Most people have the traditional view that people deposit money into banks and then bank lend those money out to other people. Banks make money because it charges higher interest on lending money out than it gives back in depositor’s interest. This is true to a certain extent. But it is not a complete big picture of how the monetary system works in modern times (such as in the United States).
Think about all the big mortgages and large car loans that many people have taken out currently. The banks have lend them all these money. Do you think depositors have deposited that same amount of money into the banks? Considering that the savings rate is around 1% and 2% in the United States around the years 2006, it doesn’t seem likely.
Perhaps the banks have all this money to lend out because the wealthy has deposited a lot of money into banks. With saving interests rates often below inflation rate, do you think the wealthy really save all their money in a bank savings account? More likely, their money is in investments such as stocks, bonds, and assets.
So where do banks get all this money to lend out to people?
The truth is that banks are lending out money that they don’t have. They are lending out more money than what people are depositing into the banks. If banks are lending out more money than deposits are putting in, where is that money coming from? Banks are creating money. Money just appears whenever someone sign their signature for a loan. In essence, money is debt.
You can learn more in the 2006 video “Money As Debt” by Paul Grignon
And this is legal?
Yes, in the United States it is legal. It is known as the partial reserve system.
In 2009, Paul Grignon created its sequel “Money As Debt II”. The movie is appear to be in part a response to the economic financial crisis that the United States is in at the time.
You can learn more on their website at moneyasdebt.net which have a references to quotations and transcripts.