Reply To: The Bank Loan Process, Creation and Destruction of Money
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When you lend existing money you’re creating a new private IOU. So, let’s pretend you have $100 in deposits and you lend that $100 to me. I have your $100 deposit and your NEW $100 loan liability. You have the new $100 loan asset. The problem with this arrangement is that your new $100 loan asset is functionally worthless unless I give you back the actual deposits. You can’t take the Kevlar Paper IOU and go spend it. It’s only good between the two of us. No one else would use it. cpstest
This is what makes banks different from the rest of us. When they create loans they create deposits that ANYONE is willing to use. So, when they create new IOUs those IOUs are trusted, unlike the Kevlar IOU that we created.
I hope that helps.