Banks Create Money To Facilitate Transactions - Example
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Summary:
- the rich person paid for a meal with ingredients and some gold
- the poor person got paid to make a meal
- the bank got paid to facilitate the transaction
Alternatives to avoid the bank loan:
- EITHER the poor person already has the gold to buy the ingredients from the beginning
- OR the poor person convinces the rich person from the beginning
- OR the ingredients don’t get converted to a more valuable meal
Starting point is a rich person with gold and meal ingredients.
🤸rich
💰 gold (1000)
🥔 ingredients (100)
The rich person deposits the gold in the bank for safety, and gets bank notes as receipt.
🏦bank
💰⇧ gold (1000)
💸⇩ notes (-1000)
🤸rich
💰⇩ gold (0)
🥔 ingredients (100)
💸⇧ notes (1000)
A poor person takes a loan to start a business. The bank creates new notes, so now the notes add up to more than the gold. The bank asks for some future extra notes as interest, so now the poor person has negative wealth.
🏦bank
💰 gold (1000)
⛓⇧ loan (110)
💸⇩ notes (-1100)
🧗poor
⛓⇩ loan (-110)
💸⇧ notes (100)
🤸rich
💰 gold (0)
🥔 ingredients (100)
💸 notes (1000)
The poor person uses the loan to buy ingredients from the rich person. Now the rich person could ask to convert all the notes back to gold and find out that the bank does not have enough gold.
🏦bank
💰 gold (1000)
⛓ loan (110)
💸 notes (-1100)
🧗poor
🥔⇧ ingredients (100)
⛓ loan (-110)
💸⇩ notes (0)
🤸rich
💰 gold (0)
🥔⇩ ingredients (0)
💸⇧ notes (1100)
The poor person uses the ingredients to make a meal worth more value. Adding value and making a profit is the only way to be able to pay back the loan.
🏦bank
💰 gold (1000)
⛓ loan (110)
💸 notes (-1100)
🧗poor
🥔⇩ ingredients (0)
⛓ loan (-110)
🍟⇧ meal (200)
💸 notes (0)
🤸rich
💰 gold (0)
🥔 ingredients (0)
💸 notes (1100)
The poor person sells the meal to the rich person. The poor person succesfully makes a profit.
🏦bank
💰 gold (1000)
⛓ loan (110)
💸 notes (-1100)
🧗poor
🥔 ingredients (0)
⛓ loan (-110)
🍟⇩ meal (0)
💸⇧ notes (200)
🤸rich
💰 gold (0)
🥔 ingredients (0)
🍟⇧ meal (200)
💸⇩ notes (900)
The poor person uses the profit to pay back the loan. The loan notes are destroyed by the bank. Now the quantity of notes is less than the quantity of gold.
🏦bank
💰 gold (1000)
⛓⇩ loan (0)
💸⇧ notes (-990)
🧗poor
🥔 ingredients (0)
⛓⇧ loan (0)
🍟 meal (0)
💸⇩ notes (90)
🤸rich
💰 gold (0)
🥔 ingredients (0)
🍟 meal (200)
💸 notes (900)
The poor person withdraws their gold.
🏦bank
💰⇩ gold (910)
⛓ loan (0)
💸⇧ notes (-900)
🧗poor
💰⇧ gold (90)
🥔 ingredients (0)
⛓ loan (0)
🍟 meal (0)
💸⇩ notes (0)
🤸rich
💰 gold (0)
🥔 ingredients (0)
🍟 meal (200)
💸 notes (900)
Everyone withdraws their gold. The bank keeps the interest it earned.
🏦bank
💰⇩ gold (10)
⛓ loan (0)
💸⇧ notes (0)
🧗poor
💰 gold (90)
🥔 ingredients (0)
⛓ loan (0)
🍟 meal (0)
💸 notes (0)
🤸rich
💰⇧ gold (900)
🥔 ingredients (0)
🍟 meal (200)
💸⇩ notes (0)