The way you describe is not really creating money. You are counting the same money being deposited/loaned multiple times. If you were to net up all the positions you'd get back to a constant level (in the absence of any central bank action). So in your example the net position remains £10K - the first bank has a net position of £1K (+10K, -9K), the second a net position of £900 (+9K, -8.1K) and there's £8,100 lent onwards. There's no extra money in the economy here - you're just counting some of it multiple times. Summing up all the deposits etc. does have some meaning, which is why economists do it.

To come back to my rloriginal questionrl, in reality where banks do not create money [ifrom nothing[/i, when a loan is repaid the money supply is reduced as that money is being counted one less time. Back to your example if the second bank is repaid and then repays the 9K to the first then the first bank now has £10K and that's your lot. The money the bank had "created" has now been "destroyed", if you like that terminology. I remain intrigued as to how LeighGionaire believes this works though (although I suspect he hasn't actually thought it through).

None of this makes interest in anyway special from any other charge any business makes for its products or services.



They cannot pay all their depositors at the same time. A bank which could do so would be unable to pay any interest on deposits as it would be unable to make any money from the deposits. They would have to charge a fee for holding the money just to cover their overheads - you'd essentially just be renting some space in their safe. The only reason banks pay people for depositing money is because they (believe) they can make more money investing it themselves.

Yes.

They get to buy their services with their big, tax payer funded, bonus payouts. So they do indeed get the chicks for free because you are paying for them instead.

Forget the fractional reserve system, thats from yesteryear.

Banks now just create money from nothing, then go into the interbank lending markets and loan the money needed to cover their reserve ratios. That's how Northern Rock was sunk, nobody would lend them the money.

They were borrowing money on the markets. That's just the same as me borrowing a fiver from you.

In my opinion understanding how money is created and destroyed is the number one political question.

Why do we let private banks control the money supply? Why do governments continue to borrow debt based money from private banks when they could create the money themselves?

Banking 101 www.positivemoney.org.uk/how-ban ... ce-sheets/ This is my understanding of how the banking system works at present. If anybody can point out any inaccuracies in the article I'd be interested to hear them.

Banking 101 www.positivemoney.org.uk/how-ban ... ce-sheets/ This is my understanding of how the banking system works at present. If anybody can point out any inaccuracies in the article I'd be interested to hear them.