How Banks Make 1000% When They Loan You Money
And why they are one crisis away from going bust
There is a saying,
‘It takes money to make money.’
— Origin unknown
It’s not true.
All you need is a reasonable idea and to roll up your sleeves and make it happen — unless you are a bank, then it is partially true. You see, banks can create money out of thin air.
It took me a magical second to appreciate the beauty of this idea. It took me a little longer to figure out a way to explain it to the kids.
Fred the Fisherman
Once upon a time, Fred was sitting on the bank of a river when a fish jumped out of the water and landed on his lap. It was a fortuitous moment for Fred was hungry. He took the fish home and cooked it for his dinner.
The next day, Fred returned to the river, waded out to the middle, and waited for the wriggling fish to leap over a step. It wasn’t easy to catch the slippery blighters, but he bagged two salmon. He ate one and sold the other to his neighbour for £10.
Fred used his £10 to buy a net. The next day, he caught ten fish. Within a couple of weeks, he had saved £1,000.
