From the conclusion:
- It was examined whether in the process of making money available to the borrower the bank transfers these funds from other accounts (within or outside the bank). In the process of making loaned money available in the borrower's bank account, it was found that the bank did not transfer the money away from other internal or external accounts, resulting in a rejection of both the fractional reserve theory and the financial intermediation theory.
Instead, it was found that the bank newly ‘invented’ the funds by crediting the borrower's account with a deposit, although no such deposit had taken place. This is in line with the claims of the credit creation theory.
Thus it can now be said with confidence for the first time –possibly in the 5000 years' history of banking - that it has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air. The implications are far-reaching.
This is how the Bank of England puts it:
- “In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”
“Commercial [i.e. high-street] banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.(1)” [our addition in brackets] (Bank of England, Money Creation in the Modern Economy)(via positivemoney.org)
Is this common knowledge? Does anyone else think the role money plays in our society a little strange considering how it is actually created?
It's kind of weird how money works, when you think about it. You give the bank money, they take it, and then you get a few numbers in your bank account.That seems logical, because you could go back that same day and get the same money that you put in right back, however they don't have a box named "X's Money" that the notes go into. Instead, it's like putting everyone's money in a large pile and saying that they are owed a certain amount money. Still, seems odd that the money that you gave to the bank is no longer "your money", but still makes sense, because you can look at it like you're just getting an equivalent almost. However, the rest of the system is weird. If you take $1,000,000 up to a bank in cash and deposit it, you could maybe get the money back the same day. However, an armored truck will stop by and take it to the reserve. If you come back the next day, they can't give you the money back, because they don't physically have $1,000,000 to give back to you. The numbers still changed, the physical dollars still exist, but the dollars aren't there. However, it's possible to look at it like they're just taking it somewhere else to store it, because if you want your $1,000,000 back in cash, they will give it to you, but it will just take longer. What about the money that really isn't being exactly tracked by physical dollars? If you got your check direct deposited, there's no physical notes being exchanged. One account just has a smaller number while another gets a slightly larger number. If you track where your company got its money from, it's completely possible that physical money was never deposited by your company. They just got an increase in numbers by taking someone else's through a credit card. Sure, it's possible to track physical notes if you go far enough back, but in this day in age, you might have to look pretty far back. Look at bank loans. If you go buy a car, they don't even put money in your account, they add it to the dealer's account. That means that they're taking their imaginary dollars and giving it to someone else, while you take your imaginary dollars and send them to the bank in small increments. It would be the same on regular currency, but look at where that money in the loan goes. The dealer isn't paying for more cars in cash. They're not paying their employees in cash. The employees aren't buying food in cash. The store isn't using cash to resupply. The store isn't paying their employees in cash. Eventually, you get into this loop, where it's possible that if you look at someone buying something today, it's entirely possible to go to the end of the time and see a chain of changing numbers where there is never a physical note that gets exchanged. The whole system relies on the trust that if I were a person or a store, I could go to a bank and empty my entire account and get the exact same amount back in cash. However, that rarely happens, so it's nothing more than just a trust. There's a bunch of dollar bills that transform from a physical currency into just an idea. There might be a note that will sit in a vault and never move for the rest of time, yet the idea of that bill has exchanged hands thousands of times.
What always gets me about money is this: There seem to exist (at least) two kinds of money, although we call them both money and we expect them to work the same. One kind is the one (presumably) you, I and everyone I know deals with. You have to invest a lot of effort into obtaining it, it's important not to waste it and if you run out, there won't be any fresh milk at the end of the month. If no money is coming in after that, there also won't be a fridge or a place to keep a fridge in. Then there is this other kind of money. It is (as shown in the paper above) simply brought into existence whenever someone takes a loan, even though there is no law actually allowing the bank to perform this numeric magic. "Airmoney" is added to your account and you're expected to pay it back... with interest and compound interest. Since you aren't allowed to conjure money, that interest needs to come out of your "work money". If you don't pay, the bank gets to take away everything you own. If you do pay it back, the money which was originally loaned to you is destroyed in the process but Mr. Bank gets to use the interest to pay for the goods and services you produce. Or to buy an island or two. We consider this normal.