Where Do Banks Get Their Money? Fractional Reserve Banking

Do Banks Create New Money out of Thin Air?

**Re-posted after the events of the credit crunch and 700 bailout packages, enjoy the read and learn how the banks got themselves in this mess.**

Here’s the story. Banks keep on lending money, but where do they get it from? Do they borrow from bigger banks who borrow from bigger banks who borrow from the central bank who then prints the money? Is it as simple as just printing more money?

Turns out money creation sometimes appears out of thin air. All banks lend based on a reserve ratio of their deposit: they must keep a certain % of each deposit at the bank but can lend out the rest. Of course, the whole system is dependent on a) the bank being responsible with lending, b) everyone not defaulting on their loans. If these two things happen eventually the system faces massive losses which is what we’re seeing in the current market.

Let’s observe a fictitious situation to help us understand how the bank gets or ‘creates’ their money. Note: when the term ‘bank’ is used in this article it will refer to your bank and not the central bank (Federal Reserve for the US.)

Let’s build a scenario where there is on bank called National Bank (operating as a monopoly). Suppose a person in another country sends $1000 and they deposit it into the bank. This becomes a NEW deposit for the bank (a PRIMARY deposit).




Cash +1000

Demand Deposit +1000

(Primary Deposit)

(Increase in money supply (Ms))

At this point there is no change in the Ms (money supply), only the composition of it. M1 outside bank to M1 in demand deposits.

The bank will now: A) Keep a little in reserve to meet cash demands, B) Lend the rest out to worthy borrowers.

Let’s assume the Bank has a desired target reserve ratio of .15 (15%) to cover customer cash demands (when you go to the bank and withdraw cash). For $1000 they will keep $150 and lend out $850.

When someone borrows the $850, eventually it will reach the bank again (unless they put it underneath their mattress). Remember we are in a one bank scenario (monopoly).
Bank Now Has:



Cash +1000

Demand Deposit +1000

Loan +850


Total $1850

Total $1850

The total Ms is now $1850.

The Bank holds 15% of 1850 in reserve & lends the rest out. This process repeats itself indefinitely until they can no longer lend out money. This whole concept is called: DEPOSIT CREATION MULTIPLIER.

A quick way to determine the theoretical maximum a bank can lend out is this formula:

New Deposit / Target Reserve Ratio =

ex. $1000 / .15 = $6666.67 in new deposits (Ms increases by this much as well).

The theoretical maximum of course depends on whether the target reserve ratio is correct. Some things that affect the max include: a) number of worthwhile borrowers, b) no currency drain, c) no precautionary balances, d) no clearing drain.

Here are some additional items that may affect how much money the bank can create.

Deposit Creation Multiplier (Modifications)

Base case –> $1000 / .15 = $6,666.67

1) Suppose a 5% currency drain = money supply will only expand to $1000 / .15 + 0.05 = $1000/ .20 = $5000

– Final position of bank –
Assets Liabilities
Cash $750 Deposits $5000
Loans $4250

2) Suppose the banks decide to hold additional precautionary balances of 5%
Ms only expand to = $1000/ .15 + .05 + .05 = $4000

3) Suppose banks have foreign currency deposits and choose to hold additional reserves of .02 (2%)

Ms will (only expand to): $1000 / .15 + .05 + .05 + .02 = $3, 703.70

These are simplistic examples of how banks create money using the scenario of a single Bank acting as a monopoly in the banking industry. It may seem like money is created out of thin air but that’s not exactly the case because behind every loan is an asset. Huge trouble develops when the asset becomes worthless (many homes); someone needs to face all the losses.

Also, this does not highlight how the Federal Reserve creates money, they can actually print more money but, again, it’s not out of ‘thin air’, it’s based on the debt created by a debt note usually in the form of a government bond.

Related deposit creation multiplier equations:

TD = ID / crr

Where: TD=change in Total Deposits ID=Initial change in Deposit ccr=cash reserve ratio


?R / ?D = r
?D = 1 / r × ?R

Where r = the required reserve ratio. This formula tells us how much deposits increase by the multiple   1 / r  > 1 : Since r < 1, 1 / r > 1

1 / r = simple deposit multiplier. When the central bank supplies the system with an addition $1 in reserves, deposits increase by the multiple $(1/r) > $1.


Read another related article to money and banking located here.

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97 Responses to “Where Do Banks Get Their Money? Fractional Reserve Banking”

  1. Banks are getting desperate these days; bankers have even been known to practically beg customers to deposit money! If you’re wanting to get a loan or line of credit, don’t be surprised if the bank first asks you to make a hefty deposit (in addition to down payment) into a checking/savings account!

  2. Mike says:

    What is the 850 liability in the second balance sheet? Since the bank has sold a 850 loan without giving up any cash because who ever the bank lent it too put it straight back into the bank then both the capital and the interest are profit. Profit is still a liability but it is money owed to the shareholders. Have I understood correctly?

  3. se7ensnakes says:

    In a foreclosure the banks exchanges a paper called a promissory note for a real assets. The trick is to get people to sign in the dotted line. Imagine that a home sells for 200k. 75k went for hiring engineers, architect, land purchase, permits and materials. Another 75k went for labor and rental equipment to aid in building the home. The contractor, subsequently, sells the home for 200k and pockets 50k for his effort. Some credit worthy customer comes along and decides they are going to buy the home and so they put up 50k for down payment and a bank finances the rest, 150k. In a matter of 15 years, depending on the interest rate, the banks would have profited 150k from the interest. The payment of the principal will eventually come unless…something happens to the debtor and he cannot fulfill his promissory obligation. Now the homes goes into foreclosure. The banks gets the house, the previous 50k down payment, all the payments the debtor made to that point. What did the bank need to do to get this deal? Just write out a check to the debtor based on the idea that he will pay it back. It is not that banks loan money from deposits but that banks loans money for deposits. In this system you can imagine why and how Washington is full of politicians who cater to these powerful institutions. The probably have controlling interest in all major companies. The future is bleak for the common worker. There does not appear to be any where to invest money for retirement. inflation will eat at it in the bank. and real estate and the stock market are primarily for the insiders that know when economy is going to take a downturn.

  4. Steve says:

    The financial institutions around the world are past fixing or understanding. You can see how confusion & misinformation has infested the reality of the financial industry. This greatly benefits ongoing corruption witch is precisely what the industry wants. While we are forever discussing, & debating exactly what the financial institutions are, & how they work, they will still be getting there trillion dollar profits, & if not, be bailed out by governments {the public money}grants.
    You {the general public} really don’t need banks. It doesn’t matter where you get your income from; it only counts where you invest it. Bypass the banks. Profit from investments, stocks, superannuation, business ventures; invest in anything but banking/finance institutions. Banks are just glorified middle men that produce nothing & take as much as possible, because they can & no one or nothing can stop them. & while you keep involving them with your wealth, they will always corrupt.
    As for the question, “what is money”? Money is, in the main, just a large IOY. Dose anyone really think that there is a physical dollar out there for every one spent? What do you think would happen if there was a global cyber attack on the finance institutions; witch resulted in destroying all credit & debit records? Would you get all your money in cash? I don’t think so.

  5. Bob says:

    The inhabitants of countries are faced with the scourge that Thomas Jefferson mentions below. Politicians have allowed the scourge to fester & grow. As one lad said …. Banking……..a giant ponzi scheme supported by laws & Judiciary & Politiicans and a giant conga line of other so called learned leeches most joyous to suck the life force out of the community with no conscience.

    Thomas Jefferson said in 1802:
    I believe that banking institutions are more dangerous to our liberties than standing armies.
    If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.

  6. Bob says:

    Well Economist…..Not Golman Sachs fan we hope…….We hope you are helping the Government put the creators of GFS behind bars……heheheh…..
    As James Madison, 4th US President is quoted “History records that the money changers have used every form of abuse, intrigue and violent means possible to maintain their control over governments by controlling money and its issuance”….not in jest as history before him & after him proves….he was right. Many famous Banksters & Leaders say & have said similar things….not in jest. The Reserve Banking system is evil. Ahh…. US beloved Thomas A Edsion once said “Interest is the invention of Satan” Many in the Bankster money chain seem to worship this evil system…& profit by it…of course worship it …destroying many a country & its people.

  7. An economist says:

    If Mervyn King said it, he was probably being humourous (Central Banks all work on this principle and have done since we were all born).

    Incidentally, in the previous post, I purposely described a situation without promisory notes (because almost no-one else had mentioned them and the example in the person’s original example wrongly adddressed the issue by ignoring such debt notes). If you allow a bank to issue these promisory debt notes and people accept them, then a bank can (in the original example) have a balance sheet anything up to 100/15 times (about 6.5 times) the total deposits with the remaining $55k or so being made up of promisory notes and the like.

    If commercial banks didn’t engage in this leveraging and promisory notes, then they would basically only be able to use the funds provided by their shareholders and other investors – i.e. most people wouldn’t be able to get a loan.

    • Dr. House says:

      You say that like it is a bad thing.

      People’s willingness to sell their future life and livelihood for gratification today is the root problem (and the theme of many, many fables.)
      If people were /unwilling/ to sell their souls and instead insisted on paying themselves for the work they do and saved money they would not become wage-slaves and would be able to modulate their behavior accord to their values.
      Today 99% of the population cannot because 99% of the population so greatly wishes to live beyond their means that they compromise their values in order to do.

      FICO only matters if you are owned by a bank.
      It’s a measure of how good of slave you are.
      Once you are a free man your FICO score becomes 0.

      If you live debt-free then you exit the system and make the banks one iota weaker.
      If, over time, many people stopped living in debt the system would wane in power.

      The religious undertones of all of this are difficult to ignore.
      I am an Atheist so permit me the liberty to recast God as the collective human wisdom of the ages.
      We knew better. We were warned. We didn’t listen.

      • aussietone says:

        well put, short and sharp. Yes I’m nearly there, Idon’t own much but I’m practically debt free. and it is a feeling of self power, but as a double edged sword it can feel a little less of a man etc. Just keep thinking beyond the materialistic urge we were warned against and things start to feel better.

    • aussietone says:

      Well that is precisely the way it should have stayed, as it was in Australia up until the 90’s when banking deregulations started to take hold. Fortunately our Reserve bank over here is not a privately organised one like in the USA. We should all remember that not everybody should be allowed to borrow too much $ to start with. So what if there is slower growth and thus ,slower profit taking by huge banks and multinational companies. That’s all it has been about. . . How the select fortunate few can maintain and continue to reap in, the vast majority of the world’s economic power and control. Thus they maintain their wealthy status quo.

      If commercial banks didn’t engage in such promisory notes etc. then there would be alot less people aquiring loans (of whom probably should have them anyway) there would be slower global growth (therefore less of an appetite for buying shit we don’t need) and there would also be much less profit being made by “The Banks” and let’s not forget the multinationals… OH NO, that can’t be allowed to happen now can it. The enviroment and the resources of the earth might be stronger and more capable of sustaining us all, but instead we must all be allowed to aquire debt so we can keep a bunch of bankers, economists (no insult intended to the individual) top ranking shareholders, directors etc. and politicians rolling flush with money. The US federal reserve bank should have remained like Australia’s reserve bank. . . NOT PRIVATELY RUN AND CONTROLLED .

  8. Bob says:

    After all the gobbly gook……

    Mervyn King (current Governor of the Bank of England) reportedly said:-

    Of all the ways of organizing banking, the worst is the one we have today… eliminating fractional reserve banking explicitly recognizes that the pretence that risk-free deposits can be supported by risky assets is alchemy. To work, financial alchemy requires the implicit support of the tax payer… For a society to base its financial system on alchemy is a poor advertisement for its rationality.

  9. An economist says:

    No one seems to have pointed out that the original example given is actually wrong. (I’ve stumbled on this looking for something else, but had to comment.) The second balance sheet should still show $1000 as both the total assets and liabilities. The “deposit creation multiplier” idea referred to is the theoretical maximum aggregate balance sheet of the banking sector, if there is more than one bank and they all lend to each other and only each other. Its double counting, but that’s allowed in the calculation of M4 money supply, but isn’t allowed on any particular bank balance sheet (which is why the example is so wrong). The double counting in the money supply total may look like creating money out of thin air, but the only time that money was created was when the central bank created that original $1000. (Such an arrangement isn’t very profitable, as the only profit for the sector to share is the differential between the interest paid on the original $1000 and the rate they all charge each other. It also would not help the wider economy.)

    Any bank in the system will be keen to loan money to a non-bank source if they can get a significantly better return than lending to each other. However, this will have the same reduction on the thoeretical max M4 type money supply as an increase in the reserve. The bank has to make sure its interest payment are sufficient to cover loans that don’t get repaid (defaults). If it has too many defaults, the bank goes bankrupt and the government deposit guarantee scheme, the banks shareholders (and depositors) and the rest of the banking sector picks up the losses. If the sector isn’t robust (profitable) enough to pick up its share of the defaults, then a domino effect occurs and you have lost your banking sector.

    Of course, if you get a $400 loan from a bank and buy some land for $200 and spend $200 building a house on it which you sell for $1200 (because the buyer thinks the price will go even higher), you pay the bank back its $400 and you walk off with a profit of $800. The house was bought with a mortgage, so the bank thinks its got a $1200 asset. If it all goes wrong and the asset can only be sold for the $400 it cost for the land and building, then there is a problem. Question: Do you blame the bank which has previously been doing this profitably and paying itself very well, the speculator who built the house (and afterall made a quick 200% profit), or the unlucky speculator who took out a £1200 that they couldn’t pay back?

    • Ro Econ says:

      The example does work if we assume that the single bank is only one and is acting as if there were multiple banks in the system. I have added some additional formulas at the bottom of the article to reflect deposit creation multiplier .

  10. Angela Adams says:

    Imagine a dialogue between the bank and yourself: “So now you want me to make new loans,” says the bank, somewhat plaintively. “But suppose THEY go down in value – through no fault of my own!” (The bank means that the economy might tank further and even the best companies will be hard-pressed to pay back debts .) “In that case,” explains the bank, “I’ll lose money on new loans, no matter how duly diligent I’ve been in making them, because of circumstances beyond my control, AND a regulatory mechanism that forces me to declare those losses way too soon!”

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  12. Shane Curran says:

    The fractional reserve system works as long as there is confidence in the banks. If the economy gets into serious trouble and individuals are worried about their money in the banks then they will race to the bank to remove the money they deposited. If everyone does this, there is said to be a run on the bank and since the bank only holds 10% of the total deposits they cannot pay everyone back and therefore fail.

  13. Jay070 says:

    Also the reason inflation is not as it appears is because all the money created in our system is still debt owed to bankers. There may be a lot of debt notes out there, but when they aren’t circulating, inflation isn’t so obvious.

    A better way to look at it – bankers and their associates through loans at interest have captured much of the wealth of the world. Since ALL money is created as interest-bearing debt owed to bankers, there is always a SHORTAGE of currency for everyday transactions for the rest of us.

    Banking is the biggest scam in history.

  14. Jay070 says:

    Sorry barry econ, but your understanding of money in today’s world is way off base.

    For you to say that banks have the money they loan out on mortgages reveals that either you have never studied modern banking thoroughly or you are putting out false information deliberately to make banks look like legitimate businesses.

    Banks never “lose millions of dollars” if they never had it to begin with. Do the terms leverage and fractional reserve banking mean anything to you?

    And if fractional reserve banking is morally acceptable, why are only a chosen few in society allowed to practice it without going to jail. If a non-banker sells something of which he has only one of to twenty people who each think they are buying that entire item, he is guilty of fraud.

    When banks loan out 20 times the “money” (actually just debt-notes) that they have on hand, they are practicing fraud. And in a nutshell, that is modern banking.

  15. Bob says:

    Thanks Barry Mr Bernacke was caught out……..millions of folk think he is an economist…..hmmmm…freudian slips of tongue don’t help your case. I’ll say again the brainwashing of the Economist Uni’s students it would appear is for a purpose to perpetuate the myth that Banks don’t create money out of thin air….Barry….. the Tasmanian Gov’t;s 1935 Select committe report on the money System showed clearly ( & many other investigations by Governments) that funds are created out of thin air….contrary to the brainwshing of the Universities. Many Leaders, eminent Bankers, thier Magazines, Governors of many Banks have said so. Many folk have died thru the afges under suspicious circumstances to protect the Banksters abilitiy to do that…… see my Sept 07 & other posts. Gobbly gook, econo speak, sure does prove any different…..only to make the it all sound so complicated that only the learned….Uni taught folk could see how the system works….however to get econ’s to agree…..well that sure is another thing. Some of us have worked in the Banksters system….& are not proud of it I can tell you…..the tales of skullduggery are plenty.

  16. barry econ says:

    You can’t use a news clip as a factoid for economics 😛

    the FACT is that you can’t just PRINT money out of thin air. You must ALWAYS have an asset to back up what you are lending. The problem that happens is when billions of people can’t pay their loans and thus default. That money then is technically tied into an asset, however, that asset depreciated (the house). So banks lose millions of dollars (Which they have).

    So there is no money out of thin air, if there was at the rate some people speculate then we’d have super inflation of the currency (which we are experiencing, but not to the scale that would happen if all the gov’t did was print money).

  17. Bob says:

    Fed Res Bank Bernacke said on the news last year…….that Fed Res creates money & lends it to the US Gov’t. In other words makes up a figure in the computet & lends it to US. Months later in the News he said they print money……but at that time the printing was halted as the printing press was making errors to the Trillions of US$ printed had to be visusally checked by humans…..heheheh. So does the US Govt buy the printed money at the Feds cost to print or buy it off them @ face value. heheheh. face value we could expect. very healthy profit. heheheh. Interesting the Jon Stewart TV picked up on it & showed Bernacke’s interviews of months apart & this made the Fed Bernacke look….well…..a goose for telling contradictory stuff …..it also it made him look a bit slippery & Capone like. Bernacke blew away all the gobbly gook & untruths learnt by econ lads in a few short sentences…..he virtually said it Feds funds are made from thin air.He forgot what he said months prior…..it was obvious.

  18. Jay070 says:

    Phrases like “money multiplier” “fractional reserve banking” are used by those in power to hide the fact that banks are fraudulent and operate to steal what little wealth the poor ever hope to have.

    And then we have the news media lying to us acting as if the super rich pay a lot in taxes when in reality the bloated governments around the world operate to keep the corrupt banking system going. Terrorism? The biggest terrorists are those working on Wall Street everyday – manipulating numbers, debt in order to steal from everyone else.

  19. Jay070 says:

    LG – Sorry to let you know, but money systems are fraudulent. Banks get to create all the money as interest-bearing debt owed to them. That is why globally governments and people are all in debt and there is NO money. Armored cars round up the debt-notes (Federal Reserve Notes) that temporarily circulate and return them to the banks who then loan them back out at interest. Bankers and their associates profit greatly from this system. The rest of us work hard and never get ahead. Evil in the form of banks runs the world

  20. LG says:

    I am hoping that some of you bank-savvy folks on this forum can help me. I am being told by a group that is helping people save their homes from foreclosure the following: they are saying that when you sign the papers at the title company, that you are essentially endorsing a check that the bank then takes and is immediately paid the price of your mortgage. Then you pay them again through monthly payments plus interest. They are saying that banks are being paid twice, and that you can sue them for damages because of this. I have never heard this before, and can’t understand how this could possibly be true.

    • Al says:

      This is how it goes, your signature is worth money, when you sign a mortgage your loaning the bank that amount, the bank deposit your note as an asset, then your note is turned into a security, sold on the open market, at signing you signed a power of attorney, this is so they can take the house back if you don’t pay them the Leander fees servicing account, you signed a contract with the lender which they did not sign only you, for a contract to be valid 2 signatures must be on it, the bank did not give you one penny of its money, or depositors money, federal law prohibits this, then this lender sells your servicing agreement to another lender, then you pay them payments, If you have a mortgage do a forensic audit this will show you. Lets say you pay for thirty years of payments and now you paid the loan off right, no you didn’t, ask the bank for your note back, they never have it, it was sold from the start.
      So yes the bank was paid 2 times, and many more, but you still don’t own your home, your just the tenant it says so on your deed, and to prove it you pay the state rent each year, in taxes, you don’t even own your car, the state dose. You registered it with the state, gave them controlling interest in it, now you need DL, tag, insurance, and they monetized it to run gov.

  21. carl says:

    If banks including the reserve make money out of thin air shouldn’t that make the tender illegal it is the same as counterfeiting. It should mean that legally we shouldn’t have to pay taxes, loans or buy items with money. If the banks don’t own anything as a collateral in the first place it voids most contracts etc. Then there is interest which doesn’t actually exist in a physical form so if the whole world did end up paying of every single debt owed there would be no money at all and millions still oweing. 2012?

  22. barry econ says:

    Thanks for your non contribution. Maybe you’d like to actually write something of value to contribute rather than your empty remarks. We’d be happy to post your pro found knowledge (honestly)

  23. Miles says:

    You made a serious mistake and need to re-read modern money mechanics

  24. RN says:

    >>Of course, the whole system is dependent on a) the bank being responsible with lending, b) everyone not defaulting on their loans

    You are forgetting about C:
    And c) that enough money, needed to pay the interest, is created in the future plus enough to replace all the money in existence as the mortgages and loans are paid off.

  25. Bob says:

    Good post Steve.

  26. Steve says:

    The Banking system is a global monopoly & has no competition in the market place. It is imposable to have any significant changes forced on it now or ever. The only way is for as many people as possible opt for an alterative income/earnings deposit institute, similar to a “members/individual restricted” fund/super or investment institution only for the personal use of its members. So instead of the bankers club {for the banking trillionairs} you would have the citizens club {for the poor bas****s like you & me} with deposits from members to benefit members. & if governments around the world can support super & investment institutions they can support this as well. When corruption & deceit is so entrenched in a business it is best to take your tread else wear. Don’t even try to fix the banking quandrume we all have to find an alterative.

  27. Bob says:

    Mike….appears Caesar went the same way as Abe Lincoln & JFK etc. & maybe a huge religious figure ( he turned over tables of the Leaders who were the money lenders) Appears fatal, in some cases, to mess with these banksters.

  28. Mike Smith says:

    Aussie Dave,

    You are asking ” who gave privately owned banks the right to create a publicly owned asset – money?”

    Web of Debt by Ellen Brown is an excellent book to read to understand how entire population is paying interest for the money supply to the private banks for the money that we (our government) could have printed:


    If the government simply printed the money and made it the legal tender of the land, then we would not have to pay interest to the bankers for our entire money supply. What we have is financial slavery and people are not aware.

    American Revolutionary War was fought for the right to print our own money and not borrow it from bankers. Andrew Jackson paid national debt and we had prosperity for a while. But then wars, import/export requirements made it harder to sustain our economy without their intervention. Jackson survived assasination attempt.

    Abraham Lincoln rejected to borrow from bankers and funded the civil war with money printed by the government. He was assasinated.

    JFK signed the executive order 11110 and gave the U.S. the ability to create its own money backed by silver. He was assasinated.

    See, some people do not like it if government prints it’s own money instead of borrowing it from the banks and pay interest to the bankers.

  29. Aussie Dave says:

    What I’d like to know is who gave privately owned banks the right to create a publicly owned asset – money? This is surely the right of the Government (on behalf of the people) alone.

  30. Jack Flash says:

    I think that most of you are wrong in your assumptions that Banks create money from thin air, they don’t, it is YOU who created money from nothing, when you sign a promissory note, you are pledging your future labour, the Bank then gets permission from the government to have this recognised as an asset, It is this asset the Bank wrote the cheque against. If Banks could create money from nothing, what do they need you for? they could just create enough money to pay the National debt. Everyone knows they cannot do this, the critical question is, “Could a Bank create money if no one borrowed from them”?. the answer is NO!. When you recognise that YOU are the creator of money, because only People can create wealth through labour, then you may be able to get a grip on the way things work.
    In the case of a mortgage, your promise is sold on the stock market as a mortgage backed security that the government guarantees and your monthly payment is passed through to the investor, CMHC lays out the whole scheme (scam) on their website. The Bank has no further interest in the mortgage and no risk but they keep convincing you that they hold the note, in fact, they are engaged in fraud when they foreclose.
    But People who are too lazy to ANY investigation keep falling for it.

  31. Mike Smith says:

    People are asking: “No new money was created (cash)”. Folks, money we use is NOT the cash. Do you buy a home with 100 dollar bills? Do you buy a car with cash? Many does not even buy groceries with cash. We either write a check or use the credit card. Thus, money is the IOUs that bank has created as your bank account. Yes, your bank account does not have the actuall green cash! But the banks promise to pay you does work like money. Promises to pay (DEBT) is our money supply. Here is a video to explain it how banks create money better:


    Now, people are saying well, banks should not be doing this, doing that! Folks, bank deposits are guaranteed (on paper) by the FDIC. In reality nobody can guarantee the value of bank deposits in an entire economy. But that aside, this guarantee blinds the depositors. They do not question bank actions. Thus, unchecked, banks feel free to take excessive risk. If they go bust, FDIC pays for it. If FDIC goes bust, tax payer pays for it. If the government goes bust, they will print money and we will get worthless paper for it. But at the end it is a bankrupt system that is created to sustain the life style of bankers at the expense of the real economy that works to create actual value.

  32. barry econ says:

    It is only a theory remember. The point is the banks are supposed to be mature enough NOT to lend out 90% of their cash. However, at the end of the day (clearing drains) you may find banks borrow from other banks to get more cash to settle accounts (which I believe happened at the 2008 collapse). The central bank pegs interest rates called prime rate, the other banks are supposed to follow suit, but they don’t have to. The best borrowers get the ‘bank prime rate’ which is generally 2% higher than prime.

    Central banks get their money by selling bank notes like bonds (thus removing money supply from the system). They could also sell foreign currency (buying back their own currency)….. Of course, they could simply print more money, but that would increase inflation (but central banks are printing money righ tnow…..)

  33. Chris says:

    Very interesting discussion, I understand the theory behind the article and it makes complete sense that this would happen in a fractional reverse banking system i.e. savings deposited into a bank result in an exponential increase in credit availability. But I still don’t understand the central banks role, the central banks set the interest rates and this dictates the level of interest with which banks can borrow from the central bank. So a slash in interest rates means that banks can borrow from the central bank more cheaply and therefore supply more credit, releasing more liquidity into the market. But where do the central banks get their money from? and also I understand how the factional reverse banking system increases the money supply but how can banks lend out ALL this money at the same time? I mean how can so much credit be created and their still be enough paper money to go around? for example if bank A takes a deposit of £10 and their is a reserve requirement of £1. Bank A then lends out the £9, this money is then deposited in Bank B. If the guy who deposited the £10 Bank A wants his money withdrawn then bank A is £9 down. Say thats all the money the bank had (for the sake of argument) then the bank has to borrow the money? Does he borrow it from other banks at interest? or from the central bank? Also, u know in the budget report? in the UK? it is always a big deal what the interest rates are set at, because it affects the interest rates for consumers. But it is my understanding ( i may be wrong on this) that when the central banks sets its interest rates it is only setting the rate at which banks can borrow form the central bank. Not the interest rate for everybody, but it does affect the rates for everybody. But why are bank borrowing from the central banks anyway??? why are they borrowing from them at all? and where is the central banks getting it’s money from? I’m really confused, could someone please explain this to me?

  34. barry econ says:

    THe point of fiat money is that in theory the entire system is supposed to operate with integrity and maturity. If that collapses then you’re in huge trouble.

  35. Mark S. says:

    As a follow up, we have a fiat monetary system. The feds can print as much as they like. When they inflate the money supply, they devalue the dollar which is a tax on your wealth. When they inflate interest rates, they charge you more which, again, takes more of your money. So, whether you save or borrow, they have control over your financial destiny. Precious metals such as gold and silver which hold their value over time are harder to control since they can’t increase those supplies easily. If you bought a home ten years ago and paid for it in gold, say, 1,000 gold dollar coins, and sold it today for the same 1,000 gold dollaw coins, would you be faced with capital gains? The gold coins would be worth more in dollars today than ten years ago, but the coins themselves would be the same as those you used ten years ago. The feds don’t like that equation. Again, fiat money which they have complete control over and is used to rob you of your wealth is what is at stake here. This is how governments control their people and make slaves out of them. Get off this system and you become free.

  36. Mark S. says:

    What is being described is called LEVERAGING. It all stems from the central bank/federal reserve. They lend money to the banks. The banks lend it to us. This increases the money supply. Then products and services expand as a result of the increased supply of money. The money gets repaid to the feds and the money supply tightens. The feds keep a close eye on the availability of the money supply thru interest rates. If they want a tighter supply of money they increase rates which brings the money back to them quicker. If they want borrowing to increase, they drop rates. This increases the supply back into the market, but may increase inflation. The problem is, the banks are their conduit for this process. Without the banks, they fail too. So, they cannot let the banks fail at any cost. It’s not as complicated as the original article states. It all starts with the federal reserve’s monetary policies.

  37. I am glad that people on here are waking up to the reality that BANKS CREATE MONEY OUT OF THIN AIR as something which is repayable (ie. a loan). However, the amount they can produce depends on the amount of existing reserves. The latter makes up a very small amount necessary for what is termed credit creation, or fractional reserve banking. If you study any economic textbook the process is outlined but they do not ofcourse express the claim that the money is electronically created out of thin air.

    For those interested in the subject please google MONETARY REFORM on the net..

  38. Bob says:

    Pete there ghas to be away. But could be difficult. The opposition from the Banksters would be intense as you are aware of many Leaders who tried through the ages were murdered! Old Abe Lincoln put it something like he did not fear the army in front of him but the Banksters at the back….is that a fair interpretation? Rest his soul.

    Seems the Banksters have a noose around Governments/countries, politiicians throats by law/&or other means . And it seems the Legal Practitioners Union in Australia (Law Society) of which to practice one is expected to join… some years ago….maybe still is….. was sponsored by different Banks at various times….well so the Law Societies Brochures adds said (on the backs of their brochures) …..so any one having a case debated in Court and a Bank was the opposing mob …..one could not help thinking….. maybe there will be some kind of bias towards the Bankster/s. (seems the presiding Beak would not excuse him/herself from the Court even if there was conflict of interest) And just maybe financial documents showing the debt (statement )….. requested by the Judge….. will not be brought into Court & just maybe the Judge will give a ruling in favour of the Bankster whilst the Bankster really is in contempt of Court for not presenting relevant documents….ledger card….. showing loan created by a debt as the 1st entry on the card/account. (FIat money…thin air money)
    And the Bankster gets away with it. It has happened in Australia…….So one could only feel uncomfortable at the relationship between Banksters & Lawyer/Beak, Judge or Legal alternative. Do they get together anyway ???? Maybe drinks, golf, shares, sport,clubs, perhaps other benefits/associations we are unaware of???

  39. pete says:

    Nice to find you aussies learning this stuff as I am myself here in the states. Question – what can I or anybody else do to protect ourselves and/or how can I (we) make money to propser in the middle of this fractional reserve banking scheme? How do we bypass the banking system?

  40. nicole says:

    Hi Guys

    The fact of the matter is that the whole banking system is a scam, we do not need banks, yet we wanted them….

  41. Terry Hammonds MSW says:

    A book published in 2008 titled “The Mystery of Banking” by Murray Rothbard (Second Edition) says bluntly on page 97 that our system of fractinal reserve banking “is a shell game, a Ponzi scheme, a fraud…” Loan money is created out of thin air. Banks hope there will not be a run on the accounts because they do not have enough in reserves to cover panic withdrawls. The scam is run with the full support of the government by insuring accounts through the FDIC. Banks take in the deposits and by financie law, they then own the money. If they squander the money, as they did in this meltdown of our financial system, they can not be charged with theft or embezzelemt. Legally, the money is theirs to do with it whatever they want. If the bank fails, the FDIC gives our money back or the bank gets a bailout and we start over.

  42. Bob says:

    Greed & because they can. What about off the balance sheet borrowing & lending hehehe…..shhh…. all Monty Pythonish wink wink nudge nudge say no more SAY NO MORE. Lovely little money earner appears never give a sucker an even break. And aren’t we all the suckers. This crash was spot on in time as the baby boomers are about to retire & their Superannuation share savings slashed….some accident. Funny that if all the boomers stopped work the Gov’ts would lose a lot of tax money. Many folk have to work on or go back to work. The many Banksters & Government nutters & regulators would appear to be sitting on their butts in their mansions & laughing like hyenas at the good people suffering at the hands of these modern day white collar leeches who appear protected by many who sail in the Legal System & also the law makers. Good news is people are waking up & doing there own research into the Banking System & cutting thru the fluff & seeing how the system is set up to be flawed & then misused/abused by the money lenders much to their advantage. Then they see how reccesions/depressions & boom are created for the benefit of the money lenders.

  43. Mammoth says:

    I get that banks create money out of ‘thin air’ for loaning out. What I don’t get is this: part of my country’s national debt is due to domestic banks borrowing from international banks and loaning out the money. Why do they need to do this? Isn’t the reserve ratio supposed to limit how much banks can lend? Why on earth are banks borrowing money when they can create it based on the deposits they hold?

  44. Prosper Mabuya says:

    I am completely lost.

  45. Bob says:

    Well, well……seems all Economic gobbly gook. The 1st head/major owner of the private Bank Bank of England (in 1694) said Banks profit from creating money (by way of a debit to an account which has the borrowers name attached to it) out of this air. Of course neither the Bank, Shareholders or Depositors are short of the funds supposedly lent to the borrower. So y’all tell me the multiplier effect is the game. In my opionion the real game is legalised white collar crime supported by the Judiciary……& court rulings. Appears in reality the money supposedy given to a borrrower does no exist….so how can it be paid back. The lending scam the Banks have done has bit them on the butt & why should any Gove support them……they will do it all again….Unless they are controlled & the public have acces to their records….& are aware of their modus operandi. How many Bankster top dogs have been put in jail so far???? ….for scamming the system??

  46. barry econ says:

    They technically don’t add to infinity assuming the reserve ratio above. I believe all banks must adhere to some form of reserve ratio.

  47. peter c says:

    I have watched “money as debt” and it would appear that banks can create money by lending money out such that each loan becomes a corresponding credit in the originating or another, bank and therefore the basis for creating further debt money and so on ad infinitum

  48. Bob says:

    Well….it seems in Australia that the Banks lent billions over their Deposits …..a report on TV said 700 bill$ over their Deposits…& the Gov’t will use Taxpayers money to bail out these Foxes….amazing. The Banks lend thin air money…..& want Tax Payer to bail them out……Why….in reality there was no money. Oh they say that they borrow other Banks money…….ever hear of contra Accounts? One could not help thinking as the system is sleight of Hand…..aka Tasmanian Government 1935 Report on th Monetary System…..Appears the Banksters could raise contra a/cs amongst themselves….Banksters appearing to lend to each other…..for the same interest rate….if any….heheheh…..Foxes in charge of the hen house….wanting all the eggs, new chickens & the neighbours eggs & chickens & more. Goodness these guys in the Res system…..lend what the ain’t got. heheheh. ponzi scheme… ain’t got nothin’ on this…… appears this has to be better as it has protection from Gov’t & it appears the the Legal lads have to protect it……or it will collapse…..whoops that is happening now it would appear.

  49. Carolyn says:

    What you are talking about is the velocity of money. For example, interest as paid by a consumer, is very real as it cuts into what money they do have to pay the debt. However, if the balance of the debt is paid off, then the bank has the interest as well as the principle. Home mortgages is one thing, unsecured loans like credit cards, are another. The interest paid by the consumer to the bank is used by the bank to pay their expenses and their other depositors. However, the default rates are rather silly, IMHO because if the universal default rule applies, the consumer now has a bigger payment to make, thus making it more difficult to discharge the debt, which leads to people defaulting because of bank intractability.

    Velocity is the ability of money being moved through the system. If I owe Charles fifty dollars, I pay him. That debt is satisfied. He owes Doris thirty dollars and Chad twenty. He pays them. Those debts are satisfied.
    Doris pays Ron the thirty she owes him and Chad pays Jenny the twenty he owes her. Thus, fifty dollars just paid 150 dollars of debt.

  50. tts says:

    There is much confusion about money(notes and coins) and credit
    by banks.When the bank gives you a loan,basically it creates a book/accounting value to-day(convertible into money)which will be destroyed as and when you,the recipient,will have produced income(from your employment) or profits(from your enterprise) to offset the value previously created.In whatever way you utilise the funds you receive from the bank these will,depending on the velocity of your/others’ transactions,ultimately land in the banking system as deposits in the form of cash or checks.So to say that banks lend your deposits does not seem valid.If the cash reserve ratio is 10% then a bank can create 90% new money e.g if you deposit $ 1000 in cash the bank can afford to create $ 9000.If you deposit a check of the same amount,the bank cannot create money as it must find $100 from the Central Bank to comply with the reserve ratio.
    Thus,in a nutshell,banks’money creation is only limited by the amount of cash in the form of notes and coins in circulation issued by the Central Bank.That is why all banks are fearsome of cash runs because the notes issued by the Central Bank are not sufficient to satisfy the amount of money created.When the economy is booming more people are employed(more income) and businesses prosper(more profits) the Central Bank must print more notes to sustain that additional expansion thus enabling banks to create more money.

  51. Bob says:

    To Debt Based Economics:

    one lad who left the country …….. but came back after he deemed it safe…so I understand… Leonard W. Clampett….Australian author….of “Hand over our Loot 1″… &” 2.”..& “Who said we have to pay interest?” Please read/scan the “1935 Parliament of Tasmania Monetary System…Report of the select Commitee” ….it is on the net.There are many references said in different ways that Banks create money out of thin air. It appears that Bankers usually are upset that they do not understand how their Bank realy creates money out of thin air…..
    It appears many of us in the finance industry are what we call ourselves “mushrooms”….fed a lot of manure. Hey the system has to have the illusion of being strong….now the new generation know that they have been mushroomed as well…..the gobbly gook presently being presented to the public in the media is increasingly becoming a new version of the Mad Hatters Tea Party polluted further by a whole range of highly paid cowboys paid huge money for failure. Should these dudes be called economic terry wrists & be treated as such? or a protected species protected by those who will profit by this system. Suggest we follow the yellow brick road…..the money trail. The mind boggles.

  52. barry econ says:

    Well put. I have moved additional comments that were of exceptional thought and quality into a new thread to make things manageable. Great topics and thoughts. Please view the new article here:


    You may still post comments pertinent to this article in this comment section.

  53. Steve says:

    Hi Bazza.
    Ok buddy I give up. But It’s no good any of us rambling on, trying to change the big picture, it’s not healthy, & it’s just not possable. All we, as individuals can do is watch our corner of the wold. & to all you big high rollers & fat cat’s, I’m reeeallllyyyy sorrrry about your losses but I,m sure you’ll all servive.
    As for the rest of us poor bar—-ds. We have got to stop being the poor uninformed victoms here. The truth is out there, don’t lisson to what is said but watch what is being dune. We can’t afford to be so simplistic anymore. Get out there & lobby your gov reps {fed, state, & local } Make a change for you. It maybe a gov backed non profit instertute for wager/salery/super {what ever income based orgeization } only for members. Only for personal expendure {not buisness not personl gain/buying & selling} as I suggested or it may be some other fantastic revilation that is so simple. Some times you just have to think outside the box. This is the best time to force big changers by lobbying gov reps.
    The best way to stop shooting you self playing russin rullet is to stop playing the game. Find your self a safer one.

  54. barry econ says:

    I’m not saying these things don’t happen. What I am saying is that it’s not as simplea s, “the govt gave a 700 billion bail out so they printed 700 billion more notes”. That didn’t happen.

  55. Steve says:

    Hay Baza
    Year & I’m the pope on weekends, but that’s another story. I can tell your a very smart man barry & I know you’d be awear of the power play, very {& I mean verrrry} powerful & Mind boglingly rich conglomerants & inderviduals, are easly capable of manipulating the markets. Coordinated mass selling of stocks at there peaks {causing panic selling} & buying value shairs in a depretion {trillions in value profits} in just a few months. Now your not going to tell me this dos’t happen?
    Cheers Buddy.

  56. barry econ says:

    If by money creation you mean the gov’t says, “700 billion coming your way” and all they do is print 700 billion notes then you’re wrong, that’s not how the system works. You can’t just print 700 billion notes without it being accounted somewhere or nobody is really better off (purchasing power). That doesn’t meant they don’t print money, they just don’t print money as the only means of getting it. Basically, there’s only X amount in circulation because the reserve values don’t warrant more. Right now we need more, so they print, however, they still need to pull that ‘money’ from somewhere. Whether it’s issuing bonds or dumping reserve money it comes from SOMEWHERE.

    Money has no value other than what the gov’t suggests it has (legal tender) and what the economy will accept. Tomorrow it could be worth nothing then we move to another system of banking such as value of goods (barter). We won’t, and the value of items are again perceptions, but going back to your printing money thing, the value of everything may expand 100X because of how much your money is worth, but if everyone gets 100X more money (because more was printed) are they really better off? No, everyone remains the same (give everyone 1 million bucks nobody is better off).

    Mathematical end point of growth doens’t make sense either because all banks can lend less the stipulated reserve ratio. Even if they were all at a mathematical end point, yet the markets were healthy, there wouldn’t be a problem (well there would be because you should overextend yourself).

    It’ snot a big conspiracy, but just greed gone too far.

  57. JohnD says:

    Why do you say money is not entirely created out of thin air Barry? I heard a radio documentary a short while ago about the sub prime crisis which interviewed a person working in the World Bank that said that between 2001 and 2007 the world money supply doubled and they had never seen such a massive growth before. Where do you think that money came from? How was it created do you think? It is an interesting documentary and is available for download if you’re interested? Money is borrowed into existence in the first instance. This borrowing may be people buying holidays or experiences. It may be to fund a wedding. It may be just to survive and buy food and pay interest payments on existing debt. Increasingly I think a key element of current problems is the % of money requiring to be paid to service all the debt from the new money creation process has spawned. Indeed I know that is a significant feature of personal debt that people are drawing cash from credit cards, making minimum payments and using the cash to pay minimum payments on other cards. Of course this is the path to financial ruin but as you see from the rising bankruptcy rates this is a growing problem. It is also true that a good deal of borrowed money does actually buy houses, cars, furniture, business purchases, government purchases so your idea that some of the loaned money is backed by real world valuable assets is correct. How much real world value exists as a % of loaned money can only be guessed at. The central problem though as far as I can see is that NO economy has any permanent money within the country or region – all money has a temporary existence based on debt based money creation via bank credit. Surely this can’t be right. If all the individual, business and government debt was repaid the money supply in that country would disappear. We’d still have all the fine homes and business assets, fine art, government buildings and gold and natural resources. We’d still have all the valuable land and the labour power of millions of population – yet no money would exist to pay for anything. Even though these vast valuable assets had been bought and paid for by honest labour, no money would exist. This is the system we live in. The system of constantly disappearing money where each new generation has to toil again to earn money to pay new loans to banks to buy. Look at a Victorian house in London and ask yourself how many times that same house has been bought and paid for, each time requiring a new bank loan to bring money into the economy to buy something that has been bought and paid for umpteen times. There is a constant focus in standard (broken) economics that all countries need constant growth. You mention it in the last paragraph of your comment Barry. Why do we constantly need growth? Answer is to pay for the extra debt money on the interest of the current money that is loaned into existence. And next year you need more and so on. It is a system that has limits. And we have reached the mathematical end point of that growth that can be supported by the actual real wealth creators within the economies. The people have been maxed out. Drained of any further ability to support this fraudulent system of banks getting more and more of everything – for nothing. You mention Barry countries like Bolivia. All these so called 3rd world countries are kept in this position by the corrupt IMF and World Bank. This is a despicable act of cruelty that is forced on developing nations by the prosperous nations. But that is another story…

  58. barry econ says:

    Again, money is not entirely created out of thin air. The assets and the liabilities at the end of the day should remain balanced. The system works so long as assets don’t depreciate (like houses have) and you don’t overlend. Both have happened in the US.

    If everyone wants to get their deposits back (which they haven’t) we’d have a problem. If everyone defaulted on mortgages and the houses aren’t worth much then we have the problem we have now. It really boils down to the issue in a free market economy and that is GREED.

    If you want an economy equivalent of Bolivia then don’t live in a first world nation. Otherwise, this system is necessary in order to spur growth (which is based on investment) which requires lending.

  59. JohnD says:

    It has become quite an amazing spectacle to see the daily disaster headlines of more and more major banks and financial headlines and news reports. Just when you think things can’t get any worse something new breaks. It has come to completely dominate the news in nearly every country of the world. The terrible repercussions of the flaws in the financial systems of the world will now hopefully, slowly open itself up to more and more people being bothered to learn about this corrupt, fraudulent and despicable banking system that is at the heart of the mess we are now in. It may be though that some good may come out of this coming total crash of the world economic system. It would be good if we could begin the process now of getting the strategy developed for a fair system that can replace the fraudulent banking system. How say you?

    Some thoughts…
    First off there are no experts in economics. Economic experts have totally failed us for too long. We need to get back down to basics and think about the root of the flaws in the present system and what we can possibly replace them with. I do not put myself forward as an expert or that my opinions are correct but I will put forward what I see as the basic flaws in the system and suggest something that might work instead of what we have now.

    1. Flaw 1 is that all money is created as debt and the debt money is temporary hence there is no permanent money supply in any country (except a small % in notes and coin, less than 3% usually)

    2. Flaw 2 is that banks are permitted to create the money supply in economies and effectively control and own the money supply therein. This they charge interest charges on for money that is effectively counterfeit created out of thin air by simply typing the amount into there computer systems. Gosh I wish I had a computer that could magic money like that.

    3. Since there is insufficient money in the system to pay the principal and the interest due to the fact that only the principal is created into the money supply there is a constant pressure cooker effect in every economy to get growth.

    4. The enormous pressures of insufficient money in the system is responsible for nearly all the ugly news of bad things in our world, from wars to environmental decimation of the planet it is all down to the pressure created by the financial system itself.

    How strange it is that most folks have no clue about the root cause of these big problems in the world. The key missing factor in our economies is a permanent supply of money created by governments at zero interest and remaining in existence. Instead of money being temporary it needs to be permanent and not requiring an interest charge just on existence. Money is like a natural social need within all countries and economies to enable the efficient transfer of value. We need to figure out a method of issuing the money by government into society without the need for private banks to create it as interest bearing debt of temporary money. I’d suggest that one way is for all banking (as we know it now) to be nationalized and run by Governments. Money could be created as loans for home mortgages for example at zero interest. Every £ $ or euro that was repaid would reduce the amount owed by that amount. Thus home owners would not pay twice for the property via principal plus interest and the money repaid would add to the permanent money supply of the country. Instead of money being fiat money, this money would be backed by a real world asset that most people would agree has proper value – a house or dwelling. I know many people that hark back to a gold standard but I can’t really see why gold should be singled out as real value as it has little practical use for ordinary people. Governments could also do away with the massive borrowing from the fraudulent financial system each year and the theft of money from citizens via all kinds of taxes to pay principal and interest to banks. Money being used for physical infrastructure could be flagged as money that stays in the economy as permanent money. Money for paying wages or services would not stay in the economy and would be deleted as money came back in as tax. Over a few years using this system tax burdens would decrease steadily. Then there is the issue of where we are at now. Vast numbers of people have profited to excess by this fraudulent system. The vast disparity in wealth of people in society is unjust and inequitable and governments need to figure out how to re-distribute from those ill- gotten gains back into the people.

    These thoughts and ideas are just crude ideas as regards reforms. Of course changing the world financial system is one of the most challenging things to contemplate. Come on guys, free your conciousness and let the ideas flow.

  60. Q. to Bob: Who was the author that had to flee the country: which country and what book did he write?

    Wrt others: bankers seem to know about the money multiplier effect, yet most that I know say that their banks do NOT lend more than they have on deposit….to me this should be an open and shut fact. Does anyone have a source that can unequivocally clear this up?

    We live in a debt-based system.

    If a bank has to balance its books then so must an economy.
    Q. How can a debt be repaid with interest if that money to pay the interest
    does not exist? A. It too must be created out of “thin air”. Eventually this “money that does not exist” has to vanish somewhere – and so it does: as a loss in a ledger.

    This is a high stales game of “pass the parcel” or “musical chairs”: the bank or business that get left holding the debt when the music stops vanishes – and with it the money. And in the blink of an eye everything is in balance again, the scarecrow finds his brain, the tinman his heart and we arrive home – just in time to hear the music start again!!

  61. meleagrid says:

    Very thought provoking posts here. We can agree there is no real value in (fiat) money. The system does not make sense in that it outpaces the ability to perpetuate itself. There is really only one solution and that is complete failure or long term depression that should lead to recaliberating monetary systems.

  62. Steve says:

    Hi Baza
    No, govenments do print money. Just Google the question & you’ll get the true info from gov sits themselves. & Yes it dose cause major inflation, that’s one of the reasions why we are in the sh– we are in.
    But I’m not conserned with the leachers & fat cats of the financil sector, thay have been doing one another over for centerys & will be for ever in the future. I’m just trying to get the average jo to get off there round about & start supporting them selves. & a supa/personal fund only for non profit & personal use for individual members, can work.

  63. barry econ says:

    Dave, local Tbills in local currency. There is a correlation between T-bill demand and the demand for dollar if everyone wants Tbills.

    Steve, the govt just doesn`t ‘print’ money, they have to pull it from somewhere. Printing 700 billion notes and giving it all would devalue the entire system and drive inflation sky high. They have to make the money somehow or pull it from reserves.

  64. Steve says:

    Guy’s, Guy;s. We can all ramble on about this into the next centery, but the thing is, Banks/lender’s off all sorts, not only get there moneys from us/norm on the street, but also from reserve banks/goverments that litery print the stuff/money. The only way the man on the street can get a win is to have a instertute simular to nonprophit super fund or nonprophit orgenizations {most of witch are gov garenteed anyway} that siqures {not banks} your well erned income {there for has a real sause of capital, not just plucked out of thin air}. That can lend back only to it’s members {not investors or buisnesses} for non profit things sutch as buying a house or car, normal house items Ect Ect. Just think how cheap a house would cost if you borrowed from your own, non prophet fund. Ofcause the deposit/amount in your account would have to be a large percentage of the item/items perchasted. Say 75% with a cap on that, compairable to your income. To easy. Then the banks & big buisness can all go to …… were ever.
    Nice dream Ha.

  65. Dave says:

    My question is in regard to the system of US Govt borrowing from the Fed and securitization of those notes. When the Fed sells US debt securities, is the payable in the foreign currency or US dollars or some neutral currency (gold?) If foreign currency, does that mean a weaker dollar effectively increases the debt? If US dollars, does that mean the security is worth less to the foreign investor?


  66. Mario C says:

    How do the CDO’s work. If the gov’t takes them off the banks books, will the banks look like they have lost a great deal of assets. Does the share price look cheap or expensive at that point.

    Also if the government is buying up all these assets because they have failed to provide liquidy to the market, why is no saying that they are going to make the buying and selling of these types of assets illegal. Is the because the governments wants to try and sell them back to the banks at a another time. That said, how long before we need a buy out for that.

    Interesting article about the senate vote http://www.whybanksfail.com/?p=197

  67. barry econ says:

    To conclude that all banks overlend and are greedy is an over statement although from the outside they look like piggies (fat ones).

    this is one of the reasons why the US govt should let banks who overlent to go broke (but pay back the creditors first!). The system will remain, tougher rules on borrowing are ths things needed now.

  68. Bob says:

    Seems Politiicians love to let the Foxes run the hen houses. Or is it the case of if you don’t let us have control we concerned for your health??? aka John Perkins book expose”Confessions of an Economic Hitman” Regardless of what learned ones say in brainwashed opinions & who sail in the ocean of boundless cash…there are alternatives to allowing Banks to create thin air money.
    …..but it is not taught in Uni’s it appears (to the changrin of the odd leading Banker & Statesmen & some of those men spoke out & some became no more) ……so we have a certain mind set…..bit like children brought up to believe their parents religious beliefs are the only way. All not normal …..according to folk who deal in healing a brainwashed mind.

    Trillions of dollars has power…one could suspect.

    The cycle of over lending is never ending. It goes around & around. They (the lenders) seem to lend stupidly (& to folk who will default due to not using prudent lending principles on these dudes situations) for a time then the poo hits the fan…..bad risks can’t pay back . Banks scale right back lending & cause the ecomy to falter…..not enough money going back into the economy to pay the river of interest……more defaults……..head to another recession/depression. Of course lack of regulation by Govt’s does not help. The Foxes & their predator mates love to play & get fatter which ever way things go. It’s the game & the public suffer again. Yes……there has to be accountability now & ongoing scrutiny of the Foxes & their leech mates who profit in all sorts of ways by the game. Wonder which Government has the gonads to bring in stingent controls. Do we hear the Foxes squeeling & flexing their muscles??? Which Government Leader has the gonads to tackle the Foxes???? Seems in South America there is a move….interesting times. Guess we have to read between the lines as John Perkins words hit home.

  69. barry econ says:

    Regardless of what you may say the money creation ideas are crucial to the development of economies. You just need that one aspect–responsibility. If you over lend you’re going to get screwed. You see now before you what happens when you overlend and everyone defaults. The bank goes bankrupt and you see the government finding ways to dump cash into the market.

  70. Bob says:

    It now appears that the Western Banking/monetary system….. house of cards has been exposed…….for what it is. Even some economic commentators interviewed on major TV programs mention corruption & lies & fiat/thin air money…& expect criminal charges to be laid in the USA. Interesting times. The Political leaders appear to have pandered to the money changers for far too long…..& guess who laughs all the way to the Bank!

  71. Bob says:

    I agree with you JohnD on the matter of financial sytems beign the chief evil in the world driving wars, starvation & envirmental disasters. One only has to read the whistle blowers expose ….e.g. Prof Joseph Stiglitz or John Perkins (Confessions of an Economic Hitman) to get a feel
    from their experiences……the lack of humanity in the systems are evil…..one has to ask “Why are they accepted by Countries?” As John Perkins suggested…it could be to do with Govt Dept Heads, Politicians & health…..it is not healthy to oppose?? There have been many other Books exposing the underbelly of the West’s Banking system & 1 I author am aware of left his country for some time as he was afraid of the consequences…….Politicians & money lenders did not like what he exposed & the remedies he suggested. One could form the opinion that these forces will protect their position as if in a war (no rules)……their house of cards depends on it.

  72. JohnD says:

    My understading is that money does not get destroyed when a loan is repaid. Sure, money is created out of thin air so to speak by banks but as it gets repaid the banks keep that money as well as the interest. My source for this is the fabulous book called “the grip of death” by michael rowbotham. I know that in the video “money as debt” by paul grignon he says that money disapears when a loan is repaid but the book “the grip of death” does not agree with this point. (see page 28 section:the ownership of money) This book is NOT a light read but thorough study will perhaps turn your beliefs on the world financial system on its head. I believe now that the financial systems of the world are the chief evil in the world and the forces that are driving wars, starvaton and environmental disasters.

  73. Bob says:

    A simple format for lending is as follows……

    When a Bank lends money it can create a debt in the borrowers name…..& credits an account in its own Bank or eslewhere…..or a cheque is written out by the borrower…..paid into payees Bank ….crediting the payees account & the cheque is exchanged by the Bankers & the cheque ends up back at the borrowers Bank creating the new loan account/debt. Thus the debt is created & the new funds are deposited in the payees Bank . New funds have been created without any Banker,Shareholder or depositor short of funds.

    Good sleight of hand. The liabilities & asset thing…..sleight of hand. So you see Banks can lend out funds to there hearts content( if there are parameters they certainly seem to blow it)….or find ways of doing it…& not use prudent lending principles….lend funds to thier subsidiaries of subsidiaries….10 times removed which have no scruples. This is apparent through the history of Banking & appears to more so since 1694. See posting above.

    All the gobbly gook can not change the simple fact……. heads of Banks have given us their words….they have spoken…. that Banks create money out of thin air….. ensuring the river of interest flowing back along with the creative charges & fees would have to lead to unbelievable riches….would it not?

    Sir Josiah Stamp, Director of the Bank of England,1928-41, said…….” The modern banking system manufacturers money out of nothing. The process is perhaps the most astounding piece of sleight of hand ever created. Banking was conceived an iniquity & born in sin. Bankers own the earth……..etc etc etc.

    ceative accounting ensures assets = liablities

  74. barry econ says:

    No not really, from my understanding money is not ‘destroyed’. Remember that assets and liabilities remain the same. If there is a default, then the bank must find a way to bring that money off its books as a liability. If everyone defaults then the system would collapse.

  75. tern says:

    Money is “destroyed” when bank loans are repaid.

    But what happens to the money when the loan is defaulted on? The loaned money stays in circulation.

    The lending bank records a loss and possibly reduces its lending.
    But no money is “destroyed” in this process. Correct?

  76. barry econ says:

    Banks don’t create everything though. Remember, that the asset versus liability position still remains 100 assets and 100 liabilities.

  77. Bob says:

    Good post THinklLogicol,

    However according to statistics Bureaus Banks in Aust lent out lots more that 9 times their deposits….try say 78 times etc. etc. that sure means a hell of a lot of income from the artificial high interest rates ….in Aust over he last 20 years! Seems the population are being cooked slowly…….and its legal? Of course the fees & charges….in my opinion & many others…. are outrageous & considered legalised rip off in Australia. Of course the high interest rates …….. in my opinion….are a scam as well. However the people are waking up.

  78. gerald says:

    how can a bank increase it deposit

  79. barry econ says:

    You all have to remember that on the balance sheet the bank still only has 1000 assets and 1000 liabilities. See Wiki for an example of that.

  80. ThinkLogical says:

    Let’s try to focus on the question.

    Assume the following:

    There is a Bank ABXY in a small town with no money. You arrive with $100 of cash in your pocket. You bring $100 in cash to Bank ABXY. The bank keeps $10 of cash in the vault as reserves. The bank lends $90 in cash to Person 22, who uses it to pay Person 33 for some service (e.g. painting a house). Person 33 deposits the $90 of cash in Bank ABXY. The bank keeps an additional $9 of cash in the vault as reserves. The bank advertises that it has $81 available for lending.

    Now the question:

    At the beginning, there was no money.
    Then you arrived, and there was $100 of money (all of it in your pocket).
    After a while there was $190 of money (two deposit accounts in Bank ABXY).

    Money is not only cash, it includes bank balances.
    Banks can create money. Bank ABXY created $90.

  81. OLiver zoum says:

    How can I create a SMALL bank in US or cash advance? how can I start and were can I get monoey? can sameone help me

  82. Bob says:

    Thanks for that Barry…….you say money…..as in borrowing money…..is not created out of thin air……then Mr Hawtrey in my posting above is not correct & the 1st Governor of the privately owned bank The Bank of England was pulling our leg or telling lies??? The 1st Gov of the Bank of England also said” The Bank hath benefit of the Interest of whatever credit it issues out of nothing” We don’t think he got it wrong. The Federal Reserve System relies upon in…..credit created (money) out of thin air. The Bankers want the public to think that Deposits are lent & they….the Banks make a margin(profit). They could not run a business on that small amount of margin……this myth of margin has been exposed by many a noted Banker. Why even the former Governor of the privately owned bank (like the fed in USA) Reserve Bank of Australia said in the E.S.& A Bank Research Address at Queensland university on 15the September 1954 ” Any given piece of expenditure can be financed from one of 4 sources: 1,2,3,&
    4. money borrowed from a bank. This last source differs from the 1st three because when the money is lent by a bank it passes into the hands of the person who borrows it without anybody having less. Whenever a bank lends money there is, therefore ,an increase an increase in the total amount of money available”
    R G Hawtrey, of the British Treasury, in the “Art of Control Banking,” says:
    When a bank lends, it creates credit. Against advance which it enters amongst its assets, there is a deposit entered in its liabilities. But other lenders have not this mystical power of creating the means of payment out of nothing. What they lend must be money that they have acquired through their economic activities.”
    Even Sir Josiah Stamp, Director of the Bank of England,1928-41, said…….” The modern banking system manufacturers money out of nothing. The process is perhaps the most astounding piece of sleight of hand ever created. Banking was conceived an iniquity & born in sin. Bankers own the earth……..etc etc etc.
    We don’t think he was telling lies….he was speaking from a position of power & knowledge…maybe some things are bypassed & not the done thing in universities when it comes to banking ……..it to appears students have to follow the dogma required to pass….albeit not the reality….but the line of thinking to perpetuate the blinkered thought patterns required to keep the Wizards of Oz alive & in power.

    The Banks maybe lends the deposits of the depositors….may as well….but please note Government statistic bureaus have shown that in Australia……. 1 year banks lent out 78 times their deposits & another year 48 times their deposits…..What the!! The river of interest flowing back to the banks per hour is unbelievable. And don’t forget all the trumped up fees & charges…another river of money flowing back to the banks.

    Maybe the Bible should be adhered to by folk …Exodus 22.25……be an interesting & we suspect……an uncomfortable debate to discuss that passage for millions of faithfull who work & profit by the western banking system. In any event interest it most certainly fuels inflation… another sin of the system. However the brainwashing continues it seems…..& there are certainly plenty of folk ignorant of how the banking system works in their country & globally who will defend it …..blindly……(& fair enough ….the propagand is very good)…..without opening up their minds & exploring to understand the money system.

  83. barry econ says:

    Dorky, I’m not sure about your question. Remember the above example is merely theoretical.

    Nice post Bob. Money isn’t created out of thin air but in itself is worthless. It has a perceived value and will lose that value if the people/investors loose confidence in it. Banks DO in fact lend out your savings, where else do they get the money? The whole sub prime mortgage problem is rooted in banks losing their investments because people default on loans.

    There is also an assumption that everyone won’t withdraw money all at once, so banks will always have X amount of money on hand to support cash demands.

  84. Bob says:

    Are we to believe that Banks lend our deposits? I have never seen a Bank ledger Card/Account with a deposit that is then lent to a borrower!! One would suggest it appears fiction ….a Bank lend Deposits. The illusion that a Bank makes only a margin on the difference of the Interest it pays the Depositor & the amount it charges the borrower…. is what it is…..an illusion….if you will …an amazing sleight of hand supported by those who profit by the trickery….which in turn appears supported by legal fiction.(Admiralty Law)

    It is interesting to note explanations of how credit is created. Having scoured many docs & books etc on the subject one comes to the conclusion that the Leaders of Banks, Govenors & Secretaries of Banks……from many parts of the world……have made it so clear in so many of those enquiries & their writings & quotes….the clarity appears lost in the detail of those educating & profitting from the credit creation system. For instance….. in the 1935 Parliament of Tasmania Monetary System: Report of Select Committee many a Leader has been quoted. eg
    Mr.R.G Hawtrey, Assistant-Secretary to the British Treasury, says”When a bank lends, it creates money out of nothing.” Also William Patterson, first Governor of the Bank of England (about 1694 said- “……………(quoted on p15 of the Report) The Bank hath benefit of the interest of whatever credit issued out of nothing.” It is also interesting to note that Beaumont Pearce, Chairman of Lloyds Bank, who said in Melbourne on 13/11/1934 & shown in the National Bank (NAB) Monthly Summary for December 1934 that “NO CAPITAL IS NECCESSARY TO START A BANK” There a many other Parliament Reports showing Banks create money out of thin air & the river of interest flowing back to them (sweat interest) is mind boggling….& the interest & fees they charge appears to be is crippling humanity. One has to only read Prof Joseph Stiglitz’s books & writings freely available on the web to dig deeper into the “System” So we have to come to the conclusion that money is created out of thin air & the System is not good for the people & stifles them…..of course after reading Prof Stiglitz & the Tasmanian Reports & many other books written by famous Legal minds & Bankers you may have a different view……..I think not

  85. Dorky says:

    What about Bank A make money by borrowing from Bank B at 1% interest, with Bank A providing 20% of the loan amount as collateral? Say the loan is $100k. Then Bank A lend out all the $100k with interest at 2%. The return will be $2k. Out of $2k, Bank A will pay back $100k + $1k (interest) to Bank B, keeping the other $1k for itself. Since Bank A only spend 20K (collateral to secure the loan) and get $1k return, it actually make 5% return ($1k out of $20k). Webmaster, do you think this tactic is possible.

  86. Webmaster says:

    There is an assumption that people won’t demand all their money at the same time (clearing drain) so there’s no danger of having Ms will (only expand to): $1000 / .15 + .05 + .05 + .02 = $3, 703.70 being demanded all at once.

    When money borrowed eventually it makes its way back to the bank then they can lend it out again–assuming that their customers won’t come back and ask for it. It’s a theoretical example to show how far banks can go.

  87. Joe says:

    I have tried to follow your explanation using your example of the one-bank monopoly and am a bit lost. The bank lends the $850, with the money deducted from cash on hand. The person then returns and deposits the money with the same bank, with the resulting balance sheet looking like this:

    Assets: Cash-$1,000 (leftover $150 from out-of-country deposit after loan was made plus $850 deposited by same individual), Loans-$850 (made to individual) TOTAL ASSETS: $1,850

    Liabilities Deposits-$1,850 ($1,000 out-of-country deposit plus $850 deposit from person who obtained the loan)

    However, no new money (cash) has been created. The situation you describe basically has people taking money from the bank and putting it right back in. The balance sheet grows as the amount of loans and deposits rise, but the amount of cash in the system remains the same. Assuming no interest, all subsequent loans and deposits will cancel each other out, leaving you with the original deposit of $1000. Please explain further.

  88. cece says:

    It was either loan shark or bank 😛

  89. Mark says:

    No, my employer is a bank but I can’t reveal the name of it because of confidentiality reasons.

  90. Webmaster says:

    What does your employer do? Loan shark?

  91. Mark says:

    This is a very interesting concept, I’ll use this info to figure out how much $ my employer makes.