RE: People don't understand money. We really should. We really should try to explain it super simply.
Hey @dagelf,
Interesting and useful post, thank you.
In the interest of understanding money, I think it would be useful to add the every enlightening fact that most money (97%) is created as debt by private banks when loans are taken out.
They just tap their keyboard and the 'money' appears and then they 'loan' it to us and/or our governments plus interest (yeeowch!)... hard to get your head around this when first one hears it ... but its true.
This subject is so critical to our future freedom and security as it gives banks huge and undemocratic power over our society.
More info on that here ... Positive Money (I'm not affiliated with this UK campaign group btw)
This for me is one of the things that makes the whole crypto-currency thing so appealing ... central profit-based control is reduced/eliminated.
Love and Peace.
Last night I could still edit it - so I thought I would be able to improve it this morning, but I see it won't let me edit it any more. So you learn!
For such a complex subject I think having more frequent shorter articles will work better, this one was way too long and I feel a bit ashamed for posting it without more editing (which I have done since! Not sure what to do with that, now... :-D)
#Steemit has attracted a really great community! It's really refreshing and encouraging to find a community where people actually read and contribute to the conversation.
Not quite... banks store money, typically your money. When they make a loan they are lending out your money, along with thousands of other customers' money.
They can loan out more than they currently have, but it needs to be balanced against the amount they expect to receive in payments on said loans. Which is money coming from other people working and paying their mortgage.
Nowhere is money magically created, except maybe when the government prints it.
you really need to look into fractional reserve banking...
they are literally making money out of thin air.
It works like this:
You put $100 in your bank account
Bank is required to keep a 10% reserve- $10
Bank loans out $90 to me, and I deposit it in my account
Bank now loans out an additional $81 (the $90 I deposited - a 10% reserve) to Bob, Bob puts that $81 in his account
Bank now loans out an additional $72.90, which someone else puts in their account
Then $65.61, Then $59.05, etc
This allows them to create debt in the amount of nearly $1000 ($999.96) off your $100 deposit, which they are owed with interest.
If you request your $100 back, they have still made $899.96 + whatever interest they decide to charge off it (up to say, 25% on a credit card)
Since the 'reserve amount' can be covered wholly by their accounts receivable, they never really need to hold actual cash anywhere unless it's requested. This is why you can't necessarily ask for your entire balance, or why there's limits on withdrawals per day. It has ZERO to do with security and everything to do with protecting the banks from everyone deciding to take their money back at once and the bank not being able to meet their reserve requirements.
Who would take out a loan and then deposit the money?
Even in that highly implausible scenario nothing is being "created." They are making the money through their accounts receivable... Which is exactly what I had said.
when you get a loan from a bank, they immediately deposit it into your account AND loan out that massive amount they're allowed to now due to fractional reserve holdings.
By the time you can take out that $100 loan from your account, the bank has already duplicated the money so to speak. That's why there's a 'processing time' on loans- so they can make more money off the new capital assets they've created.
How is turning $100 into nearly $1000 through doing literally nothing not creating money?
also I hope by 'highly implausible scenario' you mean 'how it actually works'
It gets a whole lot more complicated (and more money from nothing) when you consider that the person receiving the money gets involved.
we may not have the same bank, but all banks work on the same principle, and the money loaned out by bank A to person A will eventually make its way into another bank, who will loan out the money again.
so, if I take a $100 and put it in my account, not only will the bank loan $90 to one of it's own customers, the $90 (which the bank will immediately loan $81 out against and whatnot) loan that was created will get put into another persons account, so the $90 deposit will get another $81 loaned out against it. This makes two loans for every actual loan made, increasing that amount to about $2000 off a single $100 deposit.
they are making this currency out of thin air- it did not exist in the first place for them to actually loan out, it's paid out of the banks reserves if someone decides to turn it into cash. This is an incredibly rare scenario though- the money borrowed is always for something, so will make it's way back into the system without ever actually having existed. As the made up loans get paid back, the bank continues to loan out more and more money as the new AR payments allow them to do so based on the fractional reserve system, at a rate of about 20:1, despite them "having to have a 10% reserve fund."
lets assume this is a series of low interest business loans at 8% yearly for 1 year
that $100 deposit generates for the bank in the first year (assuming NO repayment vs the loans);
$1900 in fractional reserve principle amounts
$152 in loan interest
If the any of amount of the loans are repaid, they generate even more money at a huge rate that's literally created from no where. They are not loaning out money that exists, it only exists once someone removes it from the bank and requests cash.
This is a great explanation of something I'd heard, and hadn't found the most effective way to reiterate. I believe that's the same structure that's used with mortgage loans - or that in some way a bank is creating debt in an account without having actually paid forward that value elsewhere.
Even more interesting is how it came about!
People used to trade in gold and bigger assets. Gold became too cumbersome so people made banks to keep the gold and trade paper IOU's. Banks realized that people just use the paper, and never come back for the gold, and that they could get away with issuing more paper IOU's than they could fill from their gold supplies. And what you have there is a slippery slope, just look where we are today!
A bank run isn't even about getting back your gold any more, it's about getting back your paper!
Well, actually, no ... :)
They do lend out deposited money but really waaay the majority of the money is created out of thin air, as debt + interest.
As jfeenstra has explained so well, fractional reserve banking is the trick that lets them do this. And they don't even follow the rules for this like they should.
And government don't generally really print it .. they create it by borrowing it in the same way as we do as individuals ... as debt+interest.
The way money is created in this way (as debt + interest, by private profit-driven banks) is a fundamental source of imbalance and injustice in our world.
We are obliged to chase this debt-money in order to survive in our society as things stand. We spend significant amounts of our time doing things in order to get it.
Imagine what would happen if we had no access to money - it is not an exaggeration to say that we would die cold and hungry - as indeed do people who do not have any, or access to someone who does.
Our society-level agreement to recognise money as a holder of value, and a proof-of-work, is what makes it function. We agree that it represents our energy, thus the creation of privately-controlled debt-money in this way is a gross theft of our energy and enslaves us.
It doesn't have to be like this and our salvation is much supported by the emergence of crypto-currency and the likes of Steem and BitCoin. We agree that Steem has value, we create it with our work, with our energy. There is no debt involved. It is equitable and fair. It is beautiful.
If anyone wants more complete and authoritative analysis of this important issue, I offer again the link to Positive Money. These guys really know their subject, and are making waves here in the UK with the understanding of this profoundly important subject.
Love and Peace.