Where Do Banks Get Their Money?

What does your employer do? Loan shark?

It was either loan shark or bank

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.

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

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.

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.

how can a bank increase it deposit

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

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.

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.

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!

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.

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

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.

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.
Cheers
Steve.

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.
http://www.prosperityuk.com/prosperity/prosperity.html

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!!

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.

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.

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.

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:

http://www.discusseconomics.com/banking/money-creation-where-does-the-money-come-from/

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

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.

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.

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

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??

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?

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.

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?

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..

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.

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?

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:

http://www.tradingstocks.net/html/banks_create_money.html

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.

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.