It’s a wonderful life.

I always thought that the banks (in theory) had to have the equivalent amount of gold deposited somewhere (Federal Reserve, Bank of England etc) to back up the financial dealings? I may be wrong, of course.

So…. this confirms my theory...no one has really got a flaming clue what money really is...

ok throw this one open to the floor...anyone know what a fiat" is...(and no I don't mean the little cars).

Re: It’s a wonderful life.


As far as I know, a bank can loan any amount that it feels it can regain in repayment + interest.

To trade in a particular country, a Bank must first register there.
Certain conditions of trade are specified at that time.

(loan out) to (asset held) ratio being one of them.

Can anyone verify the ratio for the US and the UK?

but my question is this...what is it that I am borrowing from a bank...if they just lent me something they don't have?

and why am I paying interest to borrow an illusion.

There are laws that limit a bank's liabilities (the amount it's lent out). Here in the US each state sets the limits but they are usually around 60% of the bank's assets. If a bank exceeds that amount the state can pull it's charter.

You aren't borrowing an illusion. Depositors put their money into their accounts. The bank guarantees that safety of that money and you are, in effect, loaning that money to the bank (for which they pay you interest).

The banks then turn around and loan that same money to others for a home loan, car loan etc.. and those borrowers pay interest back to the bank on top of the principle.

If you take out a loan you are borrowing money from the bank that the bank borrowed from me.

Cash/paper money is only a symbolic representation of money. It makes up only a small fraction of the actual money supply (less than 5% I believe). Most large transactions, including loans, are carried out without cash changing hands. Banks only have a tiny amount of their assets in cash on any given day. So when there is a run on the bank, the bank may indeed run out of paper money.

Well in theory, money is combined representation of the country's GDP
to accomodate the exchange of goods and services central bank regulates the amount of that money with interest rates etc. 'Paper' vs the amount of product/services produced by the economy.

A lot to do with how much money the government collects in taxes - taxes are basically money, share of the wealth. The better economy works the more taxes the state can collect and redistribute back into circulation. E.g. government bills are the most stable and safest investment because they are guranteed by the state/ taxes.

Hey thanks guys...that's a great help.


...thanks fishin 60% in the US..

Equus...what you are saying seems to be closest to what I'm trying to figure out.

nexz...the GDP you think?...

I wonder how that would work for the greenback...unlike most currencies. it's being used in the smallest strangest countries as a common means of exchange...I wouldn't even like to guess how much US currency is being used outside the US at street level.

Oh, banks are always loaning money they don't have. That's how they make money. You borrow money to buy a car. The car dealer doesn't take off for Hawaii. He repays the bank money owen under the various floor planning schemes. Now, the money is back in the bank. In fact, it never left, in the first place. Meanwhile, that bank is making collecting interest on money it never parted with.

Actually, I think a federal bank's reserve limit is set by the Federal Reserve. The limit varies with the Fed's desire to warm up, or cool off the economy.

give that man a prize.

Your are closest to the truth of the matter I think.

I'm sure big money shifters view the general public the same way gourmet chefs view the burger flippers at McDonalds.

Can I share a little story .
This is true and just happens to be a good chance to watch a scaled down version of how money can sometimes work.
Way back when I was too young to be interested in money, one of the people from the street shows me several small gold bars.
I held them in my hand, (immediately thrown by how unnaturally heavy they were for their size).
This is in the hey day of gold speculating…the price of gold is increasing every day…and very much in the public eye…I mean it would have to be for this chap to have some…his usual interests were fixing his car and watching bad TV sitcoms.
Anyway he was grumbling about how the gold company wanted to just give him an ownership certificate and keep the gold safe in it's vault (for a small storage fee that is)
But being the everyday person that he was. he wanted the actual bars. And had walked out of that gold vault with his pockets dragging down by his knees.
I was left wondering why people wanted the heavy shiny stuff in the first place.

Shortly after that, the price of gold dived.
The gold company went bankrupt due to the fact that, the certificates it sold were not representative of the actual gold in its vault.
In other words, they were just selling paper.
Many people lost out, finding that their certificates were worth no more than the paper they were printed on.
Except for our friend of course…who enjoyed the happy ending god always bestows upon the practical.
After several years he sold that gold…
didn't make any money…
but at least he broke even.

Now when you can just take a peek inside a vault…it's easy to tell your paper is worth nothing….but when your vault is the whole federal Reserve system and that of all the main banks …you just cant tell.

You actually asked two questions, one what money is, and other why banks can land what they dont have..

On the first one all the currencies in the world are fiat money, so its only supported by the weight of the economy - product priduced by the country and those who trade in that currency.

On the second, banks would never keep everything in cash, thats not in the nature of banks, thats how their operate you land them when you open an account they land someone else, money only work when they are invested.

oh yep...these are absolutely right ways to look at things...

but it reminds me of when I asked one of the youngsters where milk comes from...

"from the store of course" was the indignant reply.

Around 15 years ago Forbes Magazine published an article regarding the effect of inflation on the value of paper money. The article started with the same premise that everyone already knows - that over 50 to 100 years inflation erodes the purchasing power of even the strongest paper currency by 95%+. The article then went one step further. It looked at every paper currency from 1900 to the present. Only 10 to 12 were worth anything at all. All of the rest were completely worthless, due to revolution, war and so forth.

Perhaps Needsandwants past neighbor had a good idea.

I thought banks had insurance, so if everyone wanted their money, they could actually get it.

You might be right about that.

Inflation is actually healthy, currency should devalue over time, its much better than deflation or zero inflation. Its good because the system needs a constant supply of money to keep it going. We are indebted at all levels; personal, corporate, state debt are growing constantlyat an increasing rate. Increasing debt requires increasing money supply to service that debt. If there isnt enough money available to service the debt, much debt will default and the economy will stagnate.

From a different angle, weak currency which constantly devalue (at reasonable rate) is good for an exporting economy.



Hehe, exactly! its all about how you ask the question...

This is a very broad subject.