iruoma

A man deposits $10,000 in a bank. The bank thanks him and records the deposit on its balance sheet. But not where you might expect. For the bank, that $10,000 is actually a liability – because technically it belongs to the customer and might have to be returned. So the bank does what banks do. It lends $9,000 of that money to someone buying a car. Now something interesting happens. The $9,000 loan appears on the bank’s books as an asset – because someone now owes the bank money. So the same $10,000 is doing two jobs at once. The depositor believes he has $10,000 safely in the bank. The borrower now has $9,000 to spend. That $9,000 gets deposited somewhere else. The next bank lends $8,100. That gets deposited again. Then $7,290 gets lent out. Soon the original $10,000 has quietly turned into tens of thousands of dollars of loans scattered across the economy. Everyone believes they have money. Depositors see balances in their accounts. Borrowers have the money they spent. Banks show healthy assets on their balance sheets because people owe them money. And here’s the best part. Banks charge interest on all those loans – maybe 7%. But the depositor who supplied the original money might earn only 0.5% on their savings account. So banks collect interest on money that mostly wasn’t theirs to begin with – and keep the difference. The system works beautifully. As long as nobody asks for the money back at the same time.

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