Thursday, September 1, 2011

The glories of fractional banking

There is nothing like the astonished look that comes to the faces of people when they first discover that a mortgage they must pay on for 30 years was created by a few keystrokes down at the bank.  I remember when I first had the reason bankers own everything explained to me.  I didn't believe a single word of it and argued at almost every sentence.  As John K. Galbraith once said, "The workings of the banking system are so simple the mind is repelled."

This YouTube video explains why banks get so rich in about three minutes.  But depending how much conventional wisdom one has absorbed, this little lesson can take quite a while to sink in.


  1. Small quibble with that video: The banks aren't the ones who create money out of nothing. They create loans and then go and get the necessary money from the government, since the government has the legal monopoly on the currency. While the banks function as if they do create money out of nothing, I think its an important distinction to make--because it takes the actual power away from the banks and shows where it really resides, with the government and (ideally) the people that the government serves.

  2. In theory, you are correct. According to the Constitution, only the government is supposed to be able to create money.

    In practice, the banks create the money and get to keep the payments you make for themselves. In this, the video IS correct.

    I want to live in your world!