1. Banks create money out of thin air using accounting entries. From the Bank of England:
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.
The reality of how money is created today differs from the
description found in some economics textbooks:
• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
• In normal times, the central bank does not fix the amount
of money in circulation, nor is central bank money
‘multiplied up’ into more loans and deposits.
Which means that everything that you learn in your Principles of Macroeconomics class is wrong. Banks don’t loan out the money that has been deposited in accounts. They create money out of thin air, loan it out, and charge people interest on said imaginary money. What this means is that even if a bank has no deposits, it can create money by creating loans.
2. Our current monetary system is based on debt. If everyone paid off their debts, there would be no money in circulation. From Zerohedge:
And Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, said:
If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.
My question is, since these banks are creating money out of thin air and then charging you interest on what they have created from nothing, why do people feel obligated to pay it back? After all, it never really existed.
H/T to Vox Day for the links.