In this episode of
Money Creation Explained, we are going to cover
Understanding How All Your Money in the Bank Is an IOU (I
Owe You) of the Banks.
When we give our money to the bank (whether is a large
national bank, regional bank, or small local bank in your
area), they all follow the same business model. The bank is
receiving money from bank deposits from their account
holders and giving out IOU’s (I Owe You’s) back to these
account holders by placing the digital account balance on
their statements. The bank in turn loans those funds out to
others who pay interest on the funds.
Using a 10% factorial rule, banks only need to have 10% of
client’s funds on hand for when clients actually want those
funds. This means the money that is represented in account
holders online and paper statements is not real money, but
merely the digital representation of the funds held in that
account. The bank is actually creating new money supply in
the economy by leveraging existing money to generate more
loans which produce interest many times over from the same
original funds being used. All the while, many banks pay
close to no interest back to their account holders, so it’s
like they are given free money to use, to generate more
money for their bank.
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