A look at Money
Where does money originate, where does it come from? Not a question most people often think about, which is odd since they use money every day of their lives in some way or form.
In the United Kingdom, the Royal Mint is responsible for coining and the Bank of England is responsible for bank note issue. But it’s not as simple as that.
Each and every pound and penny in circulation in the UK represents an equivalent pound or penny of debt. Yes that’s right, our currency is symbolic of debt. How’s this?
Well, all money is loaned into existence. Government borrows, banks borrow, and individuals borrow. The government borrows by selling bonds (repayment contracts) to banks and individuals at home and abroad, banks borrow from the Bank of England by selling bonds to it and individuals borrow from banks by exchanging their promise to pay for money to buy a house, car, or simply for a personal loan.
The interesting thing is that every loan that comes from a bank or building society is created from the signature of the borrower. To put it simply, this is how it works. You walk into a bank to get a loan, and end up signing a loan agreement or promissory note. This note is effectively exchanged for brand new money. This happens because the note is an asset to the bank since you will be making payments based on it. So the note is an asset, and a liability is created off of it. This liability is in the form of a loan account or drawing account. The bank can then write a cheque off of this new account to pay the seller of the house or car, or if it is a personal loan, this cheque will be given to you to be deposited in whatever bank you choose.
The same concept applies to loans from the Bank of England. If the UK government wants to borrow money they issue bonds on to the markets, and the Bank of England often ends up buying some of these bonds. When this happens, the same process happens as with the bank – the bond is an asset and the Bank of England credits a reserve account of a bank, then this bank credits a deposit account, and thus the seller of the government bond is paid with brand new money.
It is important at this juncture to understand that every high street bank has a reserve account with the Bank of England. Now this account serves many purposes. The bank can buy bank notes with this account, or it can use it to clear cheques with other banks. The reserve account also serves as bank capital to support the issuing of new loans from the high street bank.
The essential thing to understand here about banks is that they essentially cheat in the game of business. Any other business would have to pay for things with money that it makes from other business activities, but not a bank. As soon as a bank receives any asset, new money can be created by it in the form of bank deposits In order to pay for the new asset.
However the limit on the amount of deposit account balances that these high street banks can create comes because banks need enough central bank money (bank notes, coins and reserve account credits) to support the clearing of transactions and customers’ withdrawals of money.
So basically a bank has some bank notes and reserve balances, and issues loans to customers. These customers will want to withdraw their money eventually and/or send it to other banks through writing cheques and electronic transfers. Because of this every bank needs to make sure it has enough money to allow this to happen, so yes, there is a limit on how much deposit money a bank can create through the issuance of loans.
When you write a cheque, your account balance goes down. Your bank’s reserve account also goes down. The payee’s bank’s reserve account goes up and subsequently the payee’s bank account goes up. That is basically how electronic transfers and cheques clear through the banking system. You can therefore now see that it is important that banks have enough reserves (cash and reserve account balances) in order to clear transactions and allow depositors to withdraw their money.
The overall national difference between the amount of reserves available (cash, coin and bank reserve accounts) and the amount of bank deposit credit issued is the difference between the broad money supply and the narrow money supply. If everyone was to simultaneously rush down to their bank and withdraw all their money the bank would not have enough reserves to satisfy the depositors needs.
Therefore the balance on your bank statement does not represent money (cash or coin). Rather it represents your claim or interest in the reserves of your bank. I therefore find it easier to think of bank deposits as chequebook money, rather than real money (cash and coin).
Every time a bank receives new deposits, you are allowing that bank to make new loans to other people essentially backed by the money you deposited, since the bank now has more reserves to satisfy their deposits and can therefore increase their deposits through making loans to other customers.
If you have understood all of this so far, you really are amazing. It took me several months to fully grasp the banking system and even now there are some things which I do not understand, like where loan capital repayments go and how exactly a cash machine works. However most of this is irrelevant to a fundamental knowledge of banking.
If you understand what I have written so far, you will now understand more about money and banking than the general public, the MPs in Parliament and most of the government put together! VERY few people understand banking, luckily for the banks!
So let us look into mortgages a little more, since this is where a lot of people’s money goes each month. Yes, the amount of the mortgage IS created out of thin air i.e. by the borrower’s promise to repay, and yes the bank gets to seize your house if you do not pay them back on this loan money that they created out of thin air. But fraud aside, I will tell you the technicalities of the mortgage.
The first thing is the bank assesses your credit reports to see if you are going to make them a profit or not. The next thing they do is have you sign documents, which is your promise to “repay” the amount they “loaned” you. They then record this as an asset, and a drawing liability account is set up full of new money, for the amount of the “loan”. A cheque is then drawn off of this account to pay the seller of the property.
Now your loan is worth money. Banks will often sell the loan securities they now hold to other banks or individuals and make a nice lot of money on that. So they have now been paid for the mortgage. In this event, the bank acts as a collecting agent for the person that bought the mortgage from the bank, and a certain percentage of the income goes to this person.
After 25 years the mortgage is paid off. Now the money that the bank created to fund the loan (deposit account money) has been converted to real money, since the bank got paid through electronic transfers. This means that their reserves have increased and what did they risk? NOTHING. This is how bankers can get paid such big salaries and bonuses. Banking really is the best business to go into!
Now the technicalities of how the money that was created to fund the loan is destroyed are currently a mystery to me as it probably involves some complicated bookkeeping. But essentially what has happened is this:
So basically the bank is permitted to increase its money through simple bookkeeping tricks while giving you the illusion that they are risking customers’ deposits and lending you money that other people deposited.
Now for the second chapter of this piece, we move on to the bigger picture with regards to money. The first thing to note is that since all money is representative of debt, if all debts were to be paid off there would be no money left over in the financial system.
The second thing to note is that therefore all countries are bankrupt, since all money supplies are debt based. If you want solvency you will have to go to the international, where they still have gold at the Bank for International Settlements. The rest of the modern world left the gold standard in the 1930s.
The reason the countries are bankrupt is because the definition of insolvency is not having enough money to pay debts, and there is not enough money out there to pay off all the debts of everyone in the country, since the amount of deposit money greatly exceeds the amount of real money in circulation, and this deposit money is what mortgage and loan debts are based on.
Hopefully by now you are beginning to see the bigger picture. Now on a lower level all bank notes are not actually money, they are promissory notes and liabilities of who ever sign them. In the UK, that would be the Bank of England. In the US, it would be the Treasury and Federal Reserve jointly.
This opens up a big question. If people accept debts of the central bank as payment, then why can’t the people bypass the central bank and write promissory notes of their own? If the people, through their signatures, are the sponsors of all the money of the society, then why do they have to be enslaved by their creation?
Where does money originate, where does it come from? Not a question most people often think about, which is odd since they use money every day of their lives in some way or form.
In the United Kingdom, the Royal Mint is responsible for coining and the Bank of England is responsible for bank note issue. But it’s not as simple as that.
Each and every pound and penny in circulation in the UK represents an equivalent pound or penny of debt. Yes that’s right, our currency is symbolic of debt. How’s this?
Well, all money is loaned into existence. Government borrows, banks borrow, and individuals borrow. The government borrows by selling bonds (repayment contracts) to banks and individuals at home and abroad, banks borrow from the Bank of England by selling bonds to it and individuals borrow from banks by exchanging their promise to pay for money to buy a house, car, or simply for a personal loan.
The interesting thing is that every loan that comes from a bank or building society is created from the signature of the borrower. To put it simply, this is how it works. You walk into a bank to get a loan, and end up signing a loan agreement or promissory note. This note is effectively exchanged for brand new money. This happens because the note is an asset to the bank since you will be making payments based on it. So the note is an asset, and a liability is created off of it. This liability is in the form of a loan account or drawing account. The bank can then write a cheque off of this new account to pay the seller of the house or car, or if it is a personal loan, this cheque will be given to you to be deposited in whatever bank you choose.
The same concept applies to loans from the Bank of England. If the UK government wants to borrow money they issue bonds on to the markets, and the Bank of England often ends up buying some of these bonds. When this happens, the same process happens as with the bank – the bond is an asset and the Bank of England credits a reserve account of a bank, then this bank credits a deposit account, and thus the seller of the government bond is paid with brand new money.
It is important at this juncture to understand that every high street bank has a reserve account with the Bank of England. Now this account serves many purposes. The bank can buy bank notes with this account, or it can use it to clear cheques with other banks. The reserve account also serves as bank capital to support the issuing of new loans from the high street bank.
The essential thing to understand here about banks is that they essentially cheat in the game of business. Any other business would have to pay for things with money that it makes from other business activities, but not a bank. As soon as a bank receives any asset, new money can be created by it in the form of bank deposits In order to pay for the new asset.
However the limit on the amount of deposit account balances that these high street banks can create comes because banks need enough central bank money (bank notes, coins and reserve account credits) to support the clearing of transactions and customers’ withdrawals of money.
So basically a bank has some bank notes and reserve balances, and issues loans to customers. These customers will want to withdraw their money eventually and/or send it to other banks through writing cheques and electronic transfers. Because of this every bank needs to make sure it has enough money to allow this to happen, so yes, there is a limit on how much deposit money a bank can create through the issuance of loans.
When you write a cheque, your account balance goes down. Your bank’s reserve account also goes down. The payee’s bank’s reserve account goes up and subsequently the payee’s bank account goes up. That is basically how electronic transfers and cheques clear through the banking system. You can therefore now see that it is important that banks have enough reserves (cash and reserve account balances) in order to clear transactions and allow depositors to withdraw their money.
The overall national difference between the amount of reserves available (cash, coin and bank reserve accounts) and the amount of bank deposit credit issued is the difference between the broad money supply and the narrow money supply. If everyone was to simultaneously rush down to their bank and withdraw all their money the bank would not have enough reserves to satisfy the depositors needs.
Therefore the balance on your bank statement does not represent money (cash or coin). Rather it represents your claim or interest in the reserves of your bank. I therefore find it easier to think of bank deposits as chequebook money, rather than real money (cash and coin).
Every time a bank receives new deposits, you are allowing that bank to make new loans to other people essentially backed by the money you deposited, since the bank now has more reserves to satisfy their deposits and can therefore increase their deposits through making loans to other customers.
If you have understood all of this so far, you really are amazing. It took me several months to fully grasp the banking system and even now there are some things which I do not understand, like where loan capital repayments go and how exactly a cash machine works. However most of this is irrelevant to a fundamental knowledge of banking.
If you understand what I have written so far, you will now understand more about money and banking than the general public, the MPs in Parliament and most of the government put together! VERY few people understand banking, luckily for the banks!
So let us look into mortgages a little more, since this is where a lot of people’s money goes each month. Yes, the amount of the mortgage IS created out of thin air i.e. by the borrower’s promise to repay, and yes the bank gets to seize your house if you do not pay them back on this loan money that they created out of thin air. But fraud aside, I will tell you the technicalities of the mortgage.
The first thing is the bank assesses your credit reports to see if you are going to make them a profit or not. The next thing they do is have you sign documents, which is your promise to “repay” the amount they “loaned” you. They then record this as an asset, and a drawing liability account is set up full of new money, for the amount of the “loan”. A cheque is then drawn off of this account to pay the seller of the property.
Now your loan is worth money. Banks will often sell the loan securities they now hold to other banks or individuals and make a nice lot of money on that. So they have now been paid for the mortgage. In this event, the bank acts as a collecting agent for the person that bought the mortgage from the bank, and a certain percentage of the income goes to this person.
After 25 years the mortgage is paid off. Now the money that the bank created to fund the loan (deposit account money) has been converted to real money, since the bank got paid through electronic transfers. This means that their reserves have increased and what did they risk? NOTHING. This is how bankers can get paid such big salaries and bonuses. Banking really is the best business to go into!
Now the technicalities of how the money that was created to fund the loan is destroyed are currently a mystery to me as it probably involves some complicated bookkeeping. But essentially what has happened is this:
- You signed the loan docs and new deposits were created, however these deposits were not backed by any real money (cash, reserves or coin)
- When you made payments they cleared through electronic transfer and therefore the lending bank’s reserves went up
- When the process was complete (debt paid off), the deposit money that was created to fund the loan gets wiped off the books of the financial system entirely
So basically the bank is permitted to increase its money through simple bookkeeping tricks while giving you the illusion that they are risking customers’ deposits and lending you money that other people deposited.
Now for the second chapter of this piece, we move on to the bigger picture with regards to money. The first thing to note is that since all money is representative of debt, if all debts were to be paid off there would be no money left over in the financial system.
The second thing to note is that therefore all countries are bankrupt, since all money supplies are debt based. If you want solvency you will have to go to the international, where they still have gold at the Bank for International Settlements. The rest of the modern world left the gold standard in the 1930s.
The reason the countries are bankrupt is because the definition of insolvency is not having enough money to pay debts, and there is not enough money out there to pay off all the debts of everyone in the country, since the amount of deposit money greatly exceeds the amount of real money in circulation, and this deposit money is what mortgage and loan debts are based on.
Hopefully by now you are beginning to see the bigger picture. Now on a lower level all bank notes are not actually money, they are promissory notes and liabilities of who ever sign them. In the UK, that would be the Bank of England. In the US, it would be the Treasury and Federal Reserve jointly.
This opens up a big question. If people accept debts of the central bank as payment, then why can’t the people bypass the central bank and write promissory notes of their own? If the people, through their signatures, are the sponsors of all the money of the society, then why do they have to be enslaved by their creation?
