On my preceding blog post (here) I have a few links to Paul Grignon’s video about the banking system (here, here and ici).

OK I’m not on economist and didn’t read much on the topic, but I did ask a few friends around and read some tidbits here and there and I have the feeling that these videos, while accurate, only show one side of the story. There are other thing to consider and I will share below a quick summary of my thoughts on the topic.

1. Paul Grignon is right, Money is ultimately created out of nothing (and this is a good thing), but I think it could be that in the modern system it is not the private bank who are allowed to do that, but the central banks. The private bank should borrow from the central bank. My Dad often complain that the European Central Bank is a private organism, I don’t know if this is true, but I will indeed find it vexing if such was the case.
2. In these videos you see the bankers asking for an interest, which slowly takes money out of the economy in their pocket if it was not for growing productivity and debt (other lending). This forget a few important things.
3. An important forgotten thing is that the value of money is fluctuating, you’ve got inflation / deflation. If the banks gets enormously rich and everyone poor, all price will gets down that is deflation. Which will make the banker more enormously rich and everyone as before (granted through some painful transition).
4. Also, because of inflation / deflation happen as the number of goods increase (or decrease), the money available needs to increase as the productivity increase. Ideally the amount of money should be such that there is no inflation / deflation (less trouble for everyone). The banking system answer this problem. The central banks set “the interest rate”, the interest that other banks should pay on the money they have borrowed and lent. This will impact on the lending system which, quite indirectly, will impact on how much new money will be created (or destroyed). Indeed the main role of the central banks is to insure there is no inflation or deflation, i.e. that the average value of money remain constant.
5. Also this video shows that the lender (the ultimate lenders being the central banks) will get all the money back in the end if the productivity and debt stop increasing. That forgot the fact that the modern central bank are not for profit public organization (I mean so they should be, my Dad say that it is not true for the European central bank, I don’t know), they are infrastructure whose main role is to insure constant value of money. To this end they could even do something you would not expect: use a negative interest rate, i.e. you have to pay back less that you borrowed! Indeed The Japanese Central Bank did just that in some past crisis.