REPORT DEAD LINKS --- we can't keep this site up-to-date without your help
The Creation Of Money By A Bank
Letâs consider âdollar-valued assetsâ as they appear on the books of (1) a non-bank company and (2) a bank.
(1) In the case of a non-bank company, a dollar asset usually arises by the company making a sale of a product or service. If the company makes a sale and gets paid in cash or by check. The dollar amount of that sale becomes a dollar-valued asset on the companyâs books through an entry to the asset account âcashâ. An offsetting entry is usually made at the same time, usually either a reduction in the asset account âinventoryâ or an addition to the income account âsalesâ.
The dollar-valued asset represents real money that can be used to pay bills or make investments or do whatever the business does with money.
(2) In the case of a bank, the above is also true. However, the bank can also create a dollar asset by lending that dollar amount to a customer under a contract. Such contracts are at the foundation of our money supply and virtually all commercial transactions. The created dollar asset is backed by a promise of the borrower to repay that debt under the terms of the contract.
The âcreatedâ dollar asset has the same legal status as every other legally generated dollar asset. The dollar created by a sale and the dollar created by the loan have exactly the same legal and operational status.
The ability to create money is one of the special rights created by State and Federal law that makes a bank what it is.
If a non-bank company or a person lends money it owns to a person, a company or the government -- that does not create money. That transaction simply transfers the money by contract from one owner to another.
Some people think that a dollar created by a bank is somehow functionally different from a dollar âalready in existenceâ. That simply is an error. If you think that way, the easiest way to get over that thought is to realize that all existing dollars were originally created by a bank in accordance with the banking laws of this country.
------------------ end ----------------
1/04/09 / MRC