1. Money is not a thing in itself (like mud or energy or clouds) it is a unit of measurement, like inches measure length, kilograms measure mass and so on.
2. Money is a measurement of indebtedness. If one person has 'money in the bank' that is only possible because somebody else owes the bank money.
3. Gold bugs please note, gold is not 'money' for these purposes, it is an actual valuable thing.
4. Lefties please note, bank notes are an asset, but the flip side is that the government owes the holder that money. Bank notes and government debts are not magically 'debt free'.
5. Banks have very little of their own money, and they don't even have to take deposits to make loans. The loans create the deposits.
- step 1, bank gives one person a check (or whatever its electronic equivalent is) to buy a house
- step 2, that persons buys house and gives check to the seller
- step 3, seller deposits check back with bank.
At end of the day, the banks' loans and deposits have increased by the same amount.
6. So really, banks are just glorified debt collectors, they collect the monthly mortgage payments from all the borrowers and make them available to the depositors. Banks just record a pre-existing state of affairs.
7. It is important to note that total bank lending is limited only by people's willingness to borrow. That is what creates the indebtedness of which money is merely a measure. The banks do not create the indebtedness, they just measure it and make a record of it. To say that banks 'create money' is only true in bookkeeping terms, but they have no more created it than Ole Romer created the speed of light.
8. Consider this simple example, a UK bank sets up a branch in Darkest Africa, how much money can it create? None because nobody has any income to repay anything and there is nothing worth buying.
8. So where does the underlying indebtedness come from? Easy, all adults who do not own land (yet) are deeply indebted to those who own land. The system says that they have to hand over several hundred pounds a month for the rest of their lives merely for the right to walk the earth. That is a massive great debt that each adult is saddled with, which vastly swards student debts.
9. People who finish uni moan (probably rightly) about being saddled with tens of thousands of pounds of tuition fee/student loan debts. But they ought to realize that they are also carrying a debt of hundreds of thousands of pounds, being all the rent they will have to pay in future. Just because this debt is not written down anywhere does not mean it does not exist. So by going to university, their total initial debts are only one-tenth higher than the initial debts of school leavers.
10. The only way to free yourself from the liability to pay rent in future (a real but unrecorded liability) is to take out a mortgage (a real AND recorded liability), a very similar liability only with, hopefully, a limited number of years until it is paid off, even if that is half a lifetime.
11. So while in bookkeeping terms, banks appear to create money by splitting the zero, banks are just glorified debt collectors on behalf of landowners. The banks did not actually create that indebtedness.
In case I am going too fast, consider a town where everybody has a right to a council house for £80 a week, which is a fair price to pay as it covers the actual physical running costs. How much money/debt is there on paper? None, because nobody in that has a mortgage. Are school and uni leavers in that town saddled with a massive debt i.e. future housing costs? Nope. But what happens if the council decides to sell off all the housing cheaply to their current tenants and not build anymore..?
Debate Magazine
