It is often said that money-lending is, basically, printing money.
People either agree or disagree but even in the former case they often find it hard to articulate why it is so.
Here's a simple example to show how it works.
1.
A lends $1000 to B. A still owns $1000, safely stored in a form of a loan. Yet, B owns the money as well, having hard cold cash in their wallet.
The question: Where did the extra $1000 come from? It surely must have been printed?
One may argue that there's no extra $1000 in the system. A still owns the money but they temporarily granted B the right to use them.
This analysis, however, is based on the assumption that A and B know each other, care each about the other or at least that A is aware of the risk of lending money to B and that B feels a moral obligation to return the money to A.
Consider the following example:
2.
A stores $1000 in a bank. Bank then lends the money to B.
Now, A is pretty confident about the ownership of the money. It's not like it's some kind of hypothetical money bound in a loan that has a non-trivial chance of being defaulted. The money is sitting safely on their bank account, after all.
The caveat is that the creditor-debtor relationship still exists between B and the bank. That A is being shielded from the fact doesn't change the nature of the relationship.
So, let's go one step further.
3.
After lending the money from the bank, B goes to C's shop and buys $1000 worth of stuff.
Now, C has the cash and no doubts about its ownership. They gained them in a honest business transaction. A, however, still sees their money on their bank account.
$1000 + $1000 = $2000
$1000 have materialised out of nowhere.
There is still a hidden creditor-debtor relationship between B and the bank but the point is that neither A or C, the actual owners of the money, cares.
They may even meet at a social event and boast about being rich. Each of them has $1000 on their bank account! They have no inkling that they are both talking about the same, magically duplicated, money.
EDIT: After discussing the topic with couple of people it seems that mentioning a bank in the example was a mistake. The very word "bank" is guaranteed to cause emotional reaction. A progressive stops following the argument and starts swearing about evil banksters. A conservative stops following the argument and dismisses the whole thing as a leftist bullshit. In reality though, the argument is not about banks. If you allow for exchange of goods on one side and exchange of IOUs on the other, every market participant, however poor and humble, gets an option to create money out of nothing. If A, a plumber, lends $100 to B, a bus driver, they've just printed $100 worth of money.
Martin Sústrik, March 21th, 2016
A phrase for synthetize the concept of Debt Money :
When a debt is refunded, the money disapear. Or 95% of money in the world is like this. So the image of printing bills is fallacious. More, the mondial public debt is growing at 300 000 $ per seconds. The aim of the money system is to reduce humanity to slavery.
https://en.wikipedia.org/wiki/Debt_bondage
https://en.wikipedia.org/wiki/Fractional-reserve_banking
https://en.wikipedia.org/wiki/Money_multiplier
Books, Vidéos
Marcel Mauss' "The Gift" may not be 100% on topic but is worth reading as well.
As you go to less-developed countries, this surety of A gradually disappears.
Even in developed countries consumers often are insured against bank collapse, either via state, using the money collected through taxation, or through bank fees which are needed to cover mandatory bank insurance schemes.
The point is that A _believes_ their money is safe. If they didn't they would have kept the cash in the mattress.
It's more like money anti-money (as in matter and anti-matter).
They temporarily co-exist, but when the loan is repaid one will absorb the other. Idem if the borrower defaults.
But I believe it is true that it is easy to lose track of this and trade anti-money (loans) as though it was money and forget that there is a chance that when anti-money and money collapses, the money will stay with the borrower (a default).
In fact, defaulting may be increasingly likely as the money/anti-money distinction gets blurred. But you can be sure that the people who create the anti-money know about it, and know about the risks. The trick is to create anti-money, then trade it for real money. But there is no free lunch, at one point money and anti-money will collapse and if there is a default, there will be a sucker.
It sounds like you just watched "Wake up call" documentary!
The other documentary: "Planned obsolescence" is also worth seeing - you should check it out;
No, haven't seen it. I'll check it out once I have some free time.
One thing worth pointing out though — which progressive narratives tend to under-stress (maybe this documentary meakes a better job of it) — is that the mechanism is completely generic. It's not like big bad banksters are the only people creating money from nothing.
If Alice, a hairdresser, lends $10 to Bob, a waiter, they have just printed $10 worth of money.
Until the loan is paid back, the load money indeed acts as "soft" printed money. The final outcome (does the loan mean printing money?), depends in whether the bank is correct that is that B is able to pay back his loan
If the bank is correct in giving the loan to B:
The microworld has $2000 printed money and $1000 "in the books". Once the deal is finished, these $1000 can be removed from the books of the microworld.
If the bank is wrong and B cannot payback the loan
The microworld has $1000 printed money and $1000 "in the books" that cannot be removed. In order to make things right:
Martin, you are wrong about the process that takes place inside the bank. The bank doesn't take the money from A and lends it to B. It creates both a loan and a deposit at the same time from nowhere.
ex. The bank may have 5$ deposits. The after a 10$ loan the bank has 15$ in deposits and 10$ in loans.
Why don't they create unlimited deposits/loans? Because they need to make a profit from the loans, thus the loans need to be requested from the real economy and they need to have low risk of repayment.
There is an upper margin set by the Central Bank but that is mostly never reached, at least till recently where we had the banking crisis.
For more information, you can read Bank of England's brochure (figure 2) :
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf
It seems that just by having mentioned a bank, the point of the article was completely lost. I'll try to rewrite it without a bank at some point.
In short, sure the bank just creates the account for you when you take a loan instead of moving banknotes around. The question is: How come? How do they get away with it? Where do the money come from?
The answer I am trying to convey is that money is formalisation of trust. If I lend you $1, new money is created because I believe you will repay it (thus I am still owning $1). You, on the other hand, actually have the $1 bill. My trust in you was converted into money.
Interesting observation: This is really a psychological phenomenon. If I "lend" you $1, while I don't really believe you will ever repay it, calling it "lending" just to make you feel less awkward, I am NOT creating money. It's simply because I will act as if I just irrevocably lost $1. There's no observable difference between two scenarios, but from money-creation perspective they are completely opposite!
In the end, it seems that money, say dollars, are really an immense web of trust among huge mass of people.
The banks are doing the money creation trick at scale and, yes, they are often creating bad money (read: they create money even if they don't have the trust that you'll repay) but the underlying idea of commoditisation of trust still holds.
The point seems to be a minor one, but thinking about it this way opens interesting ways of thinking about economy and even creates parallels between monetary economy, reputation economy and even political systems.
I just happen to work on building a decentralized "banking system"(ryaki.org) that uses trust to issue IOU, thus I do not disagree with you on this point.
I disagree on your description of how the banking system works. The banks do not take the money of A and give them to B. They do not need initial money.
You loan me 5 coins you're now out those 5 coins until I pay them back somehow, plus the 1 coin interest we agreed upon. No money was created. Now if somebody comes along and offers to buy that "IOU" note I gave you for 6 coins you can have your money back and let me owe them. Still no money was createdthey're out 6 coins but expecting that back from me any day now. It's not until you get into fractional-reserve lending that money is created. Then it's essentially virtual moneya tangible artifact of an intangible concept: trust. That's ok, though, because the money supply shouldn't be finite—not only is population growing, but so is the value that everybody creates. The problem occurs when it gets out of hand.
At least that's how it all seems to my mind.
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