Money As Debt II: Promises Unleashed Page #4

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Yes, but probably only

a small proportion.

In over the long term, as long as the

bank gets its fair share of deposits...

the net amount of existing money, the bank needs

to cover its loans can theoretically be zero.

How?

Well, imagine first that the seller has

her account at the same bank as the buyer.

She deposits the buyer's

check into her account.

All the bank has to do to

complete the transaction...

is reduce the buyer's account by the same

amount and increases the seller's account.

As both accounts are just promises no

existing money is involved in doing this.

What is the end result?

The bank has created bank credit for

the borrower to the sum of 10.000$.

The borrower has bought the car that it

existed in the world of real things...

and the seller now has

that bank credit of 10.000$.

Thus, a brand new claim upon 10.000$

worth of real goods of value...

was accomplished with absolutely zero

dollars of the bank's or anybody else's money.

On top of that, the bank gets to have

all the so-called money paid back...

by the borrower's on his toil plus

interest or the bank gets the car.

Magic like this is

usually seen on stage.

So now let's examine what happens if the

seller deposits her check in a different bank.

Won't that require a transfer of existing bank

funds from the buyer's bank to the seller's bank?

Perhaps.

But it will almost certainly never

be anywhere near the whole amount...

because in effect, the banking

system functions as one bank.

To illustrate let's add another

transaction to this senario.

That same day, the seller's bank made

a similar loan to a little old lady...

who bought a mega home theatre system.

The electronic store deposited

her check at their bank.

The electronic store's bank made a similar loan

that was deposited at the original borrower's bank.

And when all the various balances were settled

the banks didn't owe each other anything.

And even if there were differences, they would have

been just a small portion of the total credit created.

So, at this point we can say that although banks dont

actually lend their depositors money as most of imagine

they still need deposits to make loans.

This is because banks need

incoming credit from other banks...

to asset their own credit

being deposited at those banks.

As long as banks keep their outgoing

credit balanced with incoming credit,

they're free to make new loans and thereby

keep creating brand new credit money.

None of it will ever have to

come out of the bank's pockets.

The bank is free to invest its own

funds in corporate and goverment bonds...

and whatever other

instruments the charger allows.

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