courtfool.info
The court fool reveals
secrets behind world events
list of articles
StartListOfArticles

The secrets behind money The secrets behind money:

The bankers hat

The magic of bankers The magic of bankers

sign a loan
If you just sign here, I will give you a balance of $ 1,000 and you will owe me $ 1,000 plus interest.

The banking system in short The banking system in short

exchanging mutual claims
With just a tiny little bit of money bankers can pay each other millions...

Secrets of money, interest and inflation Secrets of money, interest and inflation

Debit, credit, banco! Debit, credit, banco!

Canadas_National_Debt_1940_1987
Politicians give billions away to private bankers...

A tale of two monetary systems A tale of two monetary systems

falling banknotes

Private banks or a bank of the government Private banks or a bank of the government. A comparaison.

From state debt to state money From state debt to state money

Towards a sound economy Towards a sound economy

Bank crisis? Reform!

Bank crisis? Reform! Bank crisis? Reform!

Wall_Street_Bull

the Derivative Scam Banking explained:
the Derivative Scam



The secrets behind the euro The secrets behind the euro:

The madness of the euro

The madness of the euro The madness of the euro

heavy euro

Out of the euro, and then? Out of the euro, and then?

hungry euro

ESM, the new European dictator! ESM, the new European dictator!

YouTube: The new European dictator

ESM robs the Treasuries in 3'51'' ESM robs the Treasuries in 3'51''

Keep quiet! We build Europe!
Keep quiet! We build Europe!"

ESM, a coup d'état in 17 countries! ESM, a coup d'état in 17 countries!

Zeus rapes Europa

Zeus rapes Europa Zeus rapes Europa

Goldman Sachs captures Europe

How the Goldman Vampire Squid Just Captured Europe ESM: How the Goldman Vampire Squid Just Captured Europe

NATO rescues euro in Libya

NATO rescues euro in Libya NATO rescues euro in Libya

Obama and Sarkozy in Libya
Obama and Sarkozy in Libya

Hillary Clinton's emails about Libya Hillary Clinton's emails about Libya

Euromania

EUROMANIA by Peter Vlemmix EUROMANIA by Peter Vlemmix

Ascensao_e_queda_do_euro

Autores:
Rudo de Ruijter
Yannis Varoufakis
Costas Lapavitsas
James K. Galbraith
Gerard Dunénil
Michael Hudson
Ed Dolan
Jacques Nikonoff
Jean-Claude Paye
Eugénio Rosa
Jorge Figueiredo

Exceptional offer
Exceptional offer:

Ivan Boyadjhiev, Confused Perspectives, 40 x 50 cm

Ivan Boyadjhiev, Confused Perspectives, 40 x 50 cm Ivan Boyadjhiev
Confused Perspectives
40 x 50 cm
Click here...




The secrets behind democracies The secrets behind democracies:

Power to the people

The road to democracy The road to democracy

The bizarre Dutch referendum

The bizarre Dutch referendum The bizarre Dutch referendum

Chicken_parliament

The chicken-parliament The chicken-parliament


secrets behind the war in Iraq The secrets behind the war in Iraq:

dollar_bill

Cost, abuse and danger of the dollar Cost, abuse and danger of the dollar

Iraq_Memorial

Iraq Memorial Iraq Memorial


The secrets behind the war in Afghanistan The secrets behind the war in Afghanistan:

Pipelines_to_9_11 / WTC

Pipelines to 9/11 Pipelines to 9/11


The secrets behind the accusations against IranThe secrets behind the accusations against Iran:

Raid on the nuclear fuel market

Raid on Nuclear Fuel Market Raid on Nuclear Fuel Market

Wipe Israel from the map? Wipe Israel from the map?


Farewell to growthFarewell to growth:

outlook_population

World Energy and Population World Energy and Population

World_Energy_Imports_Exports

Turning-point of humanity Energy crisis:
Turning-point of humanity




Facts and lies about the climateFacts and lies about the climate:

Climate Conference Paris 2015

Climate Conference Paris 2015 Climate Conference Paris 2015

The clockwork of the Earth and Sun

The clockwork of the Earth and Sun 1: The clockwork of the Earth and Sun

The activity of the Sun

The activity of the Sun 2: The activity of the Sun

CO2: scare, claims and fraud...

CO2: scare, claims and fraud... 3: CO2: scare, claims and fraud...

Uncover secrets Uncover secrets:

Sleepwalking

Wake up citizens? Wake up citizens?


HumorHumor:

Protest in Draguignan
There are alternatives to capitalism...

Protest in Draguignan Protest in Draguignan

Cartoons

More cartoons Click here fore many more original cartoons...


Treaties Treaties:


Treaty establishing the European Union (EU) Treaty establishing the European Union (EU)

Treaty on the Functioning of the European Union (TFEU) Treaty on the Functioning of the European Union (TFEU)

Amendment article 136 TFEU Amendment article 136 TFEU

First version of the ESM First version of the Treaty establishing the European Stability Mechanism (ESM)(not ratified)

ESM Treaty establishing the European Stability Mechanism (ESM)

TSCG Treaty on Stability, Coordination and Governance in the economic and monetary union (TSCG)

Vienna Convention 1969 Vienna Convention on the Law of Treaties 1969

Websites having published articles of the court fool Do you want to know who publishes the fool's articles?

Publishers

StartPublishers



11 Septiembre 2001
24h Gold
321 Energy
Aardewerk.be
Academie-Gaullisme
Ad Broere
Advivo.com.br
Afghan.nl
Aftershock.su
Albe.ru
Aldeilis
Alexander's Gas and Oil
Alex Constantine's 9/11 Truthmove
Alfa Kappa
Aljazeera Com
Aljazeera Info
Altea te quiero verde
Alter du Lot
Alter Info
Altra Informazione
American Chronicle
American Iranian Friendship Committee
Amsterdam Post
Anarchiel
Andalous.ma
Anonymous France
Anovis Anophelis
Antifascist Encyclopedia
Apocalypse Total
Apollo Solaris
Aquarius Age
Argusoog
Arianna Editrice.it
ArmonyaX
Articles du jour
Artikel 7 Nu
At-Park / АТ-парк
Atlas Vista Maroc
Au bout de la route
Avant de voter
Averdade vos libertara
Avicennesy
Avizora
A voz do povo
Baltimore Chronicle
Bankiv Tomske.ru
Banque publique .be
Beaujarret 50'z
Beez Libre Info
Before it is news
Belém Livre
Bernard Sady
Bezformata.ru
Biflatie.nl
Blogapares
Blog Chalouette
Blog Chatta.it
Blog économique et social
Blogg.org
Blog World-citizenship
Bobo in Paraguay
BOINNK!!!
BouBlog
Brasilianas.org
Brood en spelen
Bullion Management Group
Burbuja.info
Business-Gazeta.ru /
БИЗНЕС Online
Cafe 415
Candombeando
Cantv
Carla Noirci's Log
CASMII
Caveat emptor
CawAilleurs
CDU Arouca
Cenex.com.ua
CGT Santé 46
Chatta it
Chris Roubis
Chiado Editora
Chris Roubis
Cogito ergo sum
Collectif de Remises En Causes de Besançon
Come Don Chisciotte
Comité Valmy
Conscience Citoyenne Responsable
Contre-Info
Correio Progressista
Corriera della Notte
Cosenostrea casanostra
Counter Currents
Crash Debug fr
Crise Systémique Globale
Critical Trend (bg)
Criticamente
Cross-Cultural Understanding
Dagboek van een belegger
Daily Motion
Daily Times
Dandelion Salad
Dazibaoueb
Déborah 33 Epée
De Echte Denker
De Kelderlander
De Lange Mars
Démocratie réelle Nimes
De Waarheid Nu
Démocratie capitaliste
Démocratie Réelle à Nimes maintenant
Démocratie royale
Democratische Partij v Solidariteit
Denissto.eu
De Reaguurder
De Vrije Chroniqueurs
Dialogue & Démocratie Française
Diário Liberdade
Diatala.org
Digitale Stad Eindhoven
Dimensional Bliss
Dire Giovani
Dissident News
Dit kan niet waar zijn.eu
Diário de Notícias - Cartaz
Djamazz Centerblog
Dolezite.sk
ДОТУ.org.ua / Dotu.org.ua
Double Standards
Dove sono le ragazze
Doy Cinco
Dreamdash
Dutch Amazing Nieuws
Dwarslezing
E.J. Bron
Earth Matters
Económico Fórum pt
Economics Kiev /
Мировая и рыночная
экономика
Статьи и книги

EC-planet
Eco-Humanisme Radical.org
Edelmetaal.Info
Educate Yourself
E-Foro Bolivia
Égalité & Réconciliation
Eindtijd in beeld
Élections Algérie
EliteTrader.ru / Элитный Трейдер
El Libre Pensador
Elkhadra
Eltimir / Елтимир
End the ECB
End US Militarism
天涯社区 /
(End of the world community)

Enrico Sabatino
Entrelector
Es.Sott.net
Etienne Chouard
EU Alert
Europe 2020
Europlouf
Eurostaete eu
Eva Anárion
Evolution de notre civilisation
Facebook
Fai te
FCCI
FDESOUCHE
Ferra Mula
Filosofia e Tecnologia
Fimdostempos.net
Finanza.com Blog
Finanza Online
Focus στην Οικονομία
Folha diferenciada
Fortune F. Desouche
Forum démocratique
Forum des Alternatives.org
Forum.for-ua.com
Forum Mondiale della Alternative
Four Winds
Francisco Trindade
François de Siebenthal
Free Minds
Freedom Bytes
French News Online
French Revolution
Fronte di Liberazione dai banchieri
FTU.su
Fugada YouTube Forum
Future Fast Forward
Gabriele van Doorn
Geen Flauwekul
Generaal Pardon
Geografia e Luta - Prof. Mazucheli
Geopolitica blog
George Orwell Werkgroep
Gest Credit
Gianfranco Vizzotto
Gino Salvi
Global Echo
Global Economic Intersection
Global Faultlines
Global Order
Global Research
Global Systemic Crisis
Golden Heart
Gorod.Tomsk.ru
Город.Томск
Goto 2012
Goudstaven-goudstukken
草根金融服务社 /
(Grassroots Financial Service)

Grioo
Guerre Libre Info.org
Henry Makow
Het echte nieuws.be
Het uur van de waarheid
Hidden Mysteries
Ho visto cose che voi umani
Holland 4 MPE
Ho visto cose che voi umani
Hubbert Peak
Huffington Post
Iceberg Finanza
Il nodo gordiano
Imperiya / Империя
Indebitati
Indymedia
Indymedia Portland
Info Guerilla
Infomare Per Resistere
Information Clearing House
Informazione in Rete
Infos différentes
Infowars Ireland
Institute of Evolutionary Economics
Instituto Reage Brasil
Intellezione
Intermarket & more
International Business Times
InvestGraf
Investors Hub
Iran Blog
Iran Daily
Iran File
IRIB Iran French Radio
Irish Public
Irish Timez
Islam City
Isxys / ΙΣΧΥΣ
Ivan Mutov
Jean Marie Lebraud
Joomla
Joop.nl
Jornal Fraternizar
Jornalggn.com.br
Jose Joa Net
Josè Maria Salvador
Journal la Mée
Journal Milénio
Journaux de Guerre
Kanie Tistory
Klein Paradijs
Klepsudra
Kollinos
Komitet / Комитет
Kostarof
L'éveil 2012
L'Observatoire de l'Immo
La banlieu s'exprime
Lanet Kiev
Las razones de Aristófanes
LeaksFree.com
Le Banquier Garou
Le Blog d'Eva
Le Blog de Nicole
Legion 5-9
Legio Victrix
Le Lot en Action
Le Metropole Cafe
Le Monde du Sud
Le Partisan de Gauche
Le Post
Les Indignés
Les moutons enragés
Leugens
Lettre d'Informations Stratégiques Internationales
Liberamenteservo.it
Libertatum
L.I.E.S.I.
Lit Corner
L'Olandese volante
Luminária
Macua Blogs Moçambique
Manifeste pour un débat sur le libre échange
Mapeni School
Marianne2
Marista Urru
Market Oracle cn
Market Oracle co.uk
MasterNewMedia
Mathaba News
Maurício Porto
Max 1967
Maxi News
MBM Hautetfort
Mecano Blog
Melochi
Mens en Politiek
Mercato Libero News
Metropolis
Mga Diskurso ni Doy
Michel Collon Info
Middle East Online
Mondialisation Ca
Money Files
Mouvement Politique d'Éducation Populaire
Na Sombra.org
Nato nella tana
Natural Money
Nervyoko-bis
Newropeans Magazine
News Follow Up
Newzz in Ukrain
Niburu
Nieuw-Nederland
Nieuws-Flash
Norma Tarozzi
Nota.to-p.net / НОТАРИАТ
Notizie Libere
Notizie Silcea
Nous les dieux
Novusordoseclorum
NucNews
Nya Politiken
Ocastendo Blogs
Occupy Amsterdam
Occupy Network tv
Oil Crisis
Olo's Ramblings
Oko-planet.su / Око Планеты
Onderzoek 9/11
One Base.com
Ons geld
Ontdek Islam
Openbare Bank be
Os Bárbaros
Osservatorio Sovranità Nazionale
Osvaldo Bertolino
Our World / НАШ МИР
Oxygene.re
Pakistan News Service
Palestine - Solidarité
Panier de Crabes
Paper Blog fr
Paperless Korea
Paraguay Tistory
Partage dialoguer avec jean loup
Parti de Gauche 34
Partido Comunista Brasileiro
Patrice Mars
PCF Bassin
PCF Cap Corse
Peace by Truth
Peak Oil .pl
Pensare Liberi News
Perunica
Peter Pan's Paradijs
Philippe Vedovati
Pintxo
Planeta Caos
Planete Non Violence
Plein Overheid
Politics & Current Affairs
Portal Luis Nassif
Portland Independent Media Center
Post Jorion
Post Switch
Pragmatic Economist
Pravda / Правда
Primavera do 11
Project for the Old American Century
Prova Final
Quo Fata Ferunt
Raise the Hammer
Ravage Digitaal
Rayven
Real Infos
Real Wealth Society
Recuperare Credit
Relapsing Fever
Resistance
ReRuBabs
Resistance 71
Résistance FR
Resistenze.org
Resistir Info
Resurs.by
Revolta Total Global
Robin Good
Rodon
Rol Club
Rue 89
Rus Nevod
Sahar TV Iran
Saura Plesio
Seigneuriage Blogspot
Sempre Vigili!
Shem.se
Siddharth Varadarajan
Signoraggio.it
Silver and Gold Shop
Silver Bear Cafe
Sociale Databank Nederland
Sociale Driegeleding
Sociologias
SOS-crise
Sott.net
Soutenir l'Afghanistan
Spartacus.info
Spazio Forum
Spiegelbeeld
Spraakloos
Sprookje Nieuws
Stampa Libera
Star People
Stienster Blogspot
Studien von Zeitfragen
Stop de bankiers
Storyo.ru / Страницы истории
Suciologicus
Sustainocratie
Svobodnoslovo / Свободно слово
Tegen Onzin
Textos A Voz do Povo.pt
The Movement
The People's Forum
The Pragmatic Economist
The Voice of Wakker Holland
The Wild, Wild Left
Tijdgeest Magazine
Time For Change
Tim's Journal
Toine van Bergen
TomskNet.ru / Город.Томск
To-p.biz
Top-débats.info
Tora Yeshua / תורה־ ישוע
Trademan.org
Transatlantic Information
Exchange System
Transition Town Breda
Transcom Se
Triplo II
Truth Spring
Truth Move 9/11
Tunisia Today
Uitpers
UKIP Hillingdon
Um Novo Despertar
Uruknet Info
Verborgen Nieuws
Vermelho.org.br
Verontruste Moeders
Veterans for America
Video data bg
Viewzone Magazine
Vilistia
Visionair.nl
Vision Démocrate.net
V-Kontakte.ru / Вконтакте
Voix dissonnantes
Voprosik / Вопросик
Voy Com
Vrijspreker
Vues du monde
Vyacheslav Burunov
ВячеславБурунов
Wake Up From Your Slumber
Wakkere Mensen
Wall Street Pit
Want to know .nl
War and Peace / война и мир
Waterput klassiek
We Are Change Holland
We Are Change Rennes
Welcome Back UZ
Werkgroep George Orwell
What really happened
Wij worden wakker
Wiki Strike
Wisdia Encyclopedia
Worldissue Blog bg
World Prout Assembly
Wroom.ru
YouTube
ZakonVremeni.ru
ЗаконВремени
Zebuzzeo
Zé Povinho no século XXI
Znanie-Vlast.ru
БезФормата.ru

Since 2006 the sites here above have published one or more of the court fool's articles. Some seem to be out of reach today, either because these websites or pages do not exist anymore, or because of other causes. To compliment them, I have chosen to keep them in the list.
Rudo de Ruijter

courtfool-faviconSpecial thanks to:

Christine, Corinne, Francisco, Evelyne, Françoise, Gaël, Peter, Ingrid, Ivan, Krister, Jorge, Marie Carmen, Ruurd, Sabine, Lisa, Sarah, Valérie & Anonymous...

courtfool-faviconAcknowledgements for translations:

StartTranslators

Alter Info
Carlo Pappalardo
Come Don Chisciotte
Ermanno di Miceli
Ivan Boyadjhiev
Jorge G-F
Lisa Youlountas
Jose Joaquin
Manuel Valente Lopes
Marcella Barbarino
Marie Carmen
Mary Beaudoin
Michel Ickx
Михаил
Natalia Lavale
Nicoletta Forcheri
Peter George
Resistir Info
Traducteur sans frontière
Valérie Courteau

StartJoinTranslators

courtfool-faviconDo you want to translate too?

translator
Information stops at the linguistic borders. All translations on this site have been made by volunteers. If you speak more than one language, please consider translating an article too. Thank you in advance in the name of the thousands of people who will be able to read your translation.
Please contact:
Rudo de Ruijter
courtfool@xs4all.nl

Decrease text size
Increase text size

 

Debit, credit, banco!

by Rudo de Ruijter,
Independent researcher,
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 wil 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.

bank balance
Click to enlarge

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.

(At a bank the numbers are that high, that on the balance sheet the last three figures are generally omitted. Then you have to multiply all amounts by 1000.)

Now let’s set the banker to work and see how he does things. It is not necessary to see the complete balance all the time. At each stage we will have a look at the part that changes. To keep it simple we’ll work with small amounts. In reality they are much bigger. We will also mention the principal rules. We start easily.

Bank takes notes in deposit

bank balance 1
Click to enlarge

John has 1000 euros in banknotes and brings them to the bank. The banker says “thank you” and inscribes the 1000 euros on the balance sheet as an asset of the bank. “Banknotes in cash: + 1000 euros. But the bank will also have to give the 1000 euros back to John one day. So the bank has also a debt to John. The banker writes at the liabilities side: Checking account John: +1000 euros.

This way many customers bring their money at the bank. By experience the banker knows that a lot of customers will leave most of their money for a long time. Daily some money goes, but other money comes. So the bank has more bank notes than for its daily needs.

Now the bank is going to lend out the bank notes that it does not need for its daily use. On that money it can collect interest. And the more the bank lends out, the more interest it can collect. But it has to take care, that it keeps suffisciently in cash, in case John comes in to collect money. And if John doesn’t come, other customers will surely come. How much money the bank should keep in its pay-desk? Well, in most countries the central bank dictates the rule. We will take the US as example [2 (abolished)]: “For all the money in transaction deposits the bank has to keep at least 10% cash reserves.” So, of the 100 euros of John, the bank may lend out 900 euros. (In Europe the liquidity varies per country from 2% to 25%. [3] )

Bank lends out banknotes

bank balance 2
Click to enlarge

Peter wants to buy a laptop and asks for a loan of 850 euros. The bank lends him 850 euros in banknotes. Customers who owe money to the bank are inscribed under Debtors (they owe to the bank = the bank has a claim on them.)

Hey, how is that possible? At first there were only 1000 euros and now John has 1000 euros and Peter has 850 euros! Yes, we have been fooled. The banker simply juggles the 850 euros from his hat. John still has 1000 euros in his account and Peter now has 850 euros for which he has to pay interest. Debit, credit, banco!

So that is the secret of the banker. You lend out the money and pretend you still have it!

Now, don’t be angry with your banker. This way of banking has grown historically. In fact is comes from the time of the goldsmith. There weren’t any banknotes at that time yet, but receipts for coins of gold that the goldsmith kept in his vault. The goldsmith lent out money in the form of such receipts. The secret of the goldsmith was, that he lent out more receipts than he had gold.

The goldsmith

In the days that people were still paying with golden coins, many gave them in deposit at the goldsmith’ and paid him a small compensation for it. At that time he was the only one with a safe vault. The customers got a receipt, with which they could collect their coins later. But the customers started to use these receipts to pay for their purchases. This way they did not have to go on the street with their gold. And whoever received the note could go and collect the gold at the goldsmith, if he wished. By storing other people’s gold, the goldmith got rich while sleeping.

More and more often there were also people who wanted to borrow money from him. But in stead of taking gold coins home, they rather left the borrowed coins  in the vault and asked for a receipt. On the loans the goldsmith collected interest. At the beginning he only lent out his own gold. (That is to say, he lent out notes with his own gold as collateral.) But when more and more people wanted to borrow money, he started to cheat. He started to lend out notes that were backed by the gold of his depositors. And those customers already had received a note for the same gold! This way the goldsmith lent out more and more notes and collected more and more interest. And as long as not too many people came in at the same time to exchange their notes for gold, nobody would find out.

Empty vault

This is still the way it goes today. Everyone has amounts in his checking accounts and as long as not too many claim their money at the same time, nobody notices, that the vault is nearly empty. Nearly all money is lent out. Many people still think, that the bank is rich and lends out its own money. Not so. The bank itself has no money for that. The bank always lends out other people’s money.

Because of that nearly empty vault, there is always a risk the bank has not enough money to fulfill the necessary payments. In such cases, like in today’s credit crisis, they say poetically: the bank has a liquidity problem. More about that later.

Multiply money with the trick with the hat

bank balance 3
Click to enlarge

Our Example Bank, thanks to the deposit of 1,000 euros of John, has created an additional 850 euros to lend out to Peter. Let’s see, what happens to these 850 euros. Peter buys a laptop and the shopkeeper brings the 850 euros to his bank, Bank B. The banker says “thank you” and inscribes the 850 euros on the balance sheet as an asset of the bank. “Banknotes in cash: + 850 euros. But the bank will also have to give the 850 euros back to the shopkeeper one day. So the bank has also a debt to him. The banker writes at the liabilities side: Checking account Computerstore: +850 euros.

bank balance 3
Click to enlarge

Bank B. must keep a cash reserve of at least 10% for the 850 euros that have been added in the checking accounts. That makes 85 euros. So Bank B. can lend out 765 euros. Bank B. lends out 750 euros to William, who buys a bicycle with it. The bicycle seller brings the 750 euros to his bank, Bank C. Of the 750 euros Bank C. can lend out 675 euros. And so the story goes on with each time a bit smaller amounts.

This way  John’s banknotes travel consecutively to the Example Bank, to the computer store, to Bank B, to the seller of the bicycle, to Bank C. and so on. And each time a banker gets his fingers on these notes, he can create new loans with them. And finally the 1000 euro’s of john can lead to many loans, spread over many banks, that collect lots of interest with it.

All banks together

bank balance 5
Click to enlarge

If all banks would lend out the maximum allowed, then our Example bank would have lent out 900 euros, the next bank 90% of 900 = 810 euros, the next bank 90% of 810 = 729 euros etc. and all banks together could lend out 9,000 euros with the 1,000 euros of John. Fortunately, until now, banks do not succeed to reach that amount. That would take a lot of time and the average loan does not exist that long. And when a loan is paid back, it disappears from the balance. But even if they succeed in adding only two, three or four times 1,000 euros, they collect two, three or four times as much interest. John himself has a checking account and does not get anything. He even pays costs for checking books and bank cards.

(Note, that the maximum of 9.000 goes for a 10% cash reserve. With a 2% cash reserve the maximum is 49.000!)

Juggling with payments

But if the banks haven’t got the money in the checking accounts, they cannot pay with it, can’t they? Then it isn’t money, is it? That is right. Of the 1,000 euros of John, our Example bank has only 150 euros left and Bank B. has 100 euros left. A bank would never be able to pay the total of all amounts in the checking accounts at once, if the accountholders would order to pay it to accounts at other banks or to hand it out in cash. If the money would really exist, the bank, of course, would be able to. For all the amounts in the checking accounts, the bank has only a little bit of real money, with which it can execute the payment orders of their customers. That is the little bit it did not lend out, the cash reserve.

And when the bank has used that little bit of real money to execute payments for its account holders to account holders at other banks, what happens then?

By that time payments will arrive from account holders from other banks to account holders of our bank. And our bank can use that bit again to execute following payment orders.

bank balance 6
Click to enlarge

So, when John wants to pay 30 euros to someone at another bank, our bank transfers 30 euros from its cash reserve. And then, some other payment will arive from another bank that will increase the cash reserve of our bank again. And this way banks can transfer continuously relatively small amounts to each other. And when they do so quickly enough, a big number of payments can be executed with it.

In fact, it looks as if bankers have an awful lot of money, but in reality it is the little bit from their cashreserves that goes forward and backward between them and with which the payments can be done. But at real banks with thousands of customers that little bit of cashreserve is still a fair amount. With that, substantial amounts can generally be transferred from one bank to another without problems.

Clearing money

Until now we have done all bookings with bank notes. But when banks have to pay each other each time in bank notes, that is not practical. The notes would have to be transported all the time from one bank to another in armoured lorries. That goes in a simpler manner nowadays. Banks can exchange their bank notes for a balance at the central bank. The central bank has accounts of each bank with their balances. And when one bank wants to make a payment to another bank, the central bank transfers it from the balance of that bank to the balance of the other bank.

bank balance 7
Click to enlarge

Because most payments are made through clearing today, banks hold few banknotes and most of their cash reserve consists of a balance at the central bank. And when our Example Bank borrows 50 euros from another bank, these are also added to the cash reserve. (120 + 50 = 170)

And when you borrow money from the bank nowadays, you won’t get bank notes to take home with you, but it is added to your checking account. And as long as you don’t spend that money, it does not lower the bank’s cash reserve. (That only happens at the moment you transfer money to someone who has an account at another bank, or if you withdraw cash money.)

Loans

When banks lend out money, they take a risk, that the loan will not be (entirely) paid back. That is why the banks usually ask for a security. When you borrow money for a car, and you don’t pay back, the bank will confiscate the car, sell it and with the product the outstanding loan is paid back. And if that is not suffiscient, you keep a debt towards the bank. But if you cannot pay, the bank has to write off the outstanding amount. And if that happens too often, not only the bank, but also the people who deposited their money, will be in trouble.

Now we come to the second important rule: Banks must have a capital which, at least, equals 8% of the outstanding loans. [4] To put it otherwise: for each 8 euros of capital, the bank may lend out 100 euros. But for some loans, such as loans with mortgages, they may lend out twice as much with the same capital and thus collect twice as much interest. So it is not very surprising that banks like to offer these types of loans. (Although, at the moment, by the end of 2008, loans are a bit problematic.) For loans to the state, the 8% rule does not apply. The state can always raise taxes to pay back the bank.

bank balance 8
Click to enlarge

So, for the loan to Peter, our Example bank has to meet that solvency requirement too. For the loan of 850 euros the bank has to have a capital of 8% of 850 = 68 euros. In our example the bank has 110 euros, so that is suffiscient.

When Peter pays back 100 euros each month, 100 euros are added in the pay-desk (cash) and the amount in Debtors decreases by 100 euros.

But if Peter doesn’t pay back the last 50 euros, then the bank must write them off. Nothing arrives in the pay-desk, but the amount in Debtors will still decrease by 50 euros. And that means, that the total (here 1,130 euros) decreases by 50 euros, and consequently that means that, on the other side, the capital decreases by 50 euros. And if the bank would have had other outstanding loans, then it can easily happen that the bank becomes insuffisciently solvent.

Debit, credit, crisis

That happened in the United States, when especially poorer people had got mortgages at a very low interest, but could not pay anymore when the interest rate went up again. Many bankers had forseen these problems and had insured themselves against defaults of payment. But what these bankers had not count with, is that there would be so many defaulters, that the insurers could not pay anymore and went bankrupt. And so they still had to write off many loans at the assets-side, which decreased their capital at the liabilities side. Their solvency was at stake. Other bankers had sold the risky mortgages in packets to other banks inside and outside the US. The buyers had been fooled and now were stuck with contaminated packets of mortgages, that nobody wanted to buy from them anymore. And this way, world wide, many banks got into troubles and a number of them failed. And because banks did not know of each other who had bought these packets and who might fail the following day, they did not want to lend money to each other anymore. Normally they do so each day, when at the end of the day some have an excess of cash reserve and other are a bit short of it. And when banks do not trust each other, each one has to take care of itself. And that means, take care for suffiscient cash reserve, so, lend out as little as possible. And because most enterprsies depend on loans, the enterprises too get in trouble. In the beginning one by one, and then in increasing numbers. Crisis.

 

[1] Secrets of money, interest and inflation:  http://www.courtfool.info/ en_Secrets_of_Money_ Interest_and_Inflation.htm

[2] Liquidity requirement Federal Reserve: (since 1992) http://www.federalreserve.gov/ monetarypolicy/0693lead.pdf (Abolished now)

[3] Liquidity in Europe http://www.bportugal.pt/ euro/emudocs/ bce/eubankingsectorstability2005en.pdf , tabel 16

[4] The 8% solvency requirement has been decided by big international banks in the Basel I accords of 1988. Since then it has been reshaped a lot. Since 2006 the Basel II accords are in force, with more requirements for the composition of the capital, but also more choice for bankers to determine the methods of calculating their risks.

The Basel Capital Accords: http://www.parl.gc.ca/information/ library/PRBpubs/prb0596-e.htm

Example of calculation of solvency percentage:  http://www.rbnz.govt.nz/finstab/ banking/regulation/ 0091769.html#navstart

European proposal to lower the solvency in 2004: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/04/178&format =HTML&aged=1&language= EN&guiLanguage=en

More documentation:

Bank balance: http://www.amosweb.com/ cgi-bin/awb_nav.pl?s=wpd&c=dsp&k= bank balance sheet

Geld, Financiële Markten & Financiële Instellingen, C. van Ewijk & L.J.R. Scholtens (Wolters Noordhoff) (in Dutch.)

December 2008

 

For reactions and reply you can contact the author via www.courtfool.info .

If you wish, you may copy this article and forward it or publish it in newspapers and on websites.

Should more people read this article?

On the internet the readers have the power! They decide which information goes around the globe! You may not be aware of it, but if each reader sends a link to 3 other interested persons, it only takes 20 steps to join 3,486,784,401 people! You want to see it happen? Use your power!

3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 x 3 = 3,486,784,401

 

If you don't want to miss the next publication, then click here:

flag UK   I would like to receive an email as soon as another article appears in English.
If the link doesn't work, please send an email.
address: courtfool@xs4all.nl
subject: Subscribe articles EN