Is fractional reserve banking sustainable
Why is Fractional Reserve Banking not a Ponzi scheme? [closed]
It is possible to repay debts (including interest) without spending new debt money. I think that is at the heart of your question.
Let me present a sophisticated example in which society has four people and one bank.
Here is a bank with $ 100 in initial deposits. The total amount of money in this society is $ 100. (We assume there is no currency in circulation as you are interested in debt money.)
This bank lends Bob USD 90 for a one year term and 10% annual interest. Bob spends that $ 90 with Charlie to buy raw materials. Charlie pays $ 90 in the bank.
The money supply just went from $ 100 to $ 190.
Bob does something with the raw materials and adds value by eventually selling the finished goods for $ 110. In our stupid little economy, the only people who have money are Adam and Charlie, so we have to assume they're buying $ 110 worth of goods from Bob between the two. Let's say Adam buys $ 60 and Charlie buys $ 50 - the actual amounts don't matter. Bob deposits this money in the bank.
Still $ 190 in money.
At the end of the year, Bob instructs the bank to transfer the payment from his deposit account to his loan account. The bank wipes off his debt and the money in Bob's account represents his return.
Who is this David? He is the owner of the bank. He earns $ 9 in interest on the loan to Bob and pays Adam $ 5 in interest on Adam's deposit. The remaining $ 4 is the profit for the owner of the bank.
The money supply went from $ 190 to $ 100 after Bob paid off his loan.
After writing this, I realized that I was just leaving out, "Where does Adam get $ 100 in the beginning?"Presumably Adam starts with a currency, either fiat money or commodity money.(IOW, debt money cannot be created out of nothing, it must be expanded in addition to a currency.)
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