A Simple Example of How Money is Created by the Banks
As it has been often repeated on this site banks create money by making loans. But what are the real reifications of this and what are the mechanisms. Let's look at a simple example.
A person wants to buy a house. The price of the house is $100,000. For the sake of argument let's say the person goes to the bank for a 100% loan. This would be unheard of (since the last depression) before until the era of Greenspan easy money and the Greenspan housing bubble.
The bank grants the loan and the person has a $100,000 mortgage. The $100,000 paid to the seller was created by the bank and begins circulating in the economy. The bank does not need to have $100,000 cash in its vaults to make a $100,000 loan. It just needs enough "reserve" to meet its fractional reserve banking requirements and it creates the $100,000 by lending it.
The bank expects the person who received to load to pay back a total of $300,000 over the next 30 years. The $300,000 is the payment of the principle (the original $100,0000 and interest. The bank does not create the additional $200,000 and this never goes into circulation. What this means is that the person who received the loan has to fight with everyone else for that extra $200,000 over the next 30 years. This person is forced to compete for a resource (that extra money) that does not exist.
The economic theory is that the real economy will grow. The real economy being real production. This will also grow the money supply. The problem is when the real economy doesn't grow fast enough. The debt economy grows the debt faster than the real economy can grow the money to pay the debt. So what has to happen when this occurs? It's simple; some people must lose money or go bankrupt so that other people can pay the debts.
There are other side effects. To pay the interest without a large number of the population going bankrupt requires endless economic growth. Many people view economic growth as being all good. That is not always the case. Either new money (new debts) have to be created to put enough new money into circulation to pay today's interest or resources must be secured from the land or people (labor) to create wealth that can be converted to money. This results in the necessity to always create debt bubbles, which are not sustainable, or in a scorched earth policy where people and companies consume resources to pay today's interest without worrying about how to pay tomorrows interest. This consumption becomes unsustainable and the environment suffers.
The collection of interest also results in a shifting of wealth from the many to the few. Wealth becomes concentrated. Throughout history countries that have seen large concentrations of wealth have always fallen.