Transcript - The making of money
https://www.youtube.com/watch?v=x67DxMeGOrc
In recent years we have experienced waves of economic crisis. To understand why this situation have and will continue to come about, we need to understand the fundamental ideas of our present day monetary system.
In the past, border between people was based on goods. As society developed, so did a genuine need for a representative values for all goods and services. Gold and silver were rare metals which could be readily worked - many people began to use them. This is the basis of the monetary system.
How did the first banks developed? Since gold was highly attractive to thieves, a new commercial branch emerged - a service of depositing and guarding gold. People were given a receipt for the gold deposit because the public believe that's the notes represented gold, they began to trade in them.
The goldsmiths who safeguarded this precious metal were the only ones who knew how much gold actually exists in the safe. From here it was, but a short step to issuing receipts not backed up by gold.
Was there no problem in issuing these receipts? As long as people did not all try to withdraw their money at the same time, the system did well. In fact it worked so well and people became more prosperous, as a result increasing pressure on the government by the safe owners and entrepreneurs anchored the system in legislation and it became possible to create money out of thin air.
The system works in a similar way today, but whereas in the past the bank notes were backed by gold. Today money gets its value out of the amount of money that already existed in the system. To illustrate how banks create money, let's take a look at this simple example.
A customer comes into a commercial bank and asks for a loan the commercial bank borrows it from the central bank, plus interest. And from there the money goes to the customer plus additional interest. So all our money comes from a central bank? Not exactly. The commercial bank is obliged to maintain a reserve of just ten per cent of the money loaned. It can lend out the remaining ninety.
Does taking out a loan actually mean creating money? Precisely, when the commercial bank loan the money to the customer it actually created new money. From here we understand the disturbing fact that all money created in this system comes from a debt.
Since we all believe that one day the money will be paid back, the system continues to work and more money is created from future debts. Hence the name: fractional reserve banking.
What about our deposits in the bank? Well the same rules applied to them. The bank is required to retain a set percentage of the deposit and the rest it can lend.
What will happen if all the banks’ clients withdraw their money? The result would be a total bank collapse; even those who have never borrowed a cent will also lose all their money.
What about the interest on loans? All the money created in the system is interest-bearing, so that the total amount of money plus interest on it will always be greater than the existing amount of money. This is the fundamental law of the system. It is the way it was designed and right now we're approaching its maximum capacity.
Without a doubt the present system needs fundamental and profound changes, it is a necessity and we can only hope it comes in the near future. Until that day comes we need to start understanding how critical our financial situation is, and work towards changing it.
