Exactly How Do Banks Create Money?

Banks create money in the process of lending, as has been pointed out by the Bank of England: “The majority of money in the modern economy is created by commercial banks making loans.” In this video, Ib Ravn from the monetary reform organization Gode Penge in Denmark explains exactly how money creation works.
Cash and money-on-account (bank money) are the two kinds of money that make up the money supply in a given country. To increase the money supply is to create money. Banks do this when they grant a loan to a customer.
The bank enters the relevant number into the borrower’s credit account with the bank. The bank also subtracts the same amount from a new “loan account” that the banks opens in the borrower’s name. This now records the borrower’s debt to the bank.
Since the money supply is made up by the balances in all bank accounts in a given country, adding the loan amount to the borrower’s credit account is equivalent to creating money.
When the borrower repays the debt, the money disappears from the borrower’s credit account (and is transferred to the loan account). This means that the money supply is reduced by the amount of the repayment: Money is destroyed.
All of this is effected through the payments system that the central bank operates for its member banks. This system of clearing both facilitates and obscures the money-creation process.
A key role is played by the so-called settlement accounts that banks have with the central bank. The money in these accounts also constitute the reserves that a bank holds, which are also known as its “liquidity”. How this all works is not generally known by the public but, confusing as it may seem, it is all laid bare in this presentation.
Other videos by Ib Ravn:
Banks don't lend money, they create it: Demystifying monetary and banking terminology
• Banks don't lend money...
A monetary system that promotes eudaimonia, not financial bubbles • A monetary system that...

[@chadpreece970]

It's true but I think it's the signature of the borrower that creates the money, as a promissory note is just paper until signed, then it has vaulue.

[@billsticker4080]

hahahahahaha ffs seriously?

[@artimussantiago4779]

This is true

[@TroyCook-vd6qu]

Chad is correct. Banks cannot loan their own money; (12 USC 83) They take the customer’s signed Promissory Note and stamp it with their Special Indorsement, thus claiming the Instrument as their own; (12 USC 412). They then submit the Promissory Note to the Federal Reserve Window for exchange for Federal Reserve Notes. They are literally “loaning” you your own money WITH interest! Now we all know why banks are all corrupt.

[@Matissekussen]

Tak for din præsentation Ib, det gjorde mig klogere!

[@user-nd1qs9zt2g]

Excellent explanation … finally .. thank you!

[@willrichardson519]

Thanks for that clear explanation. I will share it

[@mjsmcd]

Why do banks need money in its settlement account for payments? Why cant they simply pay from the depositors account?

[@XuanNguyen-nf3bi]

Thanks for such an amazing content, it is easy to understand including beginers

[@TheKarantan]

This is amazing. Thank you for this valuable information. This topic really interests me despite not having anything to do with my occupation. IMO everyone should know how money is created, but I understand that it might not be in the best interest of some groups.

[@kendrabonds6901]

It would be in EVERYONES interest to know the truth!

[@hoon_sol]

Anyone who works for money in today's world is a total and absolute slave; there's no easy way of telling people this.

[@djangogeek]

4:20 - Payment Via Book Transfer 16:50 - Reserve requirements and Capital Requirements

[@sdp5368]

I REALLY hope you see this but great video. I do need clarity So if I got it right Bank-A creates credit/NewMoney of $1000 for a borrower, it will open an account for them called a money account ( sorry if not the right word ), it'll enter in the ( 1-0-0-0 digits and boom New Money. You then can spend that money where ever you want but lets say the borrower buys a car and that money has to be send to Bank-B. From your video it seems like that $1000 digits gets uploaded to the settlement account and transferred to Bank-B's settlement and then to the Sellers account. Is that correct??? And then to retire that Money out of circulation every time the borrower pays on the loan the principal gets retired and the Interest is kelp as income to the bank and goes on it's balance sheet as cash??? Interest if that's the case where does the reserves come in for banks that don't take deposits just issue loans or credit like credit cards. or would that lean more on the Capital Adequacy Ratios?

[@ibravn1]

Your first question: "From your video it seems like that $1000 digits gets uploaded to the settlement account and transferred to Bank-B's settlement and then to the Sellers account." Correct. Your second question: "And then to retire that Money out of circulation every time the borrower pays on the loan the principal gets retired and the Interest is kelp as income to the bank and goes on it's balance sheet as cash?" All correct, and the interest indeed goes on the bank's balance sheet, not as "Cash" strictly speaking, but as account digits (money) that the bank can use for salaries, fancy furniture, dividends to shareholders etc. Your third question: "...where does the reserves come in for banks that don't take deposits just issue loans or credit like credit cards. or would that lean more on the Capital Adequacy Ratios?" First, remember that reserves are just the digits in the bank's settlement account (or a sister account with the central bank called the reserve account). This is what's often called the bank's liquidity. There must be money in the settlement account (liquidity) for the bank to transfer its customers' money out of the bank, to customers in other banks. The settlement account is normally filled up by customers having their pay checks sent to their bank from their employers' banks. So, deposits are (usually) required by a bank. A credit card company has an arrangement with a bank, essentially a large account, from which they can extend credit/loans to card holders. A credit card company is thus not a bank. A capital adequacy ratio describes the relationship between a bank's equity ("its own money", or rather, the money it owes its shareholders, who own the bank) and the amount lent out by the bank. Rules prescribe how much a bank can extend in loans (how much money they may create). If the capital adequacy ratio is 5%, it means that the bank can only lend up to twenty times its equity (20 x 5% = 100%). Since banks generally earn a lot of their money from lending, they are dying to lend as much as they can (not in bad times, though). So they want low capital adequacy ratios. Big banks employ hundreds and thousands of Ph.D.'s and other experts to weasel their way around these rules and create more, more, more money (they call it financial innovation)--so they can earn the interest, etc. on their loans, bets, "investments", etc. This was the cause of the 2007-08 subprime crisis.

[@khalidwalid3178]

Very great video with great content! My question is if banks dont use their reserves (our deposits) to lend out,are than all bank reserves (all our deposits) stored in their settlement account? And if they are why do central banks make commercial banks pay the policy interest rate to borrow money from them if they already have reserves (our deposits)?

[@ibravn1]

First, you have to let go of the idea that "our deposits" are "stored" anywhere. All we have are digits in accounts, and these digits represent money; in fact, they ARE money, in an advanced banking system like most countries have. Adding and subtracting these digits is what constitutes payment (unless you use cash: notes and coins). So, all customer deposits are merely digits in customers' accounts; they're just called deposits out of centuries-old habit and to confuse you into believing banks are rock-solid (they're not). What's in settlements accounts ( = reserves) are just some other digits that the central bank and the banks use to keep score of incoming and outgoing payments. These reserves (another wildly misleading term) "are" not your deposits in any way. But as I explain in the video, the whole system allows well-coordinated account adjustments that enable banks to transfer money ("digits") between their customers' accounts. That's what the upper layer (involving "reserves") in the two-tiered system is for. That's what reserves are mainly for today. Of course, when you get a loan from the bank and the relevant digits are entered into your account - and when you THEN spend the amount buying the thing you borrowed the money for, you have to transfer money out of the bank. That's when reserves, the digits in the settlement accounts, are brought into action, as I explain in the video. So, as you can see, a modern bank and central bank do not shuffle deposits and reserves around as if they were so many pieces of gold. They did some of that, to some extent, several hundred years ago, but no longer. Today, it's a lot of accounting tricks, also known as banking. What I've detailed in this video is just the beginning of what banks can do to create money out of promises and digits on paper or in computers. Let me return to your second question later.

[@frankcarlos6762]

@@ibravn1 they make currencies not money money are gold and silver

[@billsticker4080]

lol seriously? you believe that/ hhahaahahahaha@@frankcarlos6762

[@kendrabonds6901]

Also look up the Cesta Que vie trust act of 1666

[@billsticker4080]

@@kendrabonds6901 oh for goodness sake. you twonks

[@adamjovicic9006]

Hey mate nice video! I don’t understand how recorded debts between the consumer and banks fit into a balance sheet or whatever ledger thing they use on their computers 😅 Eg. Record of debt between adam and liam Adam +100 liam -100 + 50. -50 -20. +20 ------------ Difference is 130 to be payed to adam How do banks write it down in their system

[@ibravn1]

If I understand your question correctly: When you are granted a loan in a bank, the bank "pays" you by adding the relevant digits to your checking account. This account is a liability of the bank (it owes you this amount of money and must pay it out to you when you ask for it). It is recorded on one side of the bank's balance sheet. At the same time, the bank opens a loan account in your name, and the amount lent to you is recorded there, with a minus in front, so to speak: This is the money you own the bank. This is an asset of the bank: the money you owe it. It's recorded on the other side of the balance sheet. Both of these amounts are reflected in the bank's overall accounting system, the general ledger, that sums all the bank's accounts into two large numbers, one on of each side of the balance.) When you ay down your debt to the bank, you do it incrementally by subtracting your first installment from your checking account and "transferring" it to your loan account. Both accounts now decrease by the amount of the installment. You keep ding this, and the loan account goes to zero, you paid your debt, and that whole amount (plus interest!!) has left your checking account, over the years. The money that was created by the bank as the loan was paid to you has now been destroyed or retired, that is, taken out of the money supply, during the process of debt repayment. (Notice that I haven't addressed the payment of the good that you wanted the loan for.) Did I answer your question?

[@adamjovicic9006]

@@ibravn1 yes 👍 where can I do some bank balance sheet exercises? Reason I’m asking is because I would like to make a way so people can do banking in their own communities and still pay things like tax etc so to keep the normal life continuing just without bad banking or centralised banking

[@ibravn1]

@@adamjovicic9006 Sorry, this I don't know. Important initiative, though. Good luck with it!

[@Rob-fx2dw]

​@@ibravn1another clear explanation. It also happens the same way in the central reserve banks with the only real difference being the fact that the revenue to pay off the debt that government has incurred by the borrowing ultimately comes from the taxpayer. No surprise there!

[@tyroncline5978]

Buying and selling debt and money

[@armendibishi7985]

Great video, islamic banks currently with a 7% presenc in global banking industry, also create new bookmoney into exsistence but in a diferent form, so regardless conventional bank or islamic they all create money but this money is acepted as money mostly only by banks in the same geographic region becuase most likely its costumers will transact with eachother, but in a more fair world and free market institutions like FIDC shoulld not exsist if a bank fails it fails and depositors must share the loss also. Some may argue that banks shoulld be banned and not allowed to create money , but by doing that it would be somehow same as if I would owe Sam 20$ and he wants to buy now a 20$ tshirt from John but John also owes me 20$, so all us 3 agree to cancel our debt without reserve currency freewillingly and the transaction is made, so if we would stop banks from creating money it would be same as if goverment would come betwen us and not allow us to freewillingly make such agreements. And also if moneycreation was all in central bank hands, it would not go well for many reasons.

[@ibravn1]

Thanks for your thoughts. My preferred reaction to banks creating money is not to ban banks, but to separate money creation from bank lending. Banks would then lend money that they have acquired first and stop lending when they run out of funds (instead of creating new money as the see fit (within constraints)). The central bank (or some other agency mandated by the elected representatives of a country) would be in charge of money creation. It would create money for the democratically elected parliament/government to spend into the economy as they see fit. This reformed system would be pretty much the way everyone thinks the system is now. But it's not: It's a system that favors banks and the people that banks choose to favor (today, mostly holders of real estate, and rich folks generally, and their friends in the financial sector). So, this needs to change. See www.positivemoney.org for more.

[@armendibishi7985]

@@ibravn1 The money private banks create functions as money mostly only within that state or geographic site becuase its costumer buy more from eachother becuase of there distance, in uk there are somewhere 350 banks i think, so its better moneycreation to be let in hands of 350 institutions than to only 1 institution, chances of corruption are higher that way, also banks know better how much and when to loan, they would know even better if institutions that guarantee deposits would not exsist at all, islamic banks conventional banks all create money, every bank even in gold standart created money thats not a problem its even ok, but if we dont guarantee deposits and cb currency would be gold backed then banks would be alot more carefull also depositors would be carefull to, also on top of those if we ban private bank money to be created it would be the same as the story with me sam and john so it would be somekind of a comunist law, i know positivemoney proposition long time ago but i dont agree completly with them but i agree deposit guarantee institutions shoulld not exsist.

[@shouryasharma4150]

Question: so essentially, Bank acts as a worm hole which takes money from the future you and gives that money to the past you. Also it charges premium(interest) to move money backwards in time. Am i getting something wrong?

[@ibravn1]

Well, if the bank deems you creditworthy it agrees to create digits in your account that you can use as money NOW, against your promise to repay that (many years) LATER with digits from your account (that is, money), plus interest. So, the interest is what you pay the bank for this service.

[@shouryasharma4150]

Question: if banks create money out of thin air, what impact do Tools of monetary policy(reserve ratio, discount rate) make on the supply of money in the economy? [also Can you suggest some books regarding these topics]

[@ibravn1]

@@shouryasharma4150 Well, let's drop the "out of thin air"-phrase, because banks need the whole infrastructure of accounts, payment systems, computerized bookkeeping, etc. But money IS being created in the process of lending. However, this does not mean that a bank can create infinite amounts of money. There are many constraints, such as the tools you mention. Reserve ratios exist, I believe, in some countries, but not all, and after the past 15 years of QE banks have so many reserves that no minimum is required anymore; so, this does not limit money creation. Whether the discount rate does is a moot question. It is accepted as faith, but Richard Werner has found no direct link empirically. In fact, the link is reversed in time and of the opposite correlation (economic growth leads to rates being raised). Books to read, on banks' money creation: Ivo Mosley: Bank Robbery. Triarchy Press Josh Ryan-Collins et al.: Where Does Money Come From? New Economics Foundation. Andrew Jackson and Ben Dyson: Modernizing Money (I believe a free pdf at positivemoney.org) Joseph Huber: Sovereign Money. Springer Richard A. Werner: New Paradigm in Macroeconomics. All excellent books, listed in order of accessibility.

[@liamf4056]

Then how does rates on saving accounts work?

[@ibravn1]

Are you asking how interest rates applied to bank accounts work? Well, nothing strange there. This is money the bank has to find somewhere; that is, it gets deducted from its assets and is transferred to your account. But remember, banks hardly shell out any money for deposit accounts these days and is far more than offset against the interest it harvests on loans made.

[@liamf4056]

@@ibravn1 Ok, thank you for the reply. This is a really interesting topic. But if reserves are unrelated to the total amount of money created(sort of), why does Central Banks use QE to encourage ”lending” to the average Joe? Banks can still create money and rely on the net negative and net positive money flow during the day and simply loan on the overnight market if they are short on reserves.

[@liamf4056]

@@ibravn1 And do commercial banks buy UST securities with bank reserves? If they do, is interest paid on the securities with reserves by the FED/ us treasury? And again, if reserves is not related with the amount of money Banks can create. Why would banks want to have interest paid as reserves? If that is the case.

[@adamjovicic9006]

I still don’t get it

[@ruslandoronichev]

I still don't understand how money is created out of debt. Let’s say I loaned $100k and then I cash them out. Where the bank will get them if it doesn't use deposits?

[@ibravn1]

Only "account money" (bank money, money-on-account) is created by commercial banks "out of nothing", by bookkeeping, by swapping the borrower's debt to the bank against the bank's debt to the borrower, this latter debt being money, account money. Cash, on the other hand, is not created by commercial banks, but by the central bank. When you borrow 100K from your bank, that amount is written into your bank account as six digits, 1-0-0-0-0-0. This is account money, created during the process of "lending." LATER, maybe five seconds later, you perform another transaction with the bank, withdrawing your newly created account money in the form of cash, that is, you cash out. For this the bank needs to find a hundred thousand-dollar bills in its vault, or buy them from the central bank. So this amount, the cash, is not created by the bank. In the olden days you could possibly borrow 100K dollars in cash, but I doubt it. In any case, today loans in any meaningful amounts are created as account money. And THEN the bank may allow you to cash it out. However, they'll be VERY reluctant to do so, as they will suspect you are about to use it illegally, and there are strict regulations in place today that penalize a bank for letting you run off with more than petty cash. So forget about cashing large amounts out. So, by far the majority of lending is by book, and the borrower will transfer the amount borrowed to another bank customer in payment for her car or house. Did I answer your question?

[@ruslandoronichev]

@@ibravn1 Now it's clear. Thank you!

[@ruslandoronichev]

@@ibravn1 One more question: If I borrow the money from bank A and then spend it on Bank B, what happens in the background is - Bank A sells my debt as a bond to Bank B. Is that correct?

[@ibravn1]

@@ruslandoronichev No, no, no, no! First of all, you don't spend borrowed money "on a bank": You always borrow money to make a purchase from someone, and that someone has an account in a bank. Paying this seller involves transferring money from your account to the seller's account in his bank. This is what I described in the video (did you see it?). Your bank does not normally need to fund your loan (that is, sell a bond to fund it, as I'm assuming you're thinking). When you spend your loan on a payment to the seller, that money is simply found in your bank's reserves (its settlement account = reserve account) with the central bank. This account is replenished every day with payments from other banks, so there is typically no need for "funding" your trivial little house loan. (Only if banks make large investments do they need to acquire money in the money market, but that is another matter).

[@mjsmcd]

When you spend your loan why is it taken from banks reserve account and not the newly deposited money in your account?

[@mjsmcd]

Your deposit is a loan to the bank so their purchase of your promisory note to repay with interest is placed in your account but classified as a customer deposit and not an account payable on their balance sheet How so? And where does that money come from? Thankyou

[@ibravn1]

Correctly restated! As Richard Werner explains, banks are firms that do not discharge their accounts payable (that is, they don't pay out cash); they simply pile up the amount as a liability and rename it "customer deposits". This liability can be used by the account holder, the borrower, in payment to account holders in the same bank, or through the interbank clearing system, to account holders in other banks. Where does that money come from, the amount lent to the borrower (say, $100,000)? It is simply entered into his checking account (or other deposit account), and it is matched by a corresponding amount, with a minus in front, in a loan account that the bank opens in the borrower's name. No other account in the bank or elsewhere in society is reduced by that amount. The bank has now "expanded its balance," as they call it, or extended its balance sheet. $100,000 was "deposited" (really: created out of nothing) in the borrower's checking account, and $100,000 recorded in his loan account as his debt t the bank, his promise to pay. This process of money creation through lending is the essence of banking. This is what banks do. Nothing overtly illegal about it, even though the whole process has never (that I know) been examined for its legality. Also, the pseudoNobel Prize in Economics was awarded last year to three fellows who know nothing about money creation and peddle a completely false concept of banking.

[@mjsmcd]

The actual physical cash thats loaned from nothing taken from an atm by the borrower from his account comes from where ?

[@heathermooney7013]

@@ibravn1 So bankers are Magicians

[@ibravn1]

@@mjsmcd Well, keep it straight. Only *account money* is lent into existence, "from nothing". *Cash* is intermediated between banks and customers. Nothing weird about cash. When you withdraw a $100 bill from an ATM, that's cash the bank has fetched in its vault, and the amount is deducted from your account. However, originally some bank bought that cash from the central bank (like the FED), and the central bank created it out of nothing, by merely printing digits on fancy paper. Some of us think that the central bank should do the same thing with account money; that is, create the nation's money supply for the banks to LEND out, as in old-school intermediation::the way everyone thinks the system works.

[@ibravn1]

@@heathermooney7013 In this particular money-creation sense, yes. Over the centuries, bankers have cobbled together a system, the interbank clearing system employing money-on-account, account money, that allows THEM to be the creators of the nation's money supply. Central bankers (and the few politicians who understood this) have let them.

[@samueleagostinelli5346]

How does monetary policy fit in all this? By that I mean the two tools of central banks for controlling inflation: 1. the lowering/increasing of interest rates by central banks and 2. the quantitative easing/tightening whose goal is to change government bonds yield? Why would these actions by central banks modify the rate at which banks are willing to lend to citizens considering all the bank is doing is creating money out of thin air?

[@samueleagostinelli5346]

I'll try answering my own questions. Someone please correct me if something I'm saying is wrong. 1. Looking at bit deeper, the interest rate set by the central bank is the overnight lending rate, which is the rate at which banks can lend to one another. From what I understand, banks make short-term loans to one another for the purpose of the smooth operation of their day-to-day operations (I'm being a bit vague here as to what these day-to-day operations are). So if the overnight rate goes up, then that means that the cost of doing business goes up since banks will have to pay more interest to each other, therefore banks want to charge more on customer loans in order to recoup these costs. Does that make sense? 2. Quantitative easing causes lower government bond yields. Lower bond yields means that the risk-free rate of return is lower. I know that in the stock market the required rate of return used when valuing stocks is the risk-free rate of return PLUS a premium to account for the additional risk. I'm assuming that banks do a similar type of thinking, considering the risk of loans? For me though, it's really hard to conceptualise this in a universe in which banks can just create money out of thin air. I mean it's not like they're investing existing money like in the stock market right...? These are just personal hypotheses, I really don't know anything. I would love some clarification on this!

[@ibravn1]

@@samueleagostinelli5346 The interest rate that a central bank mostly focuses on is the rate it pays to commercial banks for their deposits at the central bank. These deposits are what's in the reserve accounts ( = the settlement accounts) discussed in my video. These reserves used to be gold (100-300 years ago, in Europe), and a commercial bank made a little money by having its gold sit idly at the central bank. However, if a central bank wanted to stimulate the economy (trade, production, etc.), it felt the banks should lend its gold (money) to entrepreneurs instead of having it waste away in the central bank's vaults. To induce the banks to lend more to entrepreneurs, it lowered its rate on that gold, so that banks would earn more on its gold by lending for business purposes, thus stimulating the economy. Vice versa, increasing the rate on deposited gold, the central bank would slow down commercial lending by inducing the bank to let its gold reserves sleep soundly at a nice rate at the central bank. Crazy as this may seem, this is the only (historical) reason I can find for the interest rate policy pursued by central banks ever since. Richard A. Werner has debunked the whole notion that interest rate policy has any effect at all, showing instead that the relationship is more likely the reverse in time (interest rate changes FOLLOW economic up- and downturns; they do not cause them) and the opposite in magnitude (higher rates are associated with economic growth, lower with slumps). (His paper: "Are lower interest rates really associated with higher growth? New empirical evidence on the interest rate thesis from 19 countries", onlinelibrary.wiley.com/doi/pdf/10.1002/ijfe.2630). To justify their actions, central banks have identified at least five "transmission channels", supposed causal chains through which interest rate policy may have effect. Mostly in vain, if you ask me. The overnight lending rate, I believe, is set by banks collectively, like the LIBOR (now phased out), in Europe. I'm not sure about the US.

[@samueleagostinelli5346]

@@ibravn1 This is really fascinating! Thank you for the video and explanation!

[@zedeyejoe]

Well it is simple. People put money into the bank. It is unlikely that all the money on deposit (held in the bank) will be needed at any time, so they can loan out more money than they actually have. That is typically 10 times the money it holds.

[@ibravn1]

Wrong. That's the obsolete fractional-reserve theory of banking. It may have been true a couple of hundred years ago, but it no longer is (in modern economies, at least). A bank doesn't lend money deposited. It creates new money (that is, bank money, account credits) in the process of lending. No cash is involved. You cannot borrow cash in a Western bank today. It's all account credits, and they are simply added to your account during lending. They are subtracted from no one else's account. They are created. See the video!

[@zedeyejoe]

@@ibravn1 Wrong. Banks have to have money to lend. They get that money from deposits (or indeed profits). But can lend more than they have. Electronic or pound notes, makes no difference. Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card. Because you can buy things with your bank account, we think of this as money even though it’s not cash. Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account. This also means as you pay off the loan, the electronic money your bank created is ‘deleted’ - it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth. Banks create around 80% of money in the economy as electronic deposits in this way. In comparison, banknotes and coins only make up 3%. Finally, most banks have accounts with us at the Bank of England, allowing them to transfer money back and forth. This is called electronic central bank money, or reserves.

[@Rob-fx2dw]

Nobody can lend out money that they don't have as they are not the owner. Your bank deposit is a debt that the bank owes you. So can you lend out your debts? Of course not. If you could then you would. It is the same for anyone including banks.

[@zedeyejoe]

@@Rob-fx2dw Certainly can. Thats the great advantage of banking. Savers put in the money, banks then lend out more than was deposited. Its called fractional reserve banking, look it up. You believing fantasies, will not make them real.

[@markvoelker6620]

Banks don’t create money. Banks only create currency. Money is gold and silver coins, which are produced by mints.

[@ibravn1]

A standard criterion for what constitutes money is what you can use for paying taxes. Most treasuries accept account money (digital money), none requires you to pay in silver and gold.

[@markvoelker6620]

@@ibravn1 So?

[@ibravn1]

@@markvoelker6620 So banks create money: account money

[@markvoelker6620]

@@ibravn1 Entries in a ledger are not money, they are evidence of debt, as are banknotes (which are liabilities of the issuing bank). All are IOUs subject to default. People may accept changes in ledger entries, or even written IOUs, as “payment”, but as long as they hold such records, they can lose the value they think they have if the institution holding the records or issuing the IOUs goes bankrupt. When someone pays you with a check, you have not been paid until you cash it. The check can bounce or the bank it’s drawn on can go bankrupt, in which case you do not get paid. You have not been paid until you take possession of an asset that is not itself someone else’s liability (someone else’s promise to pay). That is the essential characteristic of money: It cannot default, because its value does not depend on someone else’s making good on a promise.