Money Creation / Destruction Question
Could someone explain this to me? I know money is created by being loaned into existence but how is it destroyed?
For example, if I go to the bank and borrow $1,000, that $1,000 is created by the loan process. (Actually only $900 or $990 or $999 or $999.90 is created since some fraction of the loan needs to be held in the bank but I’m rounding off here.) If I take the money and use it to pay people for services, say food or someone to work on fixing up my house, they now have the money. So, is it ever destroyed or does it just stay in circulation? Does it disappear when I pay the loan back? Perhaps the original $1000 is destroyed but the interest that is created stays in circulation for good. Hopefully someone can give a better illustration that is easier to follow. Thanks.
Just as that money did not exsist without the debt, once the debt is paid off the money does not exsist. The interest is never created, it is merely shifted onto another borrower.
This two part video should help you understand more clearly.
You are asking some great questions. I think that the mechanics of money creation and elimination (extinguishing debt) are the most important fundamentals in understanding our system.
Here’s how I see it:
- There is no permanent money in our debt based system. All of our money is loaned into existence through debt that must eventually be repaid – with interest charges added. The repayment extinguishes the debt and with it, the money ceases to exist.
- The banks do not lend their or depositors money. When you deposit money in a bank, it becomes their liability but they do not lend it to others. If they actually loaned depositors money; checks and other withdrawals would be limited to the balance remaining in the depositors account.
- Money created is equally off-set by the money eliminated (extinguished). The money to repay the interest is never created which means there will always be more debt than money. In a debt based system like ours, the only way to inject new money is through new loans. This sets up a perpetual loop; principal debt + interest is always greater than the principal (amount borrowed). More money must be created (debt) to pay past interest obligations.
- New debt is required to pay existing interest debt – compounding exponentially. It cannot be sustained.
Here is another resource if you’re interested.