A General History Of Money And Banking

First, A Little History Of Money

I'm good at building huts. You're good at growing potatoes. (You're from the New World, where potatoes and tobacco have just been invented.) You want a hut built. I want potatoes. You say, “Build me a hut, and I'll give you potatoes.”

I see we have a connection. I build you your hut, and you give me the potatoes that we've agreed I shall get in return for my labor and materials. We are happy bunnies. But, what if I, the hut builder, don't want potatoes, and you, the potato grower, don't want a hut built? Then we have no common ground.

So we invent an exchangeable token - call it a dollar - and all of us in our community decide that a dollar is worth 1 tonne of potatoes, and it's worth one 5 meter by 5 meter hut, and it's worth 3 2-meter long tuna fish (a favorite food source of ours), and it's worth 100 square meters of farming land. It is also worth 100 of hut-cleaning and/or child-minding service. Indeed we denominate the dollar's worth in whatever commodities and services interest us, and vice versa we, as a community or as individuals reaching mutual agreement, can agree give a dollar value for any goods and services that interest us.

So that we can keep control of the issuance and transmission of tokens, we authorize an overseeing body. We'll call it a government - a body of people whose decisions and actions are given legitimacy by the consent of the community on whose behalf that government operates. They issue metal and paper tokens (and later, on-screen numbers that represent those tokens), and they punish anyone other than themselves who creates or copies (counterfeits) these money-tokens.

The value of the dollar tokens changes from time to time, as people decide they love huts more than potatoes, and potatoes more than tuna, and so on, but a central exchange is set up so that people know (officially, at any rate) what a dollar token is worth in terms of huts, potatoes, tuna, cleaning services, and so on.

And that basically is money. Different communities may have their own particular money tokens (currency) or they may agree to adopt a common currency. Where there are different currencies, an exchange rate between different currencies has to be agreed for inter-community trading and currency swapping, and this may become a specialist function of currency exchangers and exchanges. There may be an officially declared exchange rate for any particular pair of currencies, and there may be an unofficial rate (a black-market rate).

You can see a potentially major weakness in this system. The controllers of the dollar money tokens may decide simply to create new tokens, either unbeknownst to the public, or openly. Or they may manipulate the token exchange rate. For example, if I'm on the body of people who determine the various token exchange rates and I've bought a lot of tuna fish, I might want to make my tuna fish worth more tokens so that I can become rich in terms of potatoes, huts, farmland, being able to pay child-minders to look after my children, and so on, so I might ask my friends on the committee to decree, at least temporarily, that sharks are worth a lot of tokens relative to other commodities and services.

The unauthorized (and possibly concealed) issuance of new money-tokens is potentially an even greater problem, because in theory there could be no limit to such activity.

The problem then is not necessarily with money as such, but with the controllers of money, the creators of issuers of money, and the determiners of the value that money is decreed it should have when people use it, or when they exchange it for other currencies.

Now to look at banking.

So, money is a token of value where the value is determined both by supposedly authoritative diktat, and then in real life by people's actual determination of its value on a day to day basis in their transactions with other people. It is created by people appointed officially to be a community's money creators. Those people might also create additional money even if that might not be in the interest of the community. They might do it secretly. Other people may also attempt illegally to create (counterfeit) a community's money tokens.

A bank in this day and age is essentially a storage, handling and lending facility for money. Originally, however, we might say that the precursors of banks were those places and bodies of people that would store, manage and lend out any valuable commodity. Grains and cattle were perhaps the earliest valued commodities. But such a service had to be paid for by the people using those storage facilities. So for example you might have to give a percentage of, say, the grain you were putting into storage to the owners of the store.

Here is where banking in its traditional form as we understand it begins. If you give a tonne of potatoes to someone to store for you, you must pay them for the storage service they are providing you with. Likewise if you give 1000 dollar money-tokens to a bank to store for you, you should pay them for storing and protecting and guaranteeing the safety, and eventual return to you, of your money. This would be banking operated originally, especially when money was made of valuable material, such as gold and silver, that took a lot of time and effort to extract from the earth, and was rare as well, and therefore had a quantifiable time/effort/rarity value. It is worth paying someone to look after such intrinsically valuable money.

Later, when money-lending arose, and when money had only symbolic value (being merely pieces of paper and on-screen numbers), it would be different, and banks would start to pay people to place money with them.

However, human ingenuity, and human dishonesty, knows no bounds, and so the bankers - the holders of other peoples 'value', or money - developed their services further, and engaged in new activities.

There is one obvious problem with the simple banking model outlined above. Why should someone pay a bank to look after their money when they could simply keep their money hidden at home? Indeed why should they pay not to have their money at home, where they can at least check up on its existence and its security? If you give your money to a bank, you cannot physically check that your money is there. (You could ask to see your gold and silver coins, but they might show you somebody else's gold and silver coins and tell you that those coins are yours.)

Therefore the bankers realized that they would have to offer an incentive, an inducement, to people to get them to give the bank their money to look after. Either they would have to offer to look after people's money for free, or they would have to go further and offer to pay people if they would deposit their money with the bank.

The obvious problem then is that the bank is either making no money for itself, or it is losing money by paying people to deposit money with them.

So how could the banks make a profit? The solution was to take depositors' money and lend it out to people who needed it - for a business venture, for example - on condition that the money was paid back 'with interest'. In other words, if a business person borrowed 1000 dollars from a bank for a period of 12 months, they might have to pay back 1100 dollars to the bank before the 12 month period was up. And thus usury, the charging of interest, was invented. Of course prior to money's existence, the same had been done with commodities. You can borrow 10 tonnes of grain from me now for your short term needs so long as you give me back 11 tonnes.

This again is a very basic banking business model, although it now means that depositors' money is at risk. For example, if depositors place a total of 1,000,000 dollars with a bank, and the bank then lends that money to me, and I run off with the money, or I put it into a business venture that fails, or I get cheated out of the money, I have lost nothing of my own, but the depositors have lost all their money. So it is risky for depositors to place their money with people or institutions that will lend it out, but that is the way the bank aims to generate a profit to pay those depositors who place their money with the bank. The reward the depositors get has a risk associated with it.

The other benefit of placing money with a bank apart from security of storage and being able to receive interest is that banks allow for the convenient to-ing and fro-ing of depositors' money - taking it in, releasing it, transmitting it to where the depositor wants it to go, exchanging it for other currencies, and so on.

As far as interest payment and charging are concerned, a bank might say to you that if you give them 1000 dollars for a year, they will give you 30 dollars (3%) in interest on your money at the end of the year. Then the bank, having got your money for a year, will then lend it to someone for a year in return for, say 60 dollars interest (6%). In other words, the borrower can have the use of your 1000 dollars for a year, but within the year they must give the bank back 1060 dollars.

You have made 30 dollars, and the bank has made 30 dollars to cover its overheads and hopefully produce a profit for the bank's owners.

This is a straightforward business model, with depositors and borrowers generally understanding the risks and advantages of the system.

But banking developed further with …

The Invention Of Intrinsically Worthless (Fiat) Money

A 'fiat' is a decree or order. Fiat money is money that a government or bank orders to be created. (Here it might be interesting to look into the 'cryptocurrencies' that are being invented and created on the internet, which basically are non-government currencies created by individuals in such a way that they are not - at least as yet - regulated or regarded as being illegal.)

You immediately see the difference between original 'old style' money, such as gold and silver coins, and modern money, which is created on computers and perhaps printed out on pieces of paper, and also still put into coin forms but with the coins made up of low value metals. 'Old style' money required a great deal of time and effort to acquire the material with which to make it, plus the labor and equipment to form it into coins. Modern money - apart from printed money, and stamped coins, which obviously have an intrinsic value equivalent to their paper or metal content - has no intrinsic value, and it can be created by a government at will.

If for a moment I imagine myself to be a government, if it were possible for me to get into my bank account - on the internet, for example - and alter the figure that represents my current balance - at the moment it is 413.27 dollars - and alter it so that the point was moved 6 spaces to the right, with empty spaces being filled in with zeroes, and also to enter a figure of 1,000,000 into the credit column of my account in order to indicate to my bank's computer that there had been an (invented) input of 1,000,000 dollars into my account, and if my bank (and the real government that oversees my behavior and dictates what I can and cannot do) would agree not to notice or not to do anything about my account manipulation, I would then have 413,270,000 dollars in my bank account, and this would be perfectly genuine, legal, spendable money.

So modern fiat money only has the value that people believe it has, or that the authorities decree that it has. This, of course, also applied to old style, precious metal money, but the difference is that - if you exclude paper notes and low value metal coins - modern money is just government and bank created number tokens.

There is a problem here with fiat money on a psychological level. People - people in general … the populace - would be infuriated to think that governments and banks could invent as much money as they wanted, whenever they wanted, while ordinary people have to work, and speculate, and attempt to take part in business, in order to get money for themselves. Therefore governments, having in the past attempted to get away with the creation of new and excessive amounts of fiat money (think here of Nazi Germany, and Zimbabwe, where excessive new money creation reduced the value of the paper money so much that it became essentially worthless) realized that they had to appear to be offering something in return for the money that they were creating for themselves. So at the same time as they created money, they created government debt, an I.O.U. saying that the government promised to pay back the money that was being created.

As mentioned, this was done in order to keep people psychologically satisfied that there was some degree of fairness and balance in the process, but also there was another reason for adopting this approach. Double entry book keeping had been invented. All credits have to be balanced with debits. If you show, for example, plus one trillion dollars, then somewhere else you have to show minus one trillion dollars in order to balance it.

Therefore every time new money (positive) is created, negative money (debt) also has to be created to balance it out. All new money that comes into existence therefore also requires a matching amount of debt (negative money) to be created at the same time. But because debt always (in commerce, if not between private individuals) requires interest to be paid on it - and that interest is therefore also a debt obligation for the person who is receiving the positive money that is counter-balanced by the negative debt - it means that once this system of debt-plus-interest counter-balanced money-creation had been invented, an irreversible downward spiral had also been created where the amount of debt is always greater than the money that has been created. It is therefore impossible for money creating societies of the modern sort ever to pay off their debts because the amount of money created is always less than the debt obligation that was simultaneously created. So even if no new money were to be created, there simply cannot be enough money available to pay off all the debts that governments and central banks have created.

This is not necessarily as big a problem as you might imagine. Two things happen when governments and banks create excess new money and debt - which of course go hand in hand. Firstly, if too much money is created, all that happens is that values change. Something that cost you 1 dollar 10 years ago will now cost you, say, 100 dollars. Secondly, excessive money creators, who must also be excessive debtors by the very nature of the money creation system, simply default on some or all of their debts. They just say that they are not going to pay back their debts, and they are no longer going to recognize them.

So with the inflationary problem, what happens is that there will be a newly created 1 dollar bill which will be ordered (fiat) to have a value equivalent to 100 old dollars. Therefore the thing that 10 years ago used to cost you 1 dollar will now again cost you 1 dollar. As for debt, as mentioned, it is simply written off and decreed no longer to exist or be recognized.

Anyway, the system of supposedly balancing fiat money creation with simultaneous government debt creation is somewhat ludicrous. What happens in practice is that the treasury of a country's government creates an I.O.U. - let's say for 10 billion dollars - saying that it will pay back the money, with interest, over a period of time, and it then gives this I.O.U. to its own central bank, and the bank creates the money and gives it to the government. It's as if you or I were to create money and then promise to ourselves that we would get some money from elsewhere to give ourselves an amount of money, plus interest, equivalent to what we had created. The obvious point is that if we were capable of getting money from elsewhere, we wouldn't need to create it. The same applies to governments. They create money because they are incapable of getting the money they want from elsewhere. Therefore commonsense says that they will not be able - or at least it is very unlikely they will be able - to repay the debt obligations they had taken on. The system could only have integrity and be able to balance out if the central bank were able to sell on the debt to external, non-government, buyers for a figure sufficiently above the debt's face value not just to cover the amount of the debt, but also all the interest that will have to be paid on that debt during its lifetime.

All fiat, debt-based currencies collapse or suffer devaluation at some point.

Fractional Reserve Banking

As we see, governments create money by issuing debt - I.O.U.'s - in return for being allowed to create - usually through the government's central bank - new money. Countries' central banks, by the way, are not independent, even though they sometimes claim to be, but rather they are an extension of their countries' governments, supplying those governments with new money, as needed and requested by them.

Banks - usually private institutions, but sometimes state-owned - create debt and new money in a similar way. But because human nature and greed is what it is, bankers would naturally be inclined to issue an infinite, or at least unlimited, amount of debt and new money if they were allowed to. So governments have placed restrictions on the amount of debt, and therefore new money, that banks can create. In practice banks may ignore or find ways to side-step these restrictions, but officially they are supposed to keep their lending and money creation within bounds.

This is fractional reserve banking. The money that a bank keeps as its reserves needs only to be a fraction of the money that it creates in the form of debt and lends out.

The usual limit for a bank's debt and money creation might be 9 times the amount of the capital that it holds (the money that the owners of the bank have put into it, plus the money that depositors have placed with it). So, for example, if a small bank has 100,000,000 dollars of capital, it could lend, by creating debt-money, 900,000,000 dollars.

The idea of creating debt and new money out of thin air seems intuitively rather odd, but that is how our modern money system works.

Let's say ABC bank agrees to let you have a credit card - not a debit card, for which you would have to have money in a bank account to be able to use it - and they give you a credit limit of 10,000 dollars. It makes no difference whether you have a bank account with ABC bank or not, and if you do, it makes no difference how much money you have in that account. When you first get your card, that 10,000 does not yet exist. Now, let's say you go into a jewelers and buy a watch for 5,000 dollars. You hand over your card, it's put in a terminal, you enter your PIN, the jewelers are credited with 5,000 dollars, and they give you your nice new watch.

Where did that 5,000 dollars from? It was created by your bank during the sales transaction. Up to that point it didn't exist. At the point of sale it was created, and there are now 5,000 new dollars in the world (actually in the jeweler's bank account), and it is offset in book-keeping terms by the 5,000 dollars of debt, plus interest, that you have now taken on and are responsible for repaying to the bank.

And that essentially is how money is created in a modern banking system. Mortgages, business loans, personal loans, etc, all work in a similar way. The money is created at the point that the loan is taken out.

So, the job of banks is to store customers' money, perhaps pay them interest as an inducement to place their money with the bank, to create money in the form of debt that is leant to customers, and to charge interest on that debt. Of course banks these days provide a whole host of other services - currency exchange and transfer, commercial letters of credit, insurance, and a myriad other things - some of which, such as currency exchange and issuing letters of credit, can be said to come under the heading of banking, but others, such as offering building and contents insurance, are nothing to do with the core banking business model at all, but are peripheral generators of extra income for the bank.

For those of you who would prefer a history of banking with names, dates and places, I'll try as follows:

History Of Banking With Details

Prior to the invention of money, commodities such as grain and cattle were used as money, and could be stored and bartered for other commodities. There is evidence of such storing and exchange from at least 9000 BC.

Around 2000 BC in Assyria and Babylonia, stores were organized where grain could be deposited, and the store owners/managers would then lend out the grain to farmers and traders who needed it. This system is a precursor of money banking. As far as the storing and lending out of money, currency exchange, production of bills of exchange, promissory notes and letters of credit is concerned, this would appear to have evolved in ancient Greece and ancient Rome. There is also evidence of it in ancient China and India. There is evidence of trade in copper and silver, which we still associate today with coin-money to some extent, taking place in Sardinia in the 3rd millennium BC.

In Egypt from early times, granaries were set up to store and lend out grain for communities, and from about 1800 BC gold could be deposited, as in Babylonia, at temples for storage and lending out. The state controlled 'granary banks' throughout the country, and grain could be credited and debited from one store to another without having to be moved. The state took grain for itself as a form of tax.

In the 3rd, 2nd, and 1st centuries BC in Babylonia, people could deposit their gold at a temple, paying a fraction of the gold to the temple for the storage service, and the temple would then lend out the money to farmers and traders who might, for example, promise to repay the loan with grain when it had been harvested, or when the business transaction was completed. The temple could then sell the grain for gold again, or for some other commodity.

This business model is the precursor for deposit banking.

Modern banking as we recognize it seems to have evolved in medieval and early Renaissance northern Italy, in cities such as Venice, Genoa and Florence. In the latter city, the dominant banking families were the Bardi and Peruzzi families, who had branches of their banks in other parts of Europe. The most well-known (today, that is) banking family of that time, however, was the Medici. Their family's bank was established in 1397 by Giovanni Medici. Ultimately their assets and power were taken over by the German Fugger and Welser families. The oldest bank still in existence today is in Siena, Italy, and is called Monte dei Paschi di Siena. It has been in existence since 1472. The second oldest bank still in existence is Berenberg Bank in Hamburg, Germany.

The basic banking business model of the Italians was adopted throughout Europe, but innovations were made to it in Amsterdam, in the Dutch republic, in the 16th century, and in London, England, in the 17th century. In the 20th century, banks extended their activities, becoming much bigger, global, and engaging in speculative activities. During the financial crisis of the early 21st century, many of these gambling activities, often involving derivatives, resulted in huge losses, bringing down several banks, including such well known names as Lehman Brothers. A substantial withdrawal of cash by customers from a heavily indebted bank is sufficient to bring a bank down.

Derivatives, by the way, are simply paper investments that derive their value from some other investment or commodity. For example, if A lends money to B, a derivative could be created that derives its value from being able to receive the interest payments and ultimate capital repayment that B makes in servicing the loan, and the perceived probability that B will default on the loan. The less likely this default is perceived to be, and the higher the rate of interest that B pays on the loan, the higher the value of the derivative.

Speculative trading by banks which have deviated from their basic, straightforward banking function of storing, exchanging, transmitting and lending money, opens the door to unpredictable losses. An example is Barings Bank, where an insufficiently unsupervised trader - that is, someone who was given the bank's money to gamble with - was able to run up sufficient losses on his gambles that this old family bank was essentially wiped out.

One of the most important functions of banks in commerce from medieval times onwards was the issuance of bills of exchange. If A in Italy agreed to sell silk to B in Germany, A would not wish to travel with cash (coins) back from Germany to Italy after delivering the silk to B because the risk would be too great. So a bank, call it the Italian German Bank, with offices or branches in Italy and Germany would issue a bill of exchange which would basically guarantee that if the German branch was satisfied that the silk had been delivered to B, A could collect the money due to them in Italy from the bank's Italian branch. It is in effect a form of promissory note. Fulfill a certain condition, or conditions, and the bank guarantees that you will receive money. The interesting thing with bills of exchange and any forms of promissory notes is that if A were to want money before they actually delivered the silk to B in Germany, if they could find a buyer for the bill of exchange - at a discount obviously, because of the time until the buyer could receive payment, and because of the risk of non-delivery of the silk - they could get money before the business transaction was completed. The buyer of the bill of exchange might even sell the bill on to someone else. Bills of exchange, therefore, were one of the earliest commodity-delivery based forms of derivative.

There is evidence of loans being made in the Vedic period (from about 1750 BC onwards) in India, where notes were issued by person A to banker B to pay a sum of money or commodity to person C. If banker B did this, person A would have, by an agreed date, to pay a greater sum of money or amount of commodity to banker B.

In China from around 200 BC, coinage existed, and banks issued letters of credit for business people - a letter of credit being a guarantee from the buyer's bank to the seller's bank that the seller would get the money due to them for what they were providing for the buyer. If the buyer defaulted and did not pay their bank the money that was due to the seller, the seller's bank would still have to pay the agreed amount of money to the seller's bank. In other words, the seller has a cast-iron guarantee (so long as the seller's bank remains functioning) that they will receive the money due to them if they fulfill their obligations.

In ancient Greece, the temples were the places where money was deposited, and where currency was exchanged and lent out.

In London in the 17th century, gold was stored with scriveners, and the scriveners stored the gold with the Royal Mint. This naïve trust in government and royalty ended in 1640 when King Charles I seized the Mint's gold, promising to pay it back … eventually. After that, people deposited their gold with goldsmiths. They then also deposited money with the goldsmiths. The goldsmiths would in return issue a promissory note, guaranteeing the return of the gold/money on presentation of the note. These notes then in turn became a form of currency in their own right, exchangeable between people at whatever value they might agree.

The goldsmiths, who neither charged for their storage services (although in ancient times money-commodity storers did charges for their storage services) nor pay interest on the gold/money that had been deposited with them, were allowed to lend out their clients' money, for a fee, or rate of interest, to borrowers. And thus we have what we now probably regard a modern form of deposit banking, now superseded by government central bank (and other state bank and private bank) debt-money creation.

But even at this point, basic deposit banking soon proved inadequate for the goldsmiths. As we have seen, promissory notes were being issued well before this time, and goldsmiths chose to use them too. So instead of lending you a certain amount of money, the goldsmiths could issue you with a promissory note, promising that if that note was presented to them, or to one of their other branches or to one of their agents, the bearer of the note could receive the money stipulated on it. Therefore the goldsmiths did not have to part with actual gold - just a note. They could retain the 'real' money.

Whereas gold and silver cannot be created at will, promissory notes can. Therefore the goldsmiths were able to produce notes for more money than had actually been deposited with them, being fairly certain that it was unlikely that a demand would be made on them for all the money stipulated on all the notes at any one particular time, but that the notes would simply remain in circulation, changing hand as an alternative form of currency.

Thus was invented a form of fractional deposit banking, where more money is promised to be paid to people than is actually available in 'real' money to meet those obligations. The goldsmiths made promises to pay gold knowing that they had insufficient gold to honor all those promises if called upon to do so.

Promissory notes became a form of paper money, and paper money is the key to modern banking. Gold and silver are measurable by quantity. Paper money is deemed to have whatever denomination is printed on it, so long as people can be made to believe in the currency and the amount that they see printed. The Chinese are believed to have created paper money in the 11th century (A.D.). This was a development from their 'receipts of deposit' that were created in the 7th century A.D. Once paper money was invented, a divorce was made between commodities that had time-effort-rarity value, and the essentially valueless paper that was supposedly backed by valuable commodities, and whose worth was supposedly related to the worth of those commodities.

News of China's money spread to Europe in the 13th century, and ultimately to the rest of the world, and was adopted everywhere. In what we might broadly call Europe these days, the first banknotes were issued by Stockholms Banco of Sweden in 1661. These replaced their 'coins', which were in fact copper plates - in other words, a commodity with time-effort-rarity value. In 1664 the bank closed because it was unable to redeem its banknotes with the copper plates that the holders of its banknotes wanted. This, perhaps, is the first example of a run on a bank, where people either doubt the value of paper money and wish to receive the commodity that supposedly backs it, or they believe that the bank no longer holds their money, having lent it out to other people and being unable to get it back on demand.

Because of the danger of being robbed when carry commodities or cash, inter-bank promissory notes were introduced for business transactions and for wealthy people transferring significant sums of money.

The issuance of banknotes was adopted in America. Banks issued their own notes. If you bear in mind that a banknote is nothing more than a promise by the issuer to pay the holder of it something of equal value (in practice, either another banknote, or nothing, if the bank collapses), it is not surprising that in the 19th century there were over 5000 different banknotes circulating in America. However, only the biggest issuers, and those regarded as being most dependable, had their notes widely accepted, and managed to survive. The word 'bankruptcy' comes from the practice of an institution issuing more 'promises to redeem' than it can actually redeem, or being unable to get back sufficient money from its debtors to be able pay depositors their money back and to continue to pay the other outgoings necessary for it to continue in existence.

With modern currencies we no longer pretend that there is anything of value behind them. Modern money operates on trust, which sometimes turns out to be misguided. If you look at, say, a recent British banknote - let's say of the value of 10 pounds - it says that the Bank of England will give you 10 pounds for your 10 pound note, if you so demand. But all that means is that the bank will give you another piece of paper that says it's worth 10 pounds in return for your piece of paper that says it's worth 10 pounds. There is no way you can get anything of greater value, or more physical, these days from a central bank than a piece of paper, a promise, or a number in a computerized account

Because the ability to print money gives power and choice, governments declared themselves everywhere to be the only people legally permitted to print money. (As in America, however, until one or two hundred years ago, some banks - for example, Scottish ones - were authorized by government to print their own money. However, people placed little faith in the notes issued by the smaller, less creditworthy banks, so eventually only a handful of banks continued to issue currency, and then ultimately only the state issued the country's money)

Now, with the control of paper money creation, governments, and their central banks, no longer had to work to acquire money, conquer other nations to get it, ask permission of the populace to create more of it, demand it from the populace in the form of taxes, nor did they have to set limits on the amount of it that they created.

The value of the money in people's pockets was now decided not just by the people, by barter, but by the actions of the government, and in particular the amount of money they created, and the amount of interest that the central bank charged on its money.

In recent years we have had various bank crises and failures. These take different forms and arise from different causes. For example, central banks create too much new money. The problems caused by this are twofold. Firstly, all other things being equal, if you double the amount of money in circulation (and it gets to be evenly distributed), then the cost of everything simply doubles. People have twice as much money, but everything costs twice as much.

In practice, new money isn't distributed evenly. People nearest the source of money creation get richer, while people furthest away from that source see no extra money for themselves, but they suffer the consequences of price inflation.

Secondly, because money creation involves the creation of greater total debt - capital plus interest - than the amount of money being created, money creating institutions eventually become unable to meet their debt obligations, and so must collapse, or default and continue afresh with no, or reduced debt.

Some banks have failed by making ill-judged loans. When there is an excess of new money in the form of credit, it often goes into commodities, and in particular into real estate, boosting prices. When the price of these things becomes unaffordable and buyers dry up, their value collapses, often to below the value of the debt taken on to buy them, and the owners of them, and the banks that lent those owners money, find that if they can get back anything, they get back less than the amount of debt that is owed. Therefore potentially bankruptcy follows.

Another reason for a bank to collapse is that it has engaged in speculation. With derivatives, you can lose (be obliged to pay) much more money than you put into a contract or deal. For example, if I put 100 million dollars into a contract that will go up in value if the price of silver goes up, and it then goes down, I might not only lose my 100 million dollars, but be contractually obliged to hand over a few more 100's of millions of dollars as well.

Gamblers usually eventually come unstuck, and gambling banks are no different. Anyone who creates or takes on debt runs a risk either of not being able to pay back what they owe, or not being able to get back what they have lent. Banking therefore will always unavoidably carry risks.

Perhaps the only good thing to say about our modern system of debt-money creation is that it has allowed us to have a standard of living that we could not afford if we had to live only on what we could earn, rather than on what we can borrow. But there may be a high price to pay at some point for only being satisfied by being in debt.


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