Dandelion Salad
By Rudo de Ruijter
www.courtfool.info
Netherlands
In “Secrets of money, interest and inflation” [1] I have exposed many things about banks. There were many readers who still had questions about the way banks make money. That is not so surprising, for it is really something that is astonishing. Some people cannot believe it. That cannot be, can it?
In this article we will explain this money creation in detail. To avoid misunderstandings: banks make money, but they don’t make bank notes. Only the central bank is allowed to print banknotes. Ordinary banks do it simpler. They make money by inscribing numbers on their balance sheet and lend that out. And on the lent out money they collect interest. That is how the bank grows rich.
So, banking is a nice game. But, as with all games, there are rules. These are imposed by the central bank. That does not mean that everything always goes perfectly then. Things can become a mess, like we know from today’s credit crisis. We come back to that later.
Let us see how banking works. Banking is mainly a question of bookkeeping. I find bookkeeping boring, so I will only show the interesting parts. Here you can first have a look at the bookkeeping of a bank, to be more precise, of its balance sheet. To keep it simple, I didn’t put everything on it. On the left hand side, the debit or assets side, you find what the bank has. It is also called the Activa. On the right hand side, the credit or liabilities side, you find what the bank owes to others, like the Current accounts, also called Transaction deposits. They are often called passiva. On this side you also find what the bank owes to its owners, the capital. When you substract all the passiva from the total of the activa, you find the capital.
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