Where does the money that a bank lends come from?

 

Where does the money that a bank lends come from?

By Agustín Perozo: "If people understood how our financial system works, I think there would be a revolution tomorrow morning." Henry Ford in 1922.

I asked that same question to many people from different sectors (not economists, of course) ... most of them answered me: depositors, investments, loans from other financial institutions, services, rates, currencies, fees, etc. Of course, others answered that they simply did not know.

As we have access to a lot of virtual information, I consulted the internet for data that responded in a simple and digestible way in a few minutes so that everyone could continue their search. I mean lay people in economics and finance, like me.

I started with 100% reserve banking, which is a system by which banks must maintain reserves for 100% of demand deposits and other liabilities immediately due, so that if all depositors simultaneously demanded withdrawal Of these liabilities banks could meet these demands. The same does not happen with the liabilities due for term, since it does not imply any contractual breach not to return them before they are due.

One of the most important banks to sustain this system with continuity was the Bank of Amsterdam, which maintained it for more than 150 years, and thanks to this in 1672 it was able to return the money from the deposits to depositors who required it en masse. This system contrasts with the «fractional reserve banking» which is the prevailing system today and the reason for this article.

This takes me back to the crisis in the Dominican financial sector in 2003, where three large banks in the system collapsed, creating a gigantic financial hole that the Central Bank assumed, dramatically increasing the so-called quasi-fiscal deficit (by quasi-fiscal debt, it is understood that one that originates in annual losses from the Central Bank, which are transferred to the Government and become public debt).

Let's clarify a point: a financial elite controls, together with the large international corporations, the States and their economies. They do not create more value but control the sources of money within a pyramid where that elite is at the top and we are at the bottom; above us the governments, to which the control mechanisms (police, armies, judiciary, political power, etc.) and collection mechanisms (via taxes, tariffs, tariffs, etc.) have been granted.

Whether we agree or not, they are imposed on us all within a predatory system of natural and human resources. The elite at the top control the banking system. Therefore, they have access to loans with privileged rates. They are the puppeteers of the big corporations.

 "Banking is necessary. Banks are not."

Let's continue…

When we go to a bank and request a loan of 50,000 pesos and we are eligible and approved, the bank actually writes in your account that there are already 50,000 pesos. They do not mint money or print banknotes or use any precious metal as collateral. They simply make an accounting entry in their computerized system indicating that your account has 50,000 pesos.

From that moment you start paying interest on that money that did not exist, does not exist, and will not exist.

It turns out that banks lend up to nine times the amount of what they keep in their vaults, via our deposits, which are loans to the bank from us (and if the legal reserve is 10%), thanks to the loan known as fractional reserve .

It works like this: the Central Bank of any country is allowed to determine the amount of money that a bank must have in its reserves, which is the legal reserve. The cash ratio, also called the bank reserve ratio, legal reserve ratio, reserve ratio or legal reserve, is the portion of a bank's deposits that must be kept in liquid reserves, and therefore cannot be used for investments or loans.

In other words, it is nothing more than the reserve of a percentage of the money that financial intermediation entities receive as deposits from savers, that is, banks, savings and loan associations (AAyP) and savings and credit corporations. and that it must be preserved either in the Central Bank as custodian or in its own institutions.

If you deposit 100,000 pesos in the bank, the bank separates 10% of the legal reserve, that is, 10,000 pesos, and then operates in the market with the rest. Now another person comes to the bank and asks for a loan of 90,000 pesos to buy a motorcycle. At that time, the bank grants this loan for 90,000 pesos of the 100,000 pesos of the deposit you had created: the 90,000 pesos "disappear."

"I do not think you can trust bankers to control themselves. They are like heroin addicts." --C. Munger, 

 

 

Then that person pays another for the motorcycle, who enters the amount in that or another bank, which does not matter, since it is the same central banking system. These 90,000 pesos are considered a new deposit and the same process continues successively. The money is re-deposited and lent again until the initial deposit of 100,000 pesos becomes 1,000,000 pesos (yes, a million pesos).

The banking system has just created 900,000 pesos simply by lending the money.

It all started with the goldsmiths of the 17th century when people came to them to trade gold. The metal was too heavy and risky to carry from place to place. So people started storing it in vaults and trading receipts. They were the first tickets. With only a few withdrawing their gold at certain times, the vault owners, basically the new bankers, began creating receipts for gold that they didn't actually have. Then they would lend those receipts and apply interest to the money they borrowed… to the gold that they didn't really have.

Thus was born the fractional reserve system. In this system the bankers manage to make money where there is nothing while the rest of us have to work to earn it, which has caused a modern form of servitude where the mass of society works to pay its debt to the banks.

Where is that money?

The answer is simple: that money does not exist, it is just debt that is borrowed infinitely many times, which creates more debt, so it is a pyramid system and we already know what happens with “Ponzi” schemes. Banks speculate with other people's money and only care about your debt. The more people in debt, the more likely they are to make more money.

The 900,000 pesos mentioned above, created from scratch from an initial deposit of 100,000 pesos, are debt. It is worth noting that if each and every person who has deposited tried to withdraw at the same time, the bank would not be able to give them to them as it does not have them. The bank only has 100,000 pesos in reserve (10% of legal reserve).

Said in silver, it is equivalent to the counterfeiting of currency but without penal consequences due to the privilege mentioned. Not even the fastest printer in the Mint can make that much money so efficiently.

Pepe Mujica criticizes this crude capitalism: «Stop fucking around. The market god is the fanatical religion of our age. I don't know what the hell for there are a bunch of old men who keep wanting more and more money ... why don't they stop fucking if they're going to die like any son of a neighbor? », And asks to hold the market, including the financial one, at interest human. He affirms that “we have to make them understand that accumulation is not living longer, because what is growing the most is the concentration of wealth and excess wealth. We are going to an ‘ecological holocaust’ and they are making a gigantic frying pan to fry us.

In what I think about monetarism and how that debt generates money supply and M1-2-3 aggregates, I reflect on the sentence of Thomas Hobbes: «To this conflict of man against man, this is also consequential; that nothing can be unfair. The notions of good and evil, justice and injustice, have no place here. Where there is no common power there is no law, where there is no law there is no injustice. Taxation and fraud are the cardinal virtues in this conflict.