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Creating money out of thin airQ: Can money be created out of thin air? --
A: Yes, that is the most efficient way to make money.
In Fact -- it is the only way to create money.
That money-creation system is probably the greatest invention ever made -- it leads to the efficient creation of wealth of all kinds -- including manufactured and agricultural products.
a) When a bank makes a loan to a customer, the bank immediately records that loan as an asset on the bank's books.
b) That "asset" immediately increases the amount of "reserves" on the bank's books.
c) Therefor it can be truthfully said that "all loans create their own reserves".
d) That logically leads to the conclusion that banks can lend out an infinite amount of money.
e) We hesitate putting that (d) conclusion here because most people can't accept that as being true -- because we all "know" that there can't be an "infinite amount of money". The statement boggles the minds of most of us and we are unable to rationally consider any further discussion of the subject.
f) The problem is that the word "reserve" is a rhetorical trap when used in this context.
g) Here is a common definition of "reserve" when used as a verb, from my computer's dictionary -- "refrain from using or disposing of (something); retain for future use : roll out half the dough and reserve the other half". That "other half" is usually called a "reserve" -- the noun form of the word.
h) If such a definition is applied to a loan from a bank, it would be logical to assume the bank has a certain amount of money and it is lending the customer some of that money -- keeping some in "reserve".
i) But that is not what actually happens. In reality, when a bank makes a loan -- it truly creates that money on the spot. In other words "it creates the money out of thin air". Those 8 words are not swallowed easily. There is something inside us that will not accept anything being made out of "thin air". But, in realty, every abstract thing is always made out of thin air. Love, dreams, beauty, joy, a joke, a story and the law are all parts of the theoretically infinite abstract world that is, figuratively, "made out of thin air". We know this is a little mind boggling. Because of the laws of physics, we all tend to think you can't make something from nothing, therefore, you can't "make money out of thin air". But that thinking is fallacious. In fact, laws of physics teach that Matter and Energy can neither be created nor destroyed -- but they can be made to change form. Fractional reserve banking essentially allows money to change form. A farmer can turn money into turnips and back again to more money if that farmer uses borrowed money to buy seed and grow turnips that he sells for more money than he borrowed. Doesn't that make sense?
j) It is important that we all understand this. Without that understanding, it is impossible to understand how money works.
k) It is difficult to immediately understand this point because the money we are most consciously familiar with exists as (1) a physical thing we can hold in our hands and put in our pocket -- but it is also (2) an abstract thing that has no physical reality. That dual nature of "money" makes it hard to logically wrap our minds around the word.
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