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How do banks create the money supply?
• When someone takes out a bank loan the bank pretends that the borrower has paid in a deposit
• But neither the borrower nor the bank (nor anyone else) has paid in or transferred any money into the borrower’s account.
• The bank creates a fictitious deposit, and nobody is able to tell the difference – because banks are the settlement system of the economy, and we believe them to be honest accountants.
Since banks works as the accountants of record – while the rest of the economy assumes they are honest accountants – it is possible for the banks to increase the money in the accounts of some of us (those who reciece a loan), by simply altering the figures. Nobody else will notice, because agents cannot distinguish between money that had actually been saved and deposited and money that has been created ‘out of nothing’ by the banks.
This then, is also a major dustinguishing feature between credit creation in the banking system and the debasement of coinage that was implemented by monarchs in their attempts to increase the money supply: debased coins can be checked and indentified as such by experienced traders or professional assayists. However, bank credit creation is impossible to distinguish from ‘legitimate’ deposits, especially when the majority of transactions already takes place in a cashless form via the banking system