Samuel Greedy, a shrewd financier, founds a bank in El Dorado, California.
A. A. Stone, an up-and-coming contractor in El Dorado, finishes his first big job, receiving payment in cash to the tune of $1 million. He deposits this sum in Mr Greedy’s bank. The bank now has $1 million in capital.
In the meantime, Jane McDoughnut, an experienced but impecunious El Dorado chef, thinks she sees a business opportunity – there’s no really good bakery in her part of town. But she doesn’t have enough money of her own to buy a proper facility complete with industrial ovens, sinks, knives and pots. She goes to the bank, presents her business plan to Greedy, and persuades him that it’s a worthwhile investment. He issues her a $1 million loan, by crediting her account in the bank with that sum.
McDoughnut now hires Stone, the contractor, to build and furnish her bakery. His price is $1,000,000.
When she pays him, with a cheque drawn on her account, Stone deposits it in his account in the Greedy bank.
So how much money does Stone have in his bank account? Right, $2 million.
How much money, cash, is actually located in the bank’s safe? Yes, $1 million.
It doesn’t stop there. As contractors are wont to do, two months into the job Stone informs McDoughnut that, due to unforeseen problems and expenses, the bill for constructing the bakery will actually be $2 million. Mrs McDoughnut is not pleased, but she can hardly stop the job in the middle. So she pays another visit to the bank, convinces Mr Greedy to give her an additional loan, and he puts another $1 million in her account.
She transfers the money to the contractor’s account. How much money does Stone have in his account now? He’s got $3 million.
But how much money is actually sitting in the bank? Still just $1 million. In fact, the same $1 million that’s been in the bank all along.
Current US banking law permits the bank to repeat this exercise seven more times. The contractor would eventually have $10 million in his account, even though the bank still has but $1 million in its vaults. Banks are allowed to loan $10 for every dollar they actually possess, which means that 90 per cent of all the money in our bank accounts is not covered by actual coins and notes.
Yuval Noah Harari. Sapiens: A Brief History of Humankind.
A. A. Stone, an up-and-coming contractor in El Dorado, finishes his first big job, receiving payment in cash to the tune of $1 million. He deposits this sum in Mr Greedy’s bank. The bank now has $1 million in capital.
In the meantime, Jane McDoughnut, an experienced but impecunious El Dorado chef, thinks she sees a business opportunity – there’s no really good bakery in her part of town. But she doesn’t have enough money of her own to buy a proper facility complete with industrial ovens, sinks, knives and pots. She goes to the bank, presents her business plan to Greedy, and persuades him that it’s a worthwhile investment. He issues her a $1 million loan, by crediting her account in the bank with that sum.
McDoughnut now hires Stone, the contractor, to build and furnish her bakery. His price is $1,000,000.
When she pays him, with a cheque drawn on her account, Stone deposits it in his account in the Greedy bank.
So how much money does Stone have in his bank account? Right, $2 million.
How much money, cash, is actually located in the bank’s safe? Yes, $1 million.
It doesn’t stop there. As contractors are wont to do, two months into the job Stone informs McDoughnut that, due to unforeseen problems and expenses, the bill for constructing the bakery will actually be $2 million. Mrs McDoughnut is not pleased, but she can hardly stop the job in the middle. So she pays another visit to the bank, convinces Mr Greedy to give her an additional loan, and he puts another $1 million in her account.
She transfers the money to the contractor’s account. How much money does Stone have in his account now? He’s got $3 million.
But how much money is actually sitting in the bank? Still just $1 million. In fact, the same $1 million that’s been in the bank all along.
Current US banking law permits the bank to repeat this exercise seven more times. The contractor would eventually have $10 million in his account, even though the bank still has but $1 million in its vaults. Banks are allowed to loan $10 for every dollar they actually possess, which means that 90 per cent of all the money in our bank accounts is not covered by actual coins and notes.
Yuval Noah Harari. Sapiens: A Brief History of Humankind.
