Your Bank Account Is An IOU Of Your Bank

Professor Perry Mehrling presenting a simplified illustration showing how credit money works. The money in your bank account is actually an IOU from your bank to you. Let's see how it work: When you bring physical cash to the bank, the bank does not hold "your" money. Rather, you sell it to the bank, and the bank pays for it with its own IOU. You trade a government-issued asset (cash) for a bank-issued asset (a deposit). Now the bank is in debt to you, which is one of the reasons these accounts often pay some interest. People are very comfortable with this arrangement, and treat these bank IOUs as money. So, if I go to a restaurant and offer to pay them not with physical cash but with bank IOUs, the restaurant will most likely accept this arrangement. You then send instructions to the bank and (supposing you have the same bank), the bank will decrease your account (destroying IOUs from the bank to you) and increase the restaurant's account (creating IOUs from the bank to the restaurant. These IOUs are created in several ways: when you deposit cash, this creates bank IOUs. When the government spends, this also creates bank IOUs to whomever the government is spending money to. The third major way is when banks make loans: in effect, the borrower sells his IOU to the bank (the mortgage note) and the bank pays for it with its own IOU (the deposits the bank puts in the borrower's account). Though this is all very opaque now, during the 1800s banks issued their own notes instead of having sort of "virtual" deposit accounts, so it was very obvious that your "money" was bank IOUs! And, there is generally quite a lot more bank money in existence than there is government money. See how government money is in a parallel structure: currency is an IOU of the government. If you aren't familiar, brush up on what a balance sheet is here:    • What is a Balance Sheet?   Learn more about how "loans create deposits" here:    • Loans Create Deposits: Inside vs  Outside ...   Take the Money and Banking course free here: https://www.coursera.org/learn/money-... Follow Deficit Owls on Facebook and Twitter:   / deficitowls     / deficitowls