If you were to counterfeit $ 100 or € 100 or any other currency at home, you would be fined an unimaginable amount. Yet banks are not only able to print money, but are actually encouraged to do so.
Banking is the least known activity in history. And yet they are among the most popular places where we invest our money. And the more you look at it, the more ridiculous it becomes.
It is not that complicated if we summarize it simply. We have to ask ourselves, what is the purpose of a bank in the first place? For the most part, it is a safe place for us to store money so that we don’t have to carry it with us. The origin of the bank was not born out of the kindness that made people’s lives easier. At the end of the day, like any other organization, its goal is simply to make money for the owners. And in the banking world, collecting interest is essential, whether through credit cards, mortgages, business loans or personal loans. The more loans with high interest rates, the more money banks make.
But loans don’t necessarily make banks bad. After all, the economy and modern businesses would not exist without lending from the banks. But unlike other organizations, banks are the only entities in the world that can print money from scratch.
Since today, the world no longer bases the value of its currency on gold, it has turned its true value on belief and trust. Yes! It is called money or FIAT money. This is because we believe enough in government and the economy enough to perceive the value of our currencies. And in this modern world of the FIAT system, bankers have become the magicians of extracting money from nothing. And once you go deeper into the process, you can see beyond all the technical jargon. It’s not that hard.
This happens every time you deposit money in your bank.
Imagine you just received your first paycheck for $ 1,000 ( € 900) and deposit it in your bank account for later use and keep it. This can differ from country to country and from bank to bank and of course, the size of the bank. But because of the size and the strength of the American economy, we will look at the policies of American banks.
According to the Board of Governors of the Federal Reserve System, banks are required by law to keep about 10% of the amount of $ 1,000, for example. This is called a “reserve”. Why are they doing this you ask? Well why not? Banks are businesses. Why should they keep their money in the safe when they can just lend it to someone with interest?
So they pool that money and lend the 90% of it in the form of a loan to someone at an interest rate of 5% to someone else. And just because of that, the bank now has $ 1,900 in its safe. If you understand this short scenario, you understand how and why banks print money. Now it gets a lot more complicated with millions of people, regulations and financial gibberish. But the basic principle comes down to that
So let’s take an example. You take your well earned money from the bank and deposit it instead of hiding it under the bed. Banks can use 90% and lend to an interested person. Let’s call this someone “Mr. Jones “, an entrepreneur who needs to raise capital for his new business. So all of a sudden you have your $ 1,000 in your digital bank statement and Mr. Jones has his $ 900. So what started out as a thousand dollars in the money supply has now grown to $ 1900. And the bank manages to collect its 5% interested each year.
It also gets more interesting when Mr. Jones decides he doesn’t want to keep his money in cash. So what he also deposits his $ 900 into his bank account. Now the bank can take the $ 900 from Mr. Jones and lend it to other people and get an additional 5% on that money. When this second money supply occurs, the bank of $ 1,900 suddenly jumps by $ 2,710.
Now imagine this overly simplified process, when we are talking about billions of cash flows from around the world, entangling everything in a complex spider web of money supply. And you have the modern banking system of fractional reserve banks, where banks are only required to keep a fraction of their reserves and lend them out later to make money.
In no other industry can people put their life savings back like in the banks. There is no other legal entity where you can create money and earn interest on it. And to see this in reality, we can take a look at some of the biggest banks in the world. The largest bank in the world right now is the Industrial and Commercial Bank of China with $ 3.62 trillion in assets. The largest non-Chinese bank is JP Morgan Chase, currently 6th in the world, behind 4 other Chinese banks and HSBC Holdings in England.
But here’s an interesting question. What do you, the client, want to withdraw most of your money or start spending your deposits on? This has been a problem for banks known as the “bank run” where large numbers of people withdraw their savings from banks for fear of insolvency.
To alleviate this problem, the government has stepped in to guarantee people’s savings by creating the FDIC to guarantee that if their deposits cannot be returned, they will be insured for $ 250,000. As a customer, it looks really good. But this has another advantage for banks.
If the government gives a helping hand and the depositors are always guaranteed their money. So what keeps banks from acting unethically with their customers’ money? What keeps them from being as risky as possible, knowing that the government will bail them out in the worst case.