When a bank “loans” money to buy a house the bank uses your promise to pay them as backing to create new money.
……This means that although this arrangement is known as a “bank loan” this arrangement is not a loan.
It sounds crazy? Below is an excerpt from “Modern Money Mechanics” which was published by the Federal Reserve Bank of Chicago
“Who Creates Money?
Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank. The actual process of money creation takes place primarily in banks.
As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts. In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency……”
The full text can be purchased at amazon here (or you can google and easily find it online) .
This information as well as others can be found in Money As Debt is a Film by Canadian Paul Grignon which explains the subject very clearly. The film starts by explaining how this system came into being and how it works and then later the impacts on the economy as a whole.
The film above does make some simplifications in order to cover this complex subject and they are discussed by Paul Gignon here
Other posts on economics and finance below
Money and finance is a topic that affects all of us. If we do not understand it the we leave ourselves open to being taken advantage of by those who do.
There is a great deal of fallacious information in the mainstream media on economics this is partly why I find it so interesting, if you liked this post I have listed other articles about economics and finance that can be found on this site below.
Unfolding Economic Shift
How to Buy Bitcoins
Silver as a hedge against Inflation
Banks Need No money to lend you money
Is Now a good Time to buy a house?
I love to receive feedback from readers and appreciate anything you may to say on this post in the comments below
‘Money as Debt’ was an interesting video. I have always basically understood the difference between real wealth (wot u can do with your hands and mind) and financial wealth (paper promisory notes). My generation and the ‘poverty’ in which I was brought up, taught me about real wealth (as kids we had no money! made our own toys and amusements, lived off the land, wild blackberries mostly and damsons!) .
However, although I have always vaguely understood how and wot ‘money’ is, and latterly how it works), I am skeptical about conspiracy theories. People are people and society evolves by people coming up with new wheezes to improve their situation whether by might, cunning and/or knowledge. In todays society the real problem is not that people cannot see ‘the writing on he wall’, it is more that they are guided by what improves their individual situation and focus literally on those objectives that they (mostly erroneously) believe will make them happy.
It does not help that those in power, whether special interest groups, religions, corporates, pollies etc, thrive through promoting obfuscation in every aspect of modern life (Marketing is a four letter word). People are overwhelmed with false or misleading information, it is no wonder people can’t see the wood for the trees! Videos like the one I just watched are ‘lost’ in the swamp of information overload. Ah well, thats modern life!!!
Thanks for the feedback Harry It brightens up my day everytime someone takes the time to comment on the site.
I’m glad you liked the video I think it did quite a good job of turning a simple topic that has been made deliberately complex simple again.
I agree we are overwhelmed with a huge amount of deceptive information that can feel overwhelming. However I do believe that with a methodical approach we can get to the bottom important issues.
Personally I’m not a fan of the term “conspiracy theory” (I may write a post on that sometime) however towards the end of the videos after tyhe desciption of the history of money I feel it makes a few too logical leaps without the evidence to back it up. However I am convinced that the explanation of money creation in the video is true especially when the video is triangulated with the document from the Chicago Federal reserve.
I am impressed that you always understood how money is created. I only worked that out a couple of years ago and really only understood the loan generation process in the last couple of weeks.
On your last but one point ” In todays society the real problem is not that people cannot see ‘the writing on he wall’, it is more that they are guided by what improves their individual situation and focus literally on those objectives that they (mostly erroneously) believe will make them happy. ”
I don’t really understand the point you are making here. Is it that people don’t know what makes them happy (partly due to fallacious messages we are assaulted with daily) and then go about living there life to achieve goals that are not in their best interest or do you mean something else?
I’d appreciate clarification on that point if you get a chance.
Thanks again for the comment