Originally posted by IR35 Avoider
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Taking the opportunity to derail the thread with some interesting facts. Banks don't have to have money in order to lend it. They create it out of thin air by increasing the balance on a current account when they make a loan. There will be an offsetting balance change on the customers loan account, so neither the bank nor the customer experience a change in net worth in the instant money is created.
A current account balance and a loan account balance both represent an amount of debt. The current account balance is an amount owed to the customer by the bank, while the loan account is an amount owed to the bank by the customer. All modern-world money is debt, but not all debt is money. The debt represented by the current account balance is money because it is portable, it can be transferred around the banking system. The debt represented by the original loan is not money, because it is not similarly portable.
If you imagine a simplified scenario where there is only one bank in the world and deposits are the only kind of money, when the money created is spent, all that happens is that one customer current account is debited and another customer account credited. So the sum total of deposits at the bank doesn't change, and the sum total of deposit money always matches the sum total of outstanding loans. (Whenever a loan is repaid, a corresponding amount of money is destroyed.)
In the real world, money that is spent can flow to other banks. To ensure the integrity of the banking system, banks are required to balance their books. One way they can do this is to compete for deposits by the interest rate they offer. So it may often be true that total deposits at a bank roughly match total lending, but the idea that deposits are lent has things backwards. Deposits are not used to create loans, the making of loans creates deposits.
(I obtained these fascinating insights from articles on Bank of England web site.
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A current account balance and a loan account balance both represent an amount of debt. The current account balance is an amount owed to the customer by the bank, while the loan account is an amount owed to the bank by the customer. All modern-world money is debt, but not all debt is money. The debt represented by the current account balance is money because it is portable, it can be transferred around the banking system. The debt represented by the original loan is not money, because it is not similarly portable.
If you imagine a simplified scenario where there is only one bank in the world and deposits are the only kind of money, when the money created is spent, all that happens is that one customer current account is debited and another customer account credited. So the sum total of deposits at the bank doesn't change, and the sum total of deposit money always matches the sum total of outstanding loans. (Whenever a loan is repaid, a corresponding amount of money is destroyed.)
In the real world, money that is spent can flow to other banks. To ensure the integrity of the banking system, banks are required to balance their books. One way they can do this is to compete for deposits by the interest rate they offer. So it may often be true that total deposits at a bank roughly match total lending, but the idea that deposits are lent has things backwards. Deposits are not used to create loans, the making of loans creates deposits.
(I obtained these fascinating insights from articles on Bank of England web site.
)I'm in complete agreement with you. But only when applied to BOE. Many of the world's banks do not operate in this fashion.
High street banks should not be in a position of money creation. Ever since the Tories threw regulation out the window UK banks have become dependant on free money, thereby inflating asset prices and building up debt burdens.
The integrity of the banking system has long been broken. That became clear during the credit crisis.
Paper fiat only has value because we agree it has value. I started this thread because I saw another system far more efficient than paper money or gold. A system that we can all agree on that is not open to ledger manipulation and is independent of government politics.
The current money system that removes wealth from individuals to benefit of the few that control it is clearly not fit for purpose. Change is coming like it or not.
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