"Banks actually create money when they lend it. Here's how it works: Most of a bank's loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times."
This sounds innocent enough, but notice the peculiar nature of the money that banks create. The money exists entirely as debt. When you take out a loan from a bank, you owe the money back to the bank. With interest.
Notice that the bank does not loan you money that it has sitting in some vault. When you take out a loan, the bank merely credits your account. It makes credit appear. In exchange for your new indebtedness (that, after all is what your loan is, a debt that you owe to the bank), you get to put up collateral, often your home.
If you pay back the loan, then the bank possesses the money (your payment), which it now owes to no one, even though your incurring a debt brought the money into existence in the first place. The bank also possesses the interest you paid.
If you don't meet the terms of the loan, then the bank takes possession of your collateral, a real asset that it acquires through no risk or sacrifice on its part.
For these reasons, it cannot be said that banks earn their money. To say that they do is to obliterate any sense of the word, "earn". The money-creation system described here (fractional reserve lending of monetized debt), subverts the capitalist virtue of earning one's money. Banks might "earn" their money, but they do not earn it. Banks are the enemy of capitalism, and the capitalist enterprise needs to rid itself of the monetary parasitism of private banking.
Hehm, interesting post, but "When you take out a loan, the bank merely credits your account. It makes credit appear" is not correct: a bank can only transfer money, and cannot simply change your account.
ReplyDeleteBtw great blog!
(come to tumblr and let us reblog you ;)
Banks not only transfer money, but also originate it, as debt. The "money" in your pocket is monetized debt. Printed bills include the words, "Federal Reserve Note" (I'm assuming you're in the U.S.A.). A "note" designates a debt. That's why you'll see monetary reform advocates proposing "debt-free money."
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