Banks ”lend out” their own debt to customer accounts – not dollar

This is an attempt to describe how banks ”lend out” the banks own debt to customers accounts – the bank can’t ”lend out” dollar (or what ever currency that’s used in the specific country) to a customer account.

Balance sheets seems to frighten people so I’ve made some very simple drawings – trying to keep it next to trivially simple. We start we an extremely simple example and build our logic based on that.

Let say you are broke and have to borrow $100 from your friend Eric. I think the balance sheet in the drawing below is self explanatory.


It should also be obvios that you would be seen as a fool if you tried to lend out your own debt as shown in the next drawing:


It’s also obvious that your debt, e.g your electric bill, is denominated in dollar but you would be taken as a fool if you tried to convince someone that your electric bill ARE dollar.


All above is trivial but, as we shall see, the banks resorts to the reverse logic.

The banks balance sheet is exactly the same as yours. Let say you go to the bank and deposit a $100 bill. The banks balance sheet will then change as shown below:


If you check the above picture it’s basically the same as the first picture. The change on your balance sheet when you borrowed $100 from Eric is the same as on the banks balance sheet. The bank borrow the $100 from you when you make a deposit..

But here’s where the bank magic come into place. Let say that you want to buy a house for $400 000. You sign the ”loan” agreement stating that you borrowed $400 000 that never existed. The bank put the ”loan” agreement on it’s asset side of the balance sheet and make a direct lie stating that the $400 000 now is on your account. But as shown below – the only thing your account can contain is the banks own debt to you.


The bank employee lies to you (most likely without knowing it), by saying:
-”The $400 000 you borrowed is now on your account”

And you would be sen as an idiot if you questioned the validity of the lie.


I hope that it’s now completely clear that banks don’t lend out dollar (or what ever currency used in the country). Banks can’t ”lend out” anything else then it’s own debt to customer accounts. That’s why the whole financial system is so shaky – the banks are as indebted as all ”customers” the bank have put in debt with the banks own debt. In most countries 97% of the ”money” supply consists of the banks debt to account customers – only 3% consists of currency (dollar in the example given above). The only reason the system still is standing is the fact that politicians and central bankers pretend that it’s based on sound logic and that the emperor has cloves (money)

The obvious question is – why should we let anyone ”lend out” their own debt without seeing them as imposters? Why not make a system where we can have customer accounts capable of holding dollar (or what ever currency in the specific country)?

“Banking is not money lending; to lend, a money lender must have money” –Hyman Minsky


One thought on “Banks ”lend out” their own debt to customer accounts – not dollar

  1. I made a comment on ”Positive Money”

    It’s a good thing that the media is starting to catch up.

    But I think there’s still some misunderstanding regarding what banks ”lend out” to accounts. People in general, and even many money reformers, believes that banks ”lend out” Pound to customer accounts. Most economists even believe i the multiply myth that claims that banks ”lend out” a fraction of what people deposit, making the bank a mere intermediary.

    I think it’s very important you keep track on what a costumer account actually can contain. Because, obviously, the bank can only ”lend out” what ever stuff the account can contain to customers accounts. And it’s a given fact that banks customers accounts only can contain the banks own debt to the customer. So the bank can’t ”lend out” Pound to a customers account – the bank can only ”lend out” the banks own debt to the customer account.

    I made a very easy to follow blog post showing this:

    The follow up question should be – shouldn’t we have a system where people are able to hold Pound on their account? Isn’t making all accounts central banks accounts the only way making this possible (since central bank accounts are the only accounts capable of holding Pound)? That is so say, we have to nationalize all the banks accounts (not necessarily the banks) and make them into central bank accounts so the banks are prevented from having accounts ”on the outside” not capable of holding Pound.


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