All money in existence is representative of a bank loan of some sort. Our currency is symbolic of debt. All money is loaned into existence. Persons borrow money. A person in commerce is defined by the Uniform Commercial Code. The word person in commerce is not to be confused with a similar word which is spelled the same and is pronounced the same. Outside of commerce the word person, plural people, may mean a living breathing being but in commerce a person, plural persons, is not a living breathing being. A person is any legal or commercial entity including but not limited to a corporation, government, governmental entity, estate, partnership, trust, Limited Liability Company, and individual. In commerce a living breathing being is not a person unless that living breathing being signs as surety for the person. That means they sign to be responsible for any liabilities that legal or commercial entity may incur. Did you know that a government is a person just like your person called individual who keeps a bank account and a driver’s license is a person? Did you know that your estate is a person? And if you own a business that is incorporated that is another person. If you are involved in a partnership business, that is a person. If you live in the United States and your city is incorporated which most cities and towns are these days, your city is a person. The state in which you live is also a person. Businesses are persons. That's right. Persons borrow money. Banks do not lend money to people. Banks only lend money to persons. In order for you to obtain a bank loan you must be the authorized representative of a person then you must sign as surety for the loan. Then you can theoretically borrow money.
Governments borrow money by selling bonds to banks or anyone else with faith in the person called government to repay the loan. What is a bond? A bond is simply a contract to repay an amount of money. It is a repayment contract. A person called bank borrows from the Federal Reserve by selling bonds to it. Individuals borrow from banks by exchanging their promise to pay for money to buy a house, car, or simply for a personal loan.
When a person such as your person generically called individual decides to take on a bank loan the most important thing that you do is SIGN the loan agreement. This makes you surety for the loan. You signature links the physical you to the person called individual which is not actually you but that you just agreed to be responsible for. You are creating a bond between you and your person that the bank regards as having value based on your credit reputation. The bank takes the loan agreement also called a promissory note or promise to pay and monetizes the agreement creating new money.
But wait! What is the new money just created? How does the bank just create new money? Well the new money that is created are debt receipts. Debt receipts are promises to pay. Promises to pay are promissory notes. Federal Reserve notes are promissory notes. One dollar equals one unit of promise to pay. Federal Reserve promissory notes are a certain type of promissory note that do not have a specified date to redeem so they are open ended. The bank can create these promises in much the same way that you can create value by signing the loan agreement. The promise that you are making however when you sign the loan agreement has a fixed due date each month. This alone makes your promise more valuable than the promissory notes that you will receive from the bank which have no date of redemption in the future. Now add in the interest payments that you will be making to the deal and you can start to see why this is such a lucrative business for the bank.
You are agreeing to repay the loan, albeit in promises, in monthly installments with interest over a defined period of time. Your promises have a due date. The bank effectively redeems your promises on a monthly basis. The interest is the redemption. The promises the bank gives to you on the other hand in consideration you never get to redeem. You never get to go to the bank and say ok you gave me these promissory notes as consideration and now I would like to redeem them for something of value.
But you say that you are getting the house. True and that would be great if the bank actually delivered the house to you but you don’t actually own the house. The bank still owns the house and your title is equitable only. That means you can use the house and make improvements to it as long as you continue to make your payments on time. Even after you have paid the balance in full after thirty years you still don’t hold legal title to the house. You only hold equitable title. The local bank may be out of the picture but a larger bank still holds legal title to your house. Now if you don’t continue to pay the liabilities of the person individual then your person individual still risks losing the house.
So to sum it up, you promise to be surety for your person by signing the loan agreement, effectively promising to repay the loan to the bank, and the bank in return gives you an equivalent number of units of promises to pay in return for consideration. So the person individual promises to repay the promises to pay given by the person bank. Make sense?
The bank is able to issue these promissory notes out of thin air because the loan agreement promissory note which you signed pledging to be responsible for making payments based on the said loan agreement is an asset to the bank. Since the bank now has an asset on their books they are now able to create a liability. The liability takes the form of a drawing account or loan account upon which the bank now writes a check to the seller of the house or boat or whatever your person is purchasing.
What if the person called UNITED STATES which is another legal and commercial entity decides to take a bank loan? Well typically this person government will be borrowing money in much larger amounts than any person individual, but the concept is the same. The person UNITED STATES will issue loan agreements called bonds on the open market and the Federal Reserve will end up buying many if not all of these bonds. Now the bond, which is effectively the person corporation UNITED STATES pledging surety for the loan agreement with phrases like "On the full faith and credit of the US Treasury (that is the person government)", is an asset to the person called central bank, who then credits a deposit account and thus the seller of the government bond is paid with brand new money. And the person government begins making payments according to the payment schedule.
So now we see that a bank simply exchanges a promise for a promise. The person individual exchanges its promise which is concrete for the bank’s promise which is intangible. This is why banks are so profitable. Banks essentially short cut the game of business. What the bank is actually doing is purchasing the person's promise to pay with money that it created from nothing. It takes a short cut that no other business on earth can take. Any other business would have to pay for things with money that it makes from other business activities. As soon as the bank receives an asset, new money can be created. When a person other than a bank makes a promise to pay that goes down as a liability in that persons books because that person has every intention of repaying its promise. When a bank turns around and issues promises to pay in return in the form of promissory notes that is considered money with value although the bank really has no intention of ever following through with its promise to pay. The bank now is making money off of its intangible promises. The bank profits from its liabilities.
So can a bank create limitless amounts of money? Well, no. Not quite. Although it would seem as such in theory, actually there is a limit. If every promise was equal, if every person were equal then the system would collapse instantly and the game would be over. The value of the banks promises called promissory notes would fall to zero and they can't let that happen. The banks need enough central bank notes and reserve account credits to support the clearing of transactions and customers' withdrawals of money.
This is where the fractional reserve system of lending comes in to the story. Each bank needs to make sure that it has enough money to allow its customers to withdraw their money from their account via writing checks and electronic transfers and the like. So the bank must keep reserve balances. When you write a check your account balance goes down and likewise your bank's reserve balance also goes down. In contrast your payee's account goes up as does the payee's bank reserves. It is critical that a bank maintain their depositors confidence. If the depositors ever even just a little lost confidence that they would be able to withdraw their money then that might cause a run on the bank. Banks can not allow this to happen. This is why a bank must have enough reserves on hand in order to clear any transactions that may occur in a business day and allow it's depositors to withdraw their money. The system continues to operate simply because everyone does not all at once try to withdraw their money. If everyone did simultaneously attempt to withdraw their money, the banks would not have enough reserves to satisfy the demands of the depositors. That is fractional reserve lending.
Therefore bank deposit money is not the same as cash and coin money. Only a fraction of the deposits into the bank exists. Imagine bank deposits as if they were a community pie. The bank continues to put pies out for its depositors to nibble on as they wish. There may be three quarters of the pie left and you can still take an entire piece to satisfy your needs. But if everyone decides to eat a piece of pie all at the same time then you may have to wait for the next pie to be baked before you can get your piece. That’s fractional reserve lending. You may have to wait for more depositors to make more deposits before you can withdraw your money. Now visualize this analogy. Imagine banks reserves as if it were a stock. If every other share holder were to sell their shares of the stock, that is withdraw, all at once the value of your shares would drop to zero. Now we can see that the balance on your persons bank statement does not represent actual cash or coin, but rather it represents your persons claim or interest in the reserves of the bank.
When a bank receives new deposits, the bank’s reserves go up. Now when the reserves go up the bank is able to issue new loans based on those new reserves. It is not exactly a one to one ratio however. Remember that banks practice fractional reserve lending. It is actually closer to a 9 to 1 ratio, lending to reserves. In other words a bank can create and lend out about nine promises for every one deposit promise they hold on reserve. And what happens when reserves go down after the bank has already created and loaned promises based on a higher reserve amount? Well, depositors must give full faith and credit to the banking fractional reserve system to absorb any financial storms that may pass through from time to time in order for the system to work. Therefore the depositors are the creditors of the system. Have you thanked a depositor yet today? They are the ones responsible for upholding the banking system.
Banks do not lend willy-nilly however to anyone willing to sign as surety for a loan. A bank is a shrewd business person. It will look at the credit report, employment history and total assets of the person. The person bank needs to make a profit. That is they need the principal returned to them in tact and they need the interest which represents the energy and labor of the person known as surety on the loan agreement.
The bank now holds your loan agreement and that is valuable. Although it is just a piece of paper with writing and a signature on it, it is actually worth a lot of money. Banks will often sell these loan securities that they now hold to other banks for more than the face value and make money on that. In addition they may sell services to act as a collecting agent for the person that bought the mortgage. In many cases the "borrower" is completely unaware that the "lending" bank has already been paid the balance on the mortgage and is using that mortgage to make further profit. In fact a mortgage security may be bought and sold several times over the life of the loan.
After about thirty years of payments by the person surety the balance reaches zero and the principal of the original loan is wiped off the books of the financial system entirely and the interest is profit for the bank. In all of this the bank risked none of it's own assets. The bank never loaned anything to anyone. They simply exchanged promissory notes for a person’s promise to repay with interest.
Now ask yourself this question. Why is everyone not in the business of banking? Forget being a doctor. Forget being a lawyer or surgeon. Forget about forming a startup company and building a commercial empire. Forget about getting a job. Let us all just become bankers and then we may all simply find the nirvana that is exchanging unredeemable intangible promises to pay at an unspecified future date for someone else’s promise to pay at a specified date with interest.
Why would anyone who claims to be sane and responsible for their person exchange promise’s to pay with interest at regularly scheduled intervals in exchange for another persons false promises to pay without interest at an unspecified date in the future? Isn’t that what is occurring here? It is really not madness on the part of the bank, but brilliant. It is absolutely madness on the part of the so called borrower. It really shows that most people do not completely think through and comprehend the responsibility they have with regards to their person and as a result they act totally irresponsibly.
Sources for this article include Modern Money Mechanics published by the Federal Reserve, and the Uniform Commercial Code.