FlyingDutchman6666

Ha ! What surprised me, reading the book, is that it's not even created from the future, but literally out of thin air !!

It all started with gold and silver. But that's impractical to carry around. So you'd leave your stash with a goldsmith, pawnbroker or scrivener, take a note from them that says "I promise to pay the bearer x amount of solid gold". But you soon find out that you don't really need to retrieve the gold, you just pass the note to someone else in exchange for goods or services. So people started using this as 'money'.

So far this is what people usually expect.

Now comes the black magic. Goldsmiths were sitting on a stash of gold, and they knew it was 'inconceivable' that everyone would come and get it at the same time. So they could lend it out at interest, and make free money for themselves. And they didn't need to lend out the actual gold, they could print new notes to do so, since their notes were already used as 'money' !

Strictly speaking they committed fraud: the note spoke of actual gold, but the deposit was not there, it did not exist. But no-one could tell the difference between an actual deposit receipt and a fictitious one.

This ability gave goldsmiths (later called bankers) enormous power. Soon the King and Parliament, unable to raise enough taxes, came to rely on goldsmiths' ability to create money.

Any remaining doubts about the legality of goldsmith's notes were removed with the Promissory Notes Act 1704. This increased the state's spending power and allowed the creation of modern modern commercial bank money.

Shard

Indeed. Created out of thin air and completely necessary in a growing open economy.

Shakyuk

I'm not sure if you actually believe that or if you're being sarcastic. Either way that is clearly not how currency markets work.

JonboyE

You are the only one banging on about currency markets. We are discussing debt and growth.

Alan2005

Well, yeah, given that time travel isn't actually possible. But the idea is that the money is created now, based on the assumption that future work is done to pay it back. Well, hopefully.

When a bank makes a loan, it really is just an entry on a balance sheet.

Banks use money markets for a number of reasons, one of them is to sell their loans so that they can keep within their capital ratio limits and carry on lending.

Where do you think they get their money from?