The sequel to the popular, Money As Debt. This video will be permanently featured on our Educational Video Page for future reference.
BANKS CREATE MONEY vs. BANKS LEND DEPOSITORS’ MONEY
The idea that “all bank loans are new money” and “banks lend depositors’ savings” are often viewed as contradictory, mutually exclusive ideas. But, both loans and deposits are bank credit. They are the two ends of the banker’s magic money-creating wand. The same bank credit that was created as borrower debt is loaned back to the bank as deposits.
Here is a detailed description of the full loan and repayment structure of the banking system, as I understand it.
STEP 1. The borrower promises the bank FUTURE repayment in legal tender and/or bank promises to pay legal tender, ie. “bank credit“.This may or may not be backed up with collateral that the bank may seize and sell to compensate for non-payment.
STEP 2. The bank Promises legal tender it does not have and does not have the resources to obtain without borrowing. Therefore the CURRENT EQUITY VALUE of the BANK’S PROMISE is somewhere close to ZERO.
STEP 3. The borrower ACCEPTS this ZERO in exchange for his/her FUTURE VALUE (repayment) and spends it NOW. The CURRENT EQUITY VALUE of the borrower’s promise is also ZERO as the borrower has DONE NOTHING YET TO EARN THE CREDIT.
STEP 4. Real Production in the World ACCEPTS this ZERO for VALUE and provides the borrower with GOODS and/or SERVICES NOW.
This ACCEPTANCE FOR VALUE by society is what turns the bank’s promise worth NOTHING and the borrower’s promise of FUTURE REPAYMENT into MONEY, a DEMAND for REAL VALUE NOW. The goods & services exchanged for this NOTHING now make that MONEY EARNED.
We all know what would happen if we all simultaneously demanded payment in physical cash and coin. The bank doesn’t have it. It doesn’t even exist. So why do we accept these obviously fraudulent promises? Because the bank offers a service, a “system” that is far more convenient and secure from theft and loss than cash.
STEP 5. The DEPOSITOR, having given REAL VALUE for NOTHING, has EARNED IT and IMPARTED REAL VALUE to this “money”. The Commercial Law System ENFORCES DEBTS that have been exchanged for REAL VALUE.(“consideration”)
Because there is NOWHERE TO KEEP BANK CREDIT EXCEPT AT A BANK, the DEPOSITOR is FORCED by the DESIGN OF THE SYSTEM, to:
A. CLAIM LEGAL TENDER from the bank, (a small proportion exists in this form- typically 1-10% in developed countries)
B. LEND (same money lent twice) the EMPTY PROMISE back to the bank as a “DEPOSIT”, thus DEFERRING THE NEED for the BANK TO MAKE GOOD on its EMPTY PROMISE of legal tender. This INDEFINITE DEFERRAL of DEMAND for LEGAL TENDER (SAVINGS) is what makes it possible to create a DEMAND for REAL VALUE NOW from a BORROWER’s promise of FUTURE PAYMENT (DEBT) without having the LEGAL TENDER.
STEP 6. The DEMAND FOR PAYMENT IN LEGAL TENDER is only DEFERRED for as long as the DEPOSITS (SAVINGS) that BALANCE the initial LIABILITIES, are NOT WITHDRAWN from the banking system in legal tender notes and coins.
Thus, bank lending is completely dependent on depositors, just as if it were lending out depositors’ money. And the bank “profits” only from the “spread” between the interest paid to depositors and the interest collected from borrowers just as if it were lending out depositors’ money.
But the bank isn’t lending out depositors’ money. It is deferring its unfunded obligations to pay legal tender by having depositors lend these obligations back to the bank. Money has been CREATED AND SPENT, EARNED AND DEPOSITED, with NO PRESENT VALUE to back it, and the banking system has NO NET LIABILITY, for as long as DEPOSITORS DO NOT DEMAND LEGAL TENDER.
For a synopsis of highlights of the video see Money As Debt Analysis of Banking.
To purchase the entire 3 video set go to Money As Debt.