From State Debt to State Money

Today’s money system

World wide bankers now have a money system, which is based on making money out of thin air. Nearly all money in bank accounts consists of thin air. There is only a tiny little fraction of real money in circulation. How is that?

Banking is bookkeeping

Each time a banker supplies a loan he does not hand out money, but just a balance. The loan consists of nothing else but numbers in the banker’s books. Let’s say you want a loan from your bank, the “Hard Up Bank”. On one side of the ledger the banker writes that you owe him 250,000 Euros and on the other side that he owes you 250,000 Euros. You see the amount appear in your account. You can spend it. Buy a little home? Okay, buy a little home.

Say you write a cheque to the seller of the house. He will bring that cheque to his bank, the “Red Shield Bank”. That bank now wants to exchange the cheque at your bank, that is to say, against real money. Red Shield knows how his colleague has juggled the numbers from his hat and won’t put up with thin air.

So now “Hard Up Bank” will have to come up with real money. However, in practice, this is not necessary most of the time, because Red Shield also supplies loans continually. Part of these loans will be spent with customers of Hard Up Bank. So, what happens is that Red Shield exchanges his claim of 250,000 Euros on Hard Up Bank against a claim of 250,000 Euros of Hard Up Bank on Red Shield.

Interest on thin air

This way banks can bring into circulation more loans all the time. One can of thin air is exchanged against another one and the customers don’t notice how they are fooled. For, on this thin air, interest has to be paid.

Just for amusement an example where banks create millions without the need of a single cent of real money. In reality it is a bit more complex, but still.

We assume there are 3 banks which respectively serve 20%, 30% and 50% of the population. We suppose all three have the same type of customers, who have the same needs for loans and expenses. It is demonstrated that all payments the banks must execute at the moment the borrowers spend their loan are counterbalanced by the reception of these payments.

The borrowers at the first bank spend 20% of their loans with customers of their own bank, 30% with customers of Bank 30% and 50% with customers of Bank 50%. And so on. When we add all the amounts from the loans together, each bank has received as much as he created. Voilà, 100 million Euros created as balances in bank accounts without the need of one cent of real money.

When you ask bankers if they create money out of thin air, they generally reply that they only supply loans as far as they have balances in front of them. However, those balances increase automatically by the loans they supply all together.

Interbank payments

All payments proceed in the same way. When you make a payment to someone at another bank, then your banker must pay it to the other bank. But still the same day there will also be payments made by customers of other banks to customers at your bank. All these interbank payments are simply crossed out against each other.

What the banks finally pay to each other are the little differences between incoming and outgoing packets of payments. To facilitate these payments all banks have an account at the central bank. The amounts in these accounts are considered to be real money. (If they wished the banks could claim the entire amount in bank notes, as the central bank is authorized to print them.)

At the central bank the rule goes that banks must have a positive balance at the end of the day. When a banker is short of money, because he received a bit less than he paid out, he will borrow for the night from his colleague, who then has received a little more than he paid out. And when the colleagues don’t trust each other, like during the credit crisis in 2008 and now again since a few months ago, the banker can borrow from the central bank for a quarter of a percent more.

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About Rudo de Ruijter 3 Articles

Rudo de Ruijter is an independent researcher in Netherlands.

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