How MONEY & BANKING Really works - Part 1 (3 of 5)

Summary

The script delves into the monetary system, revealing that over 95% of money is created through bank loans and debt. It explains how banks lend money they don't possess by creating it as debt, which is accepted as currency due to government backing. The script challenges the belief that eliminating debt would boost the economy, arguing that money and debt are inseparable. It also highlights the impossibility of repaying both principal and interest from a money supply that only includes principal, leading to an escalating cycle of debt. The script questions the sustainability of perpetual economic growth, which demands increasing real-world resources and energy, and suggests that the current monetary system may be heading towards inevitable collapse.

Takeaways

• 💼 The majority of money in circulation is created through bank credit, not by government minting.
• 🏦 Banks create money by extending credit and effectively 'lending' money they don't physically hold.
• 📜 When individuals or entities take out loans, they sign a pledge of indebtedness, which is treated as money by the bank.
• 🔄 The cycle of money creation and destruction is continuous, as new loans are made and old ones are repaid.
• 🤝 Governments play a crucial role in the money creation process by enforcing legal tender laws, allowing bank credit, and protecting the money system.
• 💡 The concept of money is largely based on trust and the belief in the value of IOUs (I Owe You), which are treated as assets by banks.
• 🚫 The current financial system is built on debt, implying that without debt, there would be no money.
• 📉 The Great Depression exemplifies what can happen when the money supply shrinks due to a decrease in loans.
• 🔢 Banks only create the principal amount of a loan, not the interest, leading to a perpetual shortfall in the money supply to pay back loans.
• 🌐 The economy's reliance on constant growth and the creation of new debt to service old debts creates an unsustainable cycle.
• 💸 Low interest rates and aggressive credit offerings are tactics used to stimulate borrowing and prevent economic collapse.

Q & A

What typically accounts for less than 5% of the money in circulation?

Government-created money, such as fiat currency, typically accounts for less than 5% of the money in circulation.

How is more than 95% of money created today?

More than 95% of all money in existence today is created by banks through the process of lending, where someone signs a pledge of indebtedness to a bank.

What role does the government play in the banking money system?

The government supports the banking money system by passing legal tender laws, allowing private bank credit to be paid out in government currency, enforcing debts through courts, and passing regulations to protect the money system's functionality and credibility.

What is the real value involved when someone signs a loan or mortgage?

The real value involved when someone signs a loan or mortgage is the pledge of payment backed by the assets pledged to be forfeited if the payment is not made, which is essentially an IOU.

How does a bank create a matching debt to a borrower's loan?

A bank creates a matching debt to a borrower's loan by entering a few keystrokes on a computer, which results in a liability on the bank's balance sheet and a corresponding credit in the borrower's account.

Why is it impossible for everyone to pay back both the principal and interest on loans?

It is impossible for everyone to pay back both the principal and interest on loans because banks create only the principal amount as credit, not the money to pay the interest. The interest must be obtained from the existing money supply, which contains only principal amounts.

What happens to the money supply during periods of decreased lending, like the Great Depression?

During periods of decreased lending, such as the Great Depression, the money supply shrinks drastically as the supply of loans dries up, leading to a significant reduction in the overall money in circulation.

Why do interest rates remain low, and why are credit cards frequently unsolicited?

Interest rates remain low, and credit cards are frequently unsolicited to encourage borrowing and spending, which helps to stave off the collapse of the monetary system by creating more debt money to satisfy demands for money to pay off previous debts.

What is the relationship between economic growth and the real-world resources?

Economic growth requires the perpetual use of real-world resources and energy, with more goods and services being produced each year. This growth is exponential, not linear, and it demands an escalating consumption of resources to maintain the system.

Why are governments, corporations, and individuals heavily in debt to bankers?

Governments, corporations, and individuals are heavily in debt to bankers because the money supply is largely created through debt. As debt is potentially unlimited, so is the supply of money, leading to a situation where those who produce real wealth are in debt to those who lend the money representing that wealth.