Do you know that all the people in all the country in the world are having debt? Don’t be confused, please check the currency notes that you have in your wallet. Yes, you are liable to pay the face value of the currency to someone with some interest which is created be nothing.
The concept is simple; assume that you are the first person taking $1000 loan from the bank for 10% interest. So you have to repay the loan of $1100. Hence you are the first borrower and there are no other currency notes in circulation, you can only repay $1000 for the bank. What about interest of $100 which is created on papers. No, you cannot repay it because it is created only on papers out of nothing.
This is the situation where you repay the loan. Assume that you are the Nth one to borrow the loan of $1000 for 10% interest. Now you are able to repay the loan of $1100 because you can create the additional value of $100 by selling something or servicing someone.
At the end of the day if all the persons is capable of repaying the loan, then there will be someone’s bankrupt and there will be no currencies in circulation.
Then what are currency notes? It is the piece of paper printed by central bank on behalf of the Govt in exchange of bond papers which is assuring the repayment of the face value of such printed papers with some interest. So currency notes are the piece of papers where the Govt assures something when it is returned to Govt in the form of anything.
Govt circulates these currency notes as loans through commercial banks. So money is created through debt. Then someone borrows it from commercial banks assuring the repayment of principal with some interest. So he will create some resources, sell it to someone who will purchase it by borrowing from commercial bank. So the first borrower is able to repay the loan amount with interest.
Now the question arises how can the first borrower repay the interest? The answer is simple. When commercial banks lend some money, it will again come to bank in form of deposits. So the banks will keep some amount of deposit as reserve (Capital Reserve Ratio) and again lend it to public as loans. So the bank is able to create 90% more value from one deposit by doing the above activity in huge.
For example First borrower takes $1000 as loan. He will pay to someone in the process of gathering resources. So it will be distributed to various numbers of people. They will again deposit it in bank. Bank will again keep 10% from $1000 i.e. $100 and again distribute it in the form of loan. The second borrower will get $900 as loan. So the total money created in the system in $1900 from $1000. This is only in the second time. And this process is endless and it will be done in huge. This will lead to the problem of Bankruptcy.Interest is only one way of money creation in the system. There are many ways of creating money in the system. When the concept of Interest creates Bankruptcy, then what are the other problems created by other ways of money creation?
To Be Continued Based On Responses...........
5 comments:
it seems as if u have copied it from a text book or something..and to be honest,i dont understand these stuff of finance..so i cant tell whether its good or not..but the title is nowhere related to the post..d title is heavy and matter is related to finance..
No dear. Of course I have read some books other than text book, but it not the copy of the same. I am just trying to put the concept of money creation in my own words.
As you said this concept is related to finance. But the basic concept of Money Creation should be known to every person in this system.
Yes Bharath... Everyone should know how the money is circulated in the system...
Regarding this article, i can say that- u have researched well and ur able to put ur thoughts in a very simple way even though the concept is complex.
This is my view on the topic,
- Interest is not the only cause for bankruptcy. There are many more economical activities which make a company or an individual bankrupt.
Try to put across some more points and concepts.
In your next blog Try to write on "Effect of excess printing of currency notes on the economy"
If u want i can help u out.
Thank you,
Rohith Shridhar
Thanks Rohith. I will put the things you have told. But not in next article. I will write about this in my third post.
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