Money Series - Part 3 - Money According to Your Bank

In part two of the money series, we touched on the incompetence of politicians and policy makers when it comes to knowledge about how money is created. But surely the bank must know what is going on?

The bank management and higher-end staff is probably well equipped with information about how the bank operates. The bank personnel on the floor might not be so lucky. Might it be that the bank is not keen on spreading the knowledge of money creation since the bank profits heavily from its very existance?

By deceiving the public with the complexity of obscure economic models, the straightforward notion of money being created out of thin air when a loan is granted can be hidden from the public.

A large part of the information problem can be derived from economic modelling in which money and money creation is often excluded or forgotten. By not including money in the models, the models become flawed, as has been evidenced during the last years. It can however be assumed that the bank is thankful that money and money creation isn't discussed as one of the potential reasons of the financial melt-down. 

The public perception is that the bank is a middle-man between deposits and loans. The bank is happily spreading confusion by insinuating that customers have deposited money that is then loaned out.

This might have been true when gold and silver was used as money but not anymore. The banks started to loan out more deposit receipts than they had gold already in the 17th and 18th century. The banks were said to create fiat money. The term fiat is latin and means “let it be”. In the best case scenario in the early days, the bank went bankrupt after depositors claimed their gold back. In the worst case, the bank went bankrupt and the bankers were executed.

Today, the bank is not loaning out deposited money. The bank is instead assessing its customer and decides whether to grant the loan. In the exact moment the bank is granting the loan, the loan is created in the bank’s balance sheet and in the exact same moment a debt is appearing in the customer balance sheet – Out of thin air.

The banks have been very efficient in repeating the process of loaning out more money than it has available in form of deposits as soon as the last crises has been forgotten. The banks are becoming more and more sophisticated in hiding what it does. Marketing campaigns are diverting the attention from the banks core business of money creation at the same time which the bank is hiding the money creation behind a complex terminology.