First, there are two distinct kinds of money. There is cash, actually printed or minted by governments . And there is credit money, created by banks and rented to us.
You probably use the rented money for almost all of your transactions if you pay by cheque, debit/credit card, or electronic transfers. Credit money does not come from a printing press. But you do have to rent it. (Hey, Doc, you mean pay interest. You can say it out loud.)
Okay. Now for the big mystery, the real secret. How do banks create the money we use>
It has been said by wiser accountants than me, "It is so simple it's hard to believe."
The Money Scene
You may have seen those TV ads where a young couple smile at each other, and a bank officer - well-dressed, good-looking and devoted to the young couple's best interests - has just told them what they want to hear. She will give them $25,000 for that new car, or for their daughter's school fees, or whatever.
What follows - not shown in the ad - is a lot of document signing. Finally comes the critical moment. After you have signed the documents, the bank agent tells you that $25,000 has just been transferred to your account.
At that moment, at that very moment, $25,000 in new money has entered into the world's economy.
It is certainly real money. You write the cheque and get your car. Or your daughter gets her school uniform.
The process is so simple: a bank willing to lend makes an agreement with a client willing to borrow. And it is same process, exactly, if General Motors or Exxon wants to borrow a billion dollars. It's not cash, but it is money, ready to be spent.
And it is new money. The bank does not take it from a stack of cash in its vault nor shave it from an ingot of gold in the basement. It just pops into existence! Really!
So, remembering the law: Money goes where money is, let's follow the trail. What was the key question you asked before signing (and signing, and signing) the papers to get the loan? Of course, "What is the interest rate on the loan?"
The key word in the global monetary system has to be "interest". Sometimes called "rent".
So the couple, or you, can live in this $25,000 Loan Street dwelling as long as you pay the rent. Correct? But, no, you say. We have to pay back the principal of the loan.
No, no, and no!
Now this may be a little difficult to grasp, too. The bank really does not want you to pay back the principal, ever* So long as you pay the rent they will rejoice to let you keep the credit money. (After all, they created it out of thin air.) For you, on the other hand, if you no longer had to pay the rent, that would be great. Right?
And for the bank? Well not so good. It would be a bad thing for the bank. When you pay back the principal of a loan, they have to write a profitable asset off their books. No loans on the books, no rent/interest coming in. No rent, no profit. No profit, no salaries for bank execs, and no dividends for shareholders. Not good.
You see how the system works? The expectation that you will pay off the principal is just window dressing.
Let me finish with a mind-expanding question. What if you had no government-created non-debt cash money? For the world's banks that is the great and glorious ultimate profitable goal. And they are getting closer to it! Just think, if banks controlled interest rates and fees, and you had no cash available to escape to...
*Next blog will face-off governments and banks. Tune in, I hope you may learn something else new.
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