Have you ever wondered, "Where does money come from?" Most people think that money is printed on a machine. As a matter of fact, it is really so, but the mint produces only pieces of iron and paper, and we believe that they have certain price. It is our belief that turns these wrappers into something very meaningful and desirable. Many people think that it is the government who creates money. And it's true: a definite part of money is accountable to the government, but much money gets into the turnover in another way. It is created by private corporations which are called banks. Most people believe that banks give loans from the money they have taken on deposit. It sounds logical but in reality it is not. Be it true, bankers would earn scanty percents from the turnover and wouldn’t have such a luxurious lifestyle. In fact, money is created by banks intentionally, and commitment signed by the borrower is enough for it. It's difficult to believe but it's true. To understand how it happens, let's have a look at a small but didactic tale "Fairy-Tale About the Jeweler"
Once upon a time, when there was no money yet, there was barter: food was exchanged for clothing, jewelry for shelter, etc. But in the course of time, when people learnt to process silver and gold, they began to cast coins out of these precious metals. They were pleasant to the eye, and people believed that they had the price they represented, like it happens today, however. But it is inconvenient and unsafe to take a huge amount of gold with oneself, as well as to store it at home. The jeweler who cast coins kept it in the warehouse, and soon other residents of the town began to use his vaults, for which they left a small pay to the jeweler. As time went on, the jeweler kept on casting coins, putting it into circulation, as well as getting profit from storing other people's money. He began to notice that the citizens never came to take their valuables at the same time, which means it can be used. Purchasing goods, people used loan-certificates issued to them by the jeweler. The amount of jewelry indicated in each receipt was assigned to it. These were the receipts that became a prototype of modern money. They were not as heavy as coins and counting money with receipts was much more convenient. The jeweler opened a new business: he started lending gold and mainly not with coins but with receipts. He knew that not many investors would demand their gold and certainly would not do it at the same time, so instead of his own gold he began to give someone else's. Soon, our jeweler, but rather a banker, became quite rich and being wealthier than other residents, he flaunted. Depositors came to the jeweler-banker and demanded explanation. Fearing that they might demand their gold, the jeweler revealed his scheme, and promised them a pay – percent for using their money. In this way, the first banks emerged. The difference between the loan and deposit was used to cover the expenses, and the rest was profit. But modern banks are not willing to work according to such a scheme. Our banker got accustomed to the luxurious life and was not satisfied with the income. Then he came up with a new scheme. No one knows how much money is kept in a safe, no one knows for what sum receipts are issued, and therefore one can loan “non-existent money”. The new scheme was working perfectly, and our hero got fabulously rich with percents from non-existent gold. This is the scheme according to which modern banks work. The luxurious life of the banker again aroused suspicion of the citizens, and a few major depositors demanded their gold back. Rumors spread around the town, and the area in front of the bank was filled with the angry crowd of depositors, they demanded to return their money to them. The banker could not do it, and the bank collapsed.
Does this story with the bank remind you of the situation with financial pyramids? The bank, just like a pyramid, lives until depositors believe in its stability and carry their money into it. But, unlike the pyramids, banks are in high favor with the government that supports them. Frankly, it would be necessary to prohibit making money out of thin air, but at that period of time the loans were needed for the commercial expansion of Europe. Today, however, they are no less important. Banks agreed to limit the gross part of the non-existent money issued as a credit. As a rule, the ratio of existing and non-existent money is 1 to 10. It means that having $10, the bank has the right to issue a credit of $100. In addition, in certain situations, the central bank can support local banks by investing real gold. In this situation, the government is interested in inflating the bubble of non-existent money by banks, and the banks earn money using support of the government.
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