if you think that the money supply of the nation was increased in your example, please show at what point in the transaction it was increased - i'm talking actual dollar and cents.
Two examples:
These are both based on my island, so USA banking laws and structure does not apply. The bank in example 1 determines credit ratings of individuals and decides to loan or not loan, and no interest is charged. I.e. lets keep it as simple as possible. The decision to loan is based on the applicants credit rating (as determined by the bank) and the banks overall evaluation of the total money supply.
1) A wants to buy $10 of boards from B but lacks the money, so goes to the bank and asks for a loan of $10. The bank looks at the total money supply, looks at A's credit rating and PRINTS $10 OF THE COMMON CURRENCY, hands it A, makes a debt entry of -$10 in A's account (A owes the money, but no interest and no demand date set!). How much money was created? $10! The $10 circulates in the economy UNTIL A takes $10 of currency back to the bank and cancels out his debt. At that point $10 of money vanishes from circulation.
2) A wants to buy $10 of boards from B, but lacks the money, so goes to B who agrees to sell the boards for an IOU of $10 from A. No interest and not specific demand date are set. How much money was created? $10! The $10 IOU circulates in the economy until A redeems it, perhaps with $10 worth of fish, at which point the money vanishes from circulation because the redeemed note is destroyed.
What is the difference between the two above examples? The significant difference is that the $10 of common currency in 1) has a value controlled by the central bank and the aggregate fortunes of the economy. The IOU of 2 is subject to the fortunes of the economy, but also specifically the fortunes of A. If A suffers significant problems, the IOU might become worthless.
Your issue is the failure to understand the equivalence of the bolded sections. |
