Credit is money. Money is credit. In fact banks, although they are limited by federal edict as to how much of this money they can create out of thin air, are essentially by not being prohibited from doing it at all, allowed under law to do it. This if something is regulated as to the degree implicitly then it is allowed below that degree willy nillly.
The only thing that prevents us from doing the same thing, say signing letters of credit in lieu of money to repay loans, is the willingness of creditors to accept them. That and the invocation law against invoking the credit of a third party without their accounting of it. i.e. writing a cheque without money in the account. A private cheque to pay a debt, or a promissory is ok, as long as it is given credit or collateral in some way. Credit is [must be] between the creditor and the creditee, so cannot be officially or third party declared, except as the government allows legal tender to be printed for convenience. So yes, credit is always created out of thin air and always privately. If it were not so, it would be barter. And if you analyse barter, it is even private credit in turn, as there is no guarantee that if you take a cow in payment, that the cow will give milk.
You should never in any transaction allow one-way guarantees. Either the money and the purchase have the same value or they don't buy. If you ever see any contract language such as enforces appearances, or as is where is, or caveat emptor, you know you are buying a dry cow. Either the value is adjudicable within limits or it is not a contract, it is a fool's script to part with capital for naught.
If the bank had to create money to give credit in a loan, then they would have to borrow it. In effect they do that. Whenever they sign a dollar to your account on loan, they borrow the same and more from the government. The interesting scam they have going is that when the loan money to you, they put that same money back in their bank and declare it an asset to loan further money on. Even if you take most of that money out to pay down acquisitions and salaries, the recievable is stil an asset.
They then can by law in effect, loan more money on that asset as they can borrow more from national banks on those same assets. The more they loan, the more they can loan. That is the jungle of it.
When the Goldsmiths of England hit on a creation from nothing scheme based on the average drawdown on accounts, they invented the basis for creditory multiplication of assets. The more people asked them for money, the more fictional money they had, as accounts receivables (interest payments) by credit 'law' are assets. And if you had say 30% collateral in hard assets, then a good portion of that was protected against the odd run on the bank.
If times got tought you could always raise rates and foreclose, protecting yourself against the rising demands. What the interest did was produce a hedge against the creation of fictional money. In essence the interest, of say 3% on 4 times the money loaned as on hand in gold, became 12% of the gold on hand. So their payout rate was 3% on gold on hand, and their income was 12%. The difference between rates of income and outgo doubled their on hand capital every 8 years and therefore doubled their outlay in loans. But on a constant basis, half the capital was their own totally, and it was highly unlikely that there would ever be such a run on the bank for real capital that it could not be protected by their own capital and the foreclosable capital of collateral on loans.
If they made a slight difference between interest paid out and paid in, the effect was quadrupled. A 1% difference out and in made the total differential between owing and owed 13%, and the time to recovery of equal to at-risk capital to 5.67 years on that static differential alone. And that time was shortened even further when you consider that all interest payments become bank-owned capital and that could be loaned out again at a 4 times ratio, creating more bank owned capital in the way of interest.
With all capital against loans at 4 times debt to assets, the interest payments increasingly protected the original at risk bank-borrowed capital of the depositors. So the bank-owned capital increased at a ratio of 4 times the interest-incoming times the differential interest rate, so the effective incoming interest during periods of unrestricted growth equals to 1.04 X 1.13 or 1.1752 - 17.52% - So on original deposits, the time to total protection of that original$ = x^1.17652 = 2 -or- 4.29 years.
It seems a pretty safe bet to put take in deposits and put some of your own capital in, if you can control the flow of money in investments to an extent. Even without a banking license, if you are conservative, the time of risk exposure seems minimal -- if you operate within strict asset to debt ratios.
BTW the thing that balances positive interest on loans is the fact that the hard capital has negative interest. The money that is paper currency or coin is actually debt that the government never pays and is constantly decreasing in value. The government does not pay interest on its currency it issues which is in fact debt, but also in fact gets you to pay interest on loaning them the value that they pay in paper debt. So printed paper money or its equivalent created debt instruments in name of currency value, or coin is in fact negative interest or depreciating debt. If the money had coupons attached that could be redeemed in currency units, it would have constant value. But this would present a problem in debt repayment to other parties. It is also hard to set that coupon rate. The only way to do it fairly would be to change the dates on fixed rebate amounts.
So if there is 3% interest on a loan, it is easy to pay, as the money it is paid with is decreasing in value at least at that rate.
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