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Fractional Reserve Banking

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I understand banks can lend out 10 times the amount they have on deposit. But, where do they get the money from?

If I open a bank tomorrow and take £1 million in deposits I can, apparently, lend out £10 million. But where to I actually get the extra £9 million from? I can't print it - only the Royal Mint can do that ... so who do I get it from?

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I understand banks can lend out 10 times the amount they have on deposit. But, where do they get the money from?

If I open a bank tomorrow and take £1 million in deposits I can, apparently, lend out £10 million. But where to I actually get the extra £9 million from? I can't print it - only the Royal Mint can do that ... so who do I get it from?

The chances are you won't need it printed.

Those monies will sit in an account.. get transferred to other accounts.. cheques get written.. and round and round it grows.

When have you ever withdrawn all of your savings? How often do people withdraw loan monies and hide it under their mattress?

The money is created from thin air and exists as debt. You promise to repay the money they never had plus interest. It really is that simple.

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I understand banks can lend out 10 times the amount they have on deposit. But, where do they get the money from?

If I open a bank tomorrow and take £1 million in deposits I can, apparently, lend out £10 million. But where to I actually get the extra £9 million from? I can't print it - only the Royal Mint can do that ... so who do I get it from?

It can be explained on this forum via text. Indeed, there have been some great explanations already, but to be honest, it might be easier and quicker to go to youtube or google videos in your lunch break and do a search there. There are a number of great videos explaining the whole banking system.

"money as debt" on google videos would give you a good start. Most people found that very informative. (it's about 45 minutes long)

Mr.Mangle

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I think can just lend out 900,000.

If you want to lend any more you will have to borrow some from somewhere.

Sort of right, except that loan ends up in another account inthe banking (closed) circle, upon the deposit of which the bank can loan out 90% of that immediately. Essentially as the bank is a closed system, why wait for the telescoping and virtual deposit of funds around the system..banks immeidately telescope the initial deposit which works out as 10x initial.

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Imagine you borrow £10,000 from HSBC to buy a car.

HSBC taps some keys on a pc and the balance in your current account goes up by £10K. You start paying interest despite HSBC not having done anything more than tweaked their computer system.

You go to the dealer, pick a car, use your debit card to transfer the money from your HSBC account to the dealer's HSBC account.

Now you're paying 10% interest on £10,000 and HBSC is paying deal the dealer 5% on £10,000 - and keeping 5% for itself - despite this £10,000 not really existing in the first place.

So HSBC did nothing more than tap a keyboard for a few seconds and now you're working 100 hours a year to earn the interest to pay them for the loan.

Sweet!

The dealer will spend the money, but the chances are it will end up back in an HSBC account. HSBC is enormous so a lot of the money it lends out never leaves its computer system. Even if the dealer uses the money to restock on imported cars HSBC is global so it's quite likely they will keep the money.

And to offset the money lost to HSBC by being deposited at Barclays there are plenty of loans "written" by Barclays arriving at HSBC to compensate.

Size is everything in banking. The behemoths rule. The trick wouldn't work (as well) if the banks were small and local.

Edited by Nationalist

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and there we have it.

They ENSLAVE US. We are forced to pay 30-50% of our salaries for 25-40 years for a modest roof over our heads. We pay interest on money that never existed.

We pay these private bankers to live the fantastic lives they lead, and they are the hidden strings behind our puppet politicians.

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Thanks for all your answers. I have looked at various of the videos mentioned - not just now but previously - because this has plagued me for a long time. I still don't get it, it can't all be laying in computers. What happened before computers? Okay, it can't all be laying in ledgers.

How can anyone compute the money supply if banks can click a button and say 'Abracadabra, there is 10k for you to spend but please don't come into the branch and ask for the cash because, if everyone did that, we wouldn't have enough bits of paper to go around.

How is the amount banks lend controlled? What is to stop them lending 20 times what they have on deposit? Who is in charge? Who decides how many banknotes are in circulation.

Credit cards allow people to spend money they don't have - whenever they want. What if everyone spent £1000 on their credit cards today. Where would that money come from?

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How is the amount banks lend controlled? What is to stop them lending 20 times what they have on deposit? Who is in charge?

Government supposedly, but strongly influenced by banks. Some already lend more than 30 times what they have on deposit. The banks.

Whomever controls the money of a nation becomes government.

"Permit me to issue and control the money of a nation, and I care not who makes its laws"

Amschel Mayer Rothschild 1838

Edited by Bushy Tail

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Thanks for all your answers. I have looked at various of the videos mentioned - not just now but previously - because this has plagued me for a long time. I still don't get it, it can't all be laying in computers. What happened before computers? Okay, it can't all be laying in ledgers.

How can anyone compute the money supply if banks can click a button and say 'Abracadabra, there is 10k for you to spend but please don't come into the branch and ask for the cash because, if everyone did that, we wouldn't have enough bits of paper to go around.

How is the amount banks lend controlled? What is to stop them lending 20 times what they have on deposit? Who is in charge? Who decides how many banknotes are in circulation.

Credit cards allow people to spend money they don't have - whenever they want. What if everyone spent £1000 on their credit cards today. Where would that money come from?

Good questions.

I bet your teachers hated you :P

Edited for fat fingers

Edited by twatmangle

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Thanks for all your answers. I have looked at various of the videos mentioned - not just now but previously - because this has plagued me for a long time. I still don't get it, it can't all be laying in computers. What happened before computers? Okay, it can't all be laying in ledgers.

Yes, it was all laying in ledgers. It works on the same principle of airline seat overbooking, just on a massive scale. The chances that everyone wants their money back at once are very very small - particularly as banks pay you interest on your deposits as in incentive to keep them invested. There is not enough physical money in the system to back everyone's current account balance, because there doesn't need to be.

How can anyone compute the money supply if banks can click a button and say 'Abracadabra, there is 10k for you to spend but please don't come into the branch and ask for the cash because, if everyone did that, we wouldn't have enough bits of paper to go around.

People either don't understand the system and therefore don't worry about that happening, or they do understand the system but have confidence that the risks are adequately managed and that the BoE stands ready to bail out any bank who got into trouble that way, or they think the whole thing is insane and keep their money in gold and fivers under the bed.

How is the amount banks lend controlled? What is to stop them lending 20 times what they have on deposit? Who is in charge? Who decides how many banknotes are in circulation.

The government, nominally. They make the law, last I checked.

Credit cards allow people to spend money they don't have - whenever they want. What if everyone spent £1000 on their credit cards today. Where would that money come from?

Thin air. Honestly, that's the way it works. They do have to pay it back eventually, remember... and there are always limits to credit. (Unless you're the government, it seems.)

Money is created as debt. So long as people are prepared to take on debt, the money can be created.

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Thanks for all your answers. I have looked at various of the videos mentioned - not just now but previously - because this has plagued me for a long time. I still don't get it, it can't all be laying in computers. What happened before computers? Okay, it can't all be laying in ledgers.

How can anyone compute the money supply if banks can click a button and say 'Abracadabra, there is 10k for you to spend but please don't come into the branch and ask for the cash because, if everyone did that, we wouldn't have enough bits of paper to go around.

How is the amount banks lend controlled? What is to stop them lending 20 times what they have on deposit? Who is in charge? Who decides how many banknotes are in circulation.

I also don't understand this. I've watched various google videos that purport to explain things, and they basically confirm that the bank just creates the money out of thin air. But there has to be more than that. Otherwise, how do the bond markets come in to it so strongly? When Nationwide signs up a punter for the latest 25-year fix, they surely go to the money markets to buy the appropriate swap? (Otherwise, why do these products have limited avaialbility e.g. 50 million quid and then it's all gone?)

Is it the case that the bank issues bonds in order to obtain deposits (to be leveraged 10x) beyond what its shareholders and customers have provided?

Credit cards allow people to spend money they don't have - whenever they want. What if everyone spent £1000 on their credit cards today. Where would that money come from?

I don't think that CCs need to be a special case. You can arrange a bank loan or an overdraft and not take the whole thing up; you can arrange a CC limit and never reach it.

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and there we have it.

They ENSLAVE US. We are forced to pay 30-50% of our salaries for 25-40 years for a modest roof over our heads. We pay interest on money that never existed.

We pay these private bankers to live the fantastic lives they lead, and they are the hidden strings behind our puppet politicians.

maybe you should change your avatar to George Bush "Puppet" rather than George Bush "Terrorist" then? (put some strings on him).

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I also don't understand this. I've watched various google videos that purport to explain things, and they basically confirm that the bank just creates the money out of thin air. But there has to be more than that. Otherwise, how do the bond markets come in to it so strongly? When Nationwide signs up a punter for the latest 25-year fix, they surely go to the money markets to buy the appropriate swap? (Otherwise, why do these products have limited avaialbility e.g. 50 million quid and then it's all gone?)

Is it the case that the bank issues bonds in order to obtain deposits (to be leveraged 10x) beyond what its shareholders and customers have provided?

I don't think that CCs need to be a special case. You can arrange a bank loan or an overdraft and not take the whole thing up; you can arrange a CC limit and never reach it.

I only mentioned credit cards because it would be possible for, instantly, a huge extra amount of money to be 'spent'. If 20 million people spent a grand on their credit cards today, 20 billion pounds would have been spent. Where would it come from? The retailers will get paid, the punters will owe the money and have to repay it. Where did the pound notes come from? Did they get printed? Does it affect the money supply.

Without denigrating answers already posted here ... is there anyone who can explain the whole thing right from basics ... the Royal Mint prints money ... there is x amount in circulation ... a bank can lend out x times it's deposits ... this is controlled by ... etc.

I've been reading stuff on this subject for years but still don't get it. I'm moderately intelligent so I figure I should be able to understand it but ...

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I also don't understand this. I've watched various google videos that purport to explain things, and they basically confirm that the bank just creates the money out of thin air. But there has to be more than that.

There is more too it, in that there is a limit to how much money can be created in this way. It's restricted by law, and by the bank's attitude to credit risk.

The bank cannot make a profit by magicking money out of thin air, because its liabilities and its assets will always have to balance. It can only make money by charging more interest to borrowers than it pays out to lenders (the "credit spread").

The prevailing rate of interest about which this credit spread operates is effectively set by the money markets.

This is oversimplified, but not by much.

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The bank.. can only make money by charging more interest to borrowers than it pays out to lenders (the "credit spread").

And now you seem to be confused, because this sentence describes the old Goldsmith banking system.

It's the multiplier that is key to all this. Banks multiply their reserves to create money from thin air as debt.

This is the crux.

Edited by Bushy Tail

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There is more too it, in that there is a limit to how much money can be created in this way. It's restricted by law, and by the bank's attitude to credit risk.

The bank cannot make a profit by magicking money out of thin air, because its liabilities and its assets will always have to balance. It can only make money by charging more interest to borrowers than it pays out to lenders (the "credit spread").

The prevailing rate of interest about which this credit spread operates is effectively set by the money markets.

This is oversimplified, but not by much.

Fractional reserve requirements were removed some time ago.

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I understand banks can lend out 10 times the amount they have on deposit. But, where do they get the money from?

If I open a bank tomorrow and take £1 million in deposits I can, apparently, lend out £10 million. But where to I actually get the extra £9 million from? I can't print it - only the Royal Mint can do that ... so who do I get it from?

But all paper moeny is is basically just an IOU that is universally accepted.

The money created within the banking system is just a number in an account to represtn an hgue IOU.

Thats my simplistic idea of what money really is.

But no-one ever asks for all there IOUs (cash) to be returned we just tleave it in the bank as a figure in an account.

Thtas why the banks get so damn rich and we stay poor. Becasue of this fact the can lend out stupid amounts earning stupid amounts of interest on this no- existent tangible set of promises (IOUs).

(apologies for rubbish spelling typing)

Edited by snap_crackle_and_pop

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you cant just create money out of thin air.

No, he can't, but banks can. It's one of the supposedly useful functions they provide to society.

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