Money As Debt Page #4

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the amount of government-issued cash or equivalent

that the bank has deposited with the central bank,

plus the amount of already existing debt money

the bank has on deposit.

To illustrate this in a simple way.

let us imagine that a new bank has just started up

and has no depositors at all yet.

However the bank's investors have made a reserve deposit

of one thousand one hundred and eleven dollars and twelve cents

of existing cash money at the central bank

and the required reserve ratio is 9:1.

Step 1:
The doors open and the new bank

welcomes its first loan customer.

He needs $10,000 to buy a good used car.

At a 9:
1 reserve ratio, the new bank's reserve at the central bank,

also known as "high-powered money",

allows it to legally conjure into existence 9 times that amount,

or $10,000 on the basis of the borrower's pledge of debt.

This $10,000 is not taken from anywhere.

It is brand new money simply typed into the borrower's account as bank credit.

The borrower then writes a check on that bank credit

to buy the used car.

Step 2:
The seller then deposits this newly

created $10,000 at her bank.

Unlike the high-powered government money deposited at the central bank,

this newly created credit money cannot be multiplied by the reserve ratio.

Instead it is divided by the reserve ratio.

At a ratio of 9:
1, a new loan of $9,000 can be created

on the basis of the $10,000 deposit.

Step 3:
If that $9000 is then deposited by a third party,

at the same bank that created it, or a different one,

it becomes the legal basis for a third issue of bank credit,

this time for the amount of $8100.

Like one of those Russian dolls, each layer of which contains

a slightly smaller doll inside, each new deposit contains the potential

for a slightly smaller loan in an infinitely decreasing series.

Now, if the loan money created is not deposited at a bank,

the process stops.

That is the unpredictable part

of the money creation mechanism.

But more likely, at every step, the new money

will be deposited at a bank, and the reserve ratio process

can repeat itself over and over until almost $100,000

of brand new money has been created within the banking system.

All of this new money has been created entirely from debt,

and the whole process legally authorized by the initial reserve deposit

of just one thousand one hundred and eleven dollars and twelve cents,

which is still sitting untouched at the central bank!

What's more, under this ingenious system,

the books of each bank in the chain must show

that the bank has 10% more on deposit than it has out on loan.

This gives banks a very real incentive to seek deposits

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