker's Law of Money Multiplication: If a glass has water to its mid-line, is it better to say that the glass is half-full, or half-empty?

It depends. Either expression would be equally appropriate if the glass was standing with the water in it. However, one description would be more apt depending on whether the glass was in the process of being filled or drained. A similar consideration should be taken in describing the bankers' handling of money: Is production rising or falling ... multiplying or dividing?

If the bankers are handling the currency so as to multiply production, then the appropriate description of the bankers' law would be one of money multiplication. However, if the money is recirculated within the system of production so as to drain or dilute production, then a better phrase would be "Bankers' Law of Production Division."

As mathematical operations, multiplication and division are reciprocals of each other, two sides of the same coin. If bankers channel money so as to divide up and dilute production then their handling of the money supply should be called one of division, not multiplication. Stated another way, they are not increasing (multiplying) the product value of money. Rather, they are consistently dividing or cheapening the value of the money each time that they handle it.

An extensive list could be constructed of banking loan policies that are counterproductive, but only general principles will be provided. Specific examples are presented throughout this book. Acquisition loans do divide and reduce production, e.g., Seagrams and Wheelabrator. Speculation loans for real estate, stocks and other old products exert a counterproductive effect which reduces production: if the banks weren't lending to speculators, the cost of money for production loans would be less.,

If banks were not lending their deposits to far distant, larger banks, their local economies would not be suffering lost production and employment. Each time that the bankers handle the nation's money, some product worth is "subtracted" which eventually divides production. The bankers' use of money is not one of multiplication but one of division, for repeated instances of subtraction are the same as division.

As with all systems of production, America needs institutions to harbor savings and to act as currency clearinghouses. But does America need a financial system which effectively divides production and dilutes the value of money?

The present financial institutions are destroying the very system of which they are a part. These words are not too strong in describing the destructive nature of how bankers channel the nation's currency away from production. This currency dislocation occurs foremost with production of essential goods and services where inflation due to shortages of production occurs, e.g., the farming, processing, trucking and marketing of food.

Money Is A Product Of Human Production

Another theoretical short-coming of Bankers' Law of Money Multi plication is the virtual sanctification of the scribbled-on-paper- product known as money. Money should be viewed for what it is, namely, another product of human effort. Frequently, one hears that there are no simple solutions to complex problems, yet the economic policy-makers and private individuals emphasize money as the panacea.

When a system of production (an economy) is sick, the solutions simply will not be found in money or money multiplication, for money is only one product of the economy. The various parts of the system need to be tuned individually, for simplistically "tuning" the money supply affects only one area of the economy.

Increasing the money supply (that is, the currency supply) does not simultaneously increase the production of bread and other essentials. Quite to the contrary, contemporary money expansion through the banks has been counterproductive of essential production. The Bankers' Law is a law of money division on two accounts: frequency of division and what is divided.

As noted above, money multiplies each time it passes through anybody's hands, not only when it passes through bankers' hands. Previously, it was noted that more production of goods and services would occur if the money never multiplied/passed through bankers' hands. After all, the bankers have to keep 10% each time they handle it as savings, along with their own service charges.

This dilution or drain of buying power is compounded by the counterproductive loans which bankers make as they redirect the money away from production. Few individuals would directly lend money so as to put themselves out of work or home. Unknowingly, however, many people are indirectly decapitalizing their existence through where they bank with their savings and checking. A fine example of banks pooling the money of the small people so as to indirectly put the people out of job, home, and life is the acquisition loan made to Seagram of Canada: $3 billion! As Seagram acquires production south of the Canadian border it will streamline and vivisect production, which means more unemployment, taxation and inflation.

Grandma's Law Of Product Multiplication

As generally conceived, the law of money multiplication has short-comings which allow counterproductive implementation of it. Foremost, the over-emphasis on multiplying money is--by its implied nature--inflationary. Money multiplying is the classical definition of inflation: more money, no more goods or services. Falsely, people assume the assumption that bankers always lend money for productive reasons; they don't. An additional insight is how money multiplies at face value when not handled by bankers who extract not only the reserve requirement but a sizable handling charge. Furthermore, money should be understood and accepted as merely another product of human busytime.

The uniqueness of money--a form of currency--is how it is supposed to function as the common, standardized, intermediate product of production: it should facilitate the exchange of all other human products (goods and services) between producers. As such, money has the capacity to be a tool of productivity like any other time-saving innovation of man's conscious or accidental ingenuity. This capacity dissipates when the premier handlers direct money away from production through their lending practices.

The revisions of the money law should recognize that production is stimulated only when money is directed toward, not away form, production. An encapsulation of this thought is something which your grandmother might have told you: "As you sow, so shall you reap." Most any Grandma knows that you receive according to where you busy your perspiration and inspiration. An appropriate title for this common sense from wizened grandmothers would be "Grandma's Law of Product Multiplication."

With Bankers' Law, individuals and nations invariably fall into the delusion of thinking that the multiplication of money is synonymous with more wealth, which is not the case if production is being undermined by cash-starvation. The destructive delusions of Bankers' Law does not exist with Grandma's Law. Before one's reading of Grandma's Law is finished, one has to confront the spontaneous question: "What products should be multiplied?"

If this question had been asked in the late 1920's and had been acted upon, no Great Depression would have occurred. Then, as now, scribbled-on-paper products were multiplying faster than other production; stocks, bonds, and loans were booming. These counterproductive activities consumed an increasing percentage of the available human time, matter and energy.

Today, the economic policy-makers are liberalizing the laws that encourage non-productive income. Reaganomics included a reduction in the taxes on income from speculating in old stocks and bonds. An indication of the effect on human endeavor is found in the rise in the number of stocks traded each day, and since corporations are not proportionally issuing fresh stocks, the implication is that old stale stocks are being traded more often.

The Secretary of Treasury under Reagan, Donald Regan, predicted in 1981 that the number of stocks traded on the Big Board would exceed the 100 million mark in the near future. The increased appeal of speculating on old stale stocks can also be found in the accounts describing Wall Street as "Las Vegas East" in which upwards of 4000 new speculators jump in each day.

In summary, America does not need a conceptual tool that emphasizes money multiplication for the benefit of the financial community. America needs a common sense appreciation of how money should be a catalyst for product multiplication. The needed tool is Grandmas' Law of Product Multiplication which rests on the homily: "As ye sow, so shall ye reap."

This pragmatic law puts the onus on the politicians to ask the questions, "What products? What production? What Producers?" When production in existing goods and services is maintained or improved by restricting the mislending of money into less-essential activities, then America will have stable employment and prices.

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