Wednesday, June 14, 2017

Modern banking = credit swapping OR fiat money = debt

I was taught a misconception in school, and the truth was more than hinted at by my college Macroeconomics teacher. I wish I had been exposed to this explanation of modern banking earlier in my career.
"The fundamental proposition which I first wish to establish in regard to all commercial banking, is that the business of the modern bank is almost solely the exchange of credit, to use a clear but homely phrase, the swapping of credits.The business of a bank is not in the main the reception of money and its safekeeping, nor is it the loaning of money. The money transactions of a bank are, under ordinary conditions, comparatively insignificant: almost its entire business consists of receiving from its customers their evidences of indebtedness, which have a narrow currency, and giving to those customers in ex-change the bank's evidences of indebtedness, which have a wide currency. These evidences of a bank's indebtedness are then transferred from one individual to another and from one bank to another, and in that way the credits created serve the purpose of the medium of exchange by which perhaps ninety-five percent of the exchange transactions of commerce take place.
It is a misconception to suppose that a bank first accumulates deposits and then loans them out to borrowers.The operation is the reverse. The bank first makes a loan to the borrower and in so doing creates a deposit. The borrower exchanges his credit, his evidence of indebtedness, for the bank's credit, a deposit balance. The creation of these credits has relation to production; their liquidation is related to consumption. If production increases, the demand for this exchange of individual credit for bank credit increases; and the indebtedness incurred is liquidated as the articles upon which the financial credit was based enter into consumption."
- FRANK A. VANDERLIP, President of the National City
Bank of New York aka CITYBANK (1864 – 1937)