BANKING - FOR THE LAYPERSON
Imagine that five people (Persons A, B, C, D and E) have $100 each and they ask me to store this money for them. They trust me and want to ensure their money is kept safely.
I take their money and on my website I make an account for each person, showing how much money I have stored for them. Person A checks his account online and sees $100, and he's happy. Person B to E do the same and find $100 in their accounts.
I decide that I could put this money to good use. I take the $500 that is entrusted to me, and buy some 1-year term deposits with the government. After 1 month, I earn interest of $5. Now I have $505, but only $5 cash is mine, the remaining $500 belongs to Persons A to E.
After 1 month, Person A checks his account online and still sees $100, and he's happy. Person B to E do the same.
Then it gets interesting.
I advertise that I will be giving out loans to businesses in need. ZZ Manufacturing, a business in my neighborhood, hears about this and asks for a loan of $1000. They don't want cash right now, they just want it deposited in their bank account. I agree to give them a loan with interest of $10/month.
I don't have the money in cash, but who cares? I create an online transaction and credit ZZ Manufacturing's Account with $1000. ZZ Manufacturing sees a balance of $1000 in their account, with a note that it is payable to me after 1 year. They call me with a thank you message.
And then.
At the end of 1 month, Person A has a cash need, so he comes to me and asks for his $100 back. I had put that money in term deposits with the government, and I can't withdraw that without incurring a significant penalty. What do I do?
I call my friend, Big Boss (BB). BB is special because he has a printing machine and he has been given authority by the government to print money. BB prints $100 and gives it to me. I give the newly printed $100 to Person A. He's happy.
I still have term deposits of $500 with the government, plus interest earned of $5, so a total of $505. I also expect to receive $1000 from ZZ Manufacturing. So my total assets after 1 month are $1505. On the other hand, I owe $400 to Persons B to E. My net wealth is therefore $1105, literally created out of thin air!
And I expect to start receiving $10/month in interest from ZZ Manufacturing.
This is too good. Almost addictive. So I keep doing this over and over again. I multiply and grow the overall money that people and businesses have in the economy. They don't realize this, but most of that money is in the form of loans due to me.
I, my dear friends, am the bank.
And this is a simple illustration of how money is created in the economy by those who control the money supply and eventually benefit from it.
I take their money and on my website I make an account for each person, showing how much money I have stored for them. Person A checks his account online and sees $100, and he's happy. Person B to E do the same and find $100 in their accounts.
I decide that I could put this money to good use. I take the $500 that is entrusted to me, and buy some 1-year term deposits with the government. After 1 month, I earn interest of $5. Now I have $505, but only $5 cash is mine, the remaining $500 belongs to Persons A to E.
After 1 month, Person A checks his account online and still sees $100, and he's happy. Person B to E do the same.
Then it gets interesting.
I advertise that I will be giving out loans to businesses in need. ZZ Manufacturing, a business in my neighborhood, hears about this and asks for a loan of $1000. They don't want cash right now, they just want it deposited in their bank account. I agree to give them a loan with interest of $10/month.
I don't have the money in cash, but who cares? I create an online transaction and credit ZZ Manufacturing's Account with $1000. ZZ Manufacturing sees a balance of $1000 in their account, with a note that it is payable to me after 1 year. They call me with a thank you message.
And then.
At the end of 1 month, Person A has a cash need, so he comes to me and asks for his $100 back. I had put that money in term deposits with the government, and I can't withdraw that without incurring a significant penalty. What do I do?
I call my friend, Big Boss (BB). BB is special because he has a printing machine and he has been given authority by the government to print money. BB prints $100 and gives it to me. I give the newly printed $100 to Person A. He's happy.
I still have term deposits of $500 with the government, plus interest earned of $5, so a total of $505. I also expect to receive $1000 from ZZ Manufacturing. So my total assets after 1 month are $1505. On the other hand, I owe $400 to Persons B to E. My net wealth is therefore $1105, literally created out of thin air!
And I expect to start receiving $10/month in interest from ZZ Manufacturing.
This is too good. Almost addictive. So I keep doing this over and over again. I multiply and grow the overall money that people and businesses have in the economy. They don't realize this, but most of that money is in the form of loans due to me.
I, my dear friends, am the bank.
And this is a simple illustration of how money is created in the economy by those who control the money supply and eventually benefit from it.
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