Alice is broke and in need of $100 to buy food. She goes to Bob and tells him about her problem.
Bob is actually broke as well, but he keeps quiet about that and presents his idea:
"You and I have never done business together before and owe each other nothing. However, let's pretend that I owe you $100 and you owe me $100 - that still keeps us even."
Bob takes a piece of paper from his desk, writes $100 on it and signs it.
"Here, take this piece of paper. I agree to pay $100 to whomever comes to me with this piece of paper—so it's actually just as good as $100. For this service I'll charge you $1, so I will note that you owe me $101."
Bob calls this a "loan" despite not actually lending anything to Alice, because he knows how important perception is. Alice acknowledges the "loan" and proceeds to go to the local farm to buy some eggs with Bob's signed paper. The farmer accepts Bob's paper as if it were money since he sees that it can be legally redeemed for $100.
If at this point someone goes to Bob with that piece of paper, he will not be able to pay $100—because remember—he doesn't have any money. However, Bob's two close friends Charlie and David have been doing the same thing for the past few months and these pieces of paper have started to be used as if they actually were money. Few people are interested in redeeming them for real money, especially since they are more convenient to use.
Years pass as Bob, Charlie, and David continue this practice, and one day realize that they can't remember the last time they saw a real dollar. Everyone is using their signed papers—debt-money—instead of real money. Why? Well, in addition to the fact that these signed papers are more convenient to use than real money, their supply dwarfs that of real money after all these years of continuous "lending".
Bob, Charlie, and David went from being broke to having the whole society indebted to them, while at the same time continuously getting interest payments for every existing piece of paper. However, money no longer is of any value to them, especially since at this point the debt is being paid with their own pieces of paper through new "loans". Note that the amount of debt continuously increases as there is interest to pay in addition to the old debt.
The three friends decide to no longer give out "loans" without insurance. People must now pledge their assets for new "loans", and because new "loans" are necessary to pay off the old ones they know that people are guaranteed to comply.
Now holding almost every home and car hostage, the three money-lenders cleverly decide to reduce the amount of new "loans". They sit back as the debt-money supply rapidly shrinks as payments for old debt are made, and patiently await the moment when people start defaulting on their debt due to the lack of new "loans" so that their homes and cars can be confiscated.
In our day and time, Bob, Charlie, and David are the major private banks. The numbers in your bank account are not money, but the amount of money that the bank owes you. The bank cannot print money, but it can go deeper into debt just like the three friends in our story. As long as we use their debt as a medium of exchange as if it were money—which is precisely what we're doing when we pay with debit cards or do bank transfers—they have the power to print our "money".
Whenever someone "borrows" money from a bank, new debt-money is created. The bank doesn't transfer the balance from another account; the balance is simply created there and then. The major issue with this is that the money is created as an interest-bearing debt, meaning that now virtually the whole money supply is a debt to the private banks with a constant interest on it that sucks out all the growth from the economy. This is how our "money" is created: private banks creating it out of thin air and demanding it back with interest. The following is a translated excerpt from a document by the Swedish central bank (p. 67 ):
In Sweden the money supply primarily increases due to the lending practices of the private banks. Let's assume there is only one bank - Bank A. Customer A is granted a loan of $100 for an apartment. Money is deposited to Customer A's account at Bank A at the same time as the loan creates an asset in the shape of a mortgage loan on the bank's balance sheet. Customer A now has an asset in the shape of a deposit at Bank A, and a debt to Bank A in the shape of a loan. The money that is loaned to Customer A will now be part of the total money supply because it is owned by the public: new money is created. When Customer A then pays for his apartment, the money is transferred to Customer B's account in Bank A as payment for the apartment. The money will now be seen on the side of the liabilities on the balance sheet of Bank A. The deposit of Customer B thus finances the loan to Customer A.
The reason an ever-increasing amount of debt is necessary—financing old debt and the interest thereof—is also the reason consumption needs to constantly increase. To have an increasing amount of mortgage loans, the price of housing needs to go up and/or more houses need to be built which requires an ever-growing population. There is a point where consumption cannot grow anymore due to the interest on the ever-increasing debt catching up to the rate of "growth", which is when the banks get to choose between two options:
- Continue lowering interest rates in order to have this choice postponed
- Let the economy collapse, optionally by increasing interest rates for more extreme effect
Take a look at this graph and see how it coincides with the economic cycles of the USA:
Bob, Charlie, and David were able to pull off their scheme because people used their debt as money instead of exposing the fraud at an early stage by redeeming it for real dollars. At this point we do not have the possibility to claim our money. If enough people were to attempt to "withdraw" their money from the banks today, the banks would close down in an instant in order to not collapse in a bank panic. This also makes it clear why the digital cashless society is so desirable for the banks.