Do Banks Actually Loan Money When Making You a "Loan"?

What is the Problem?

This one comes from Colin in Yorkshire, and his question is: “I’ve seen a lot of debate online about Bank loans. Do Banks actually loan anything when they make a loan?”

In order to understand the question and the answer, you are advised to engage in some homework, and learn about the creation of money: Modern Money Mechanics, the Chicago Plan (IMF Website), and the Bank of England Quarterly Bulletin 2014 Quarter 1, Volume 54, No. 1; are good places to start.

The Outline Solution

If you want to understand how bank "loans" work, it makes good sense to work through the actions involved in the process; very slowly!

Pay particular attention to the movement of the paper.

• Customer Applies for Loan
• Bank Approves the ‘Loan’
• Bank agrees monthly re-payments with the Customer, verbally (this is the ‘agreement’)

• Bank needs “security”
• Customer signs a Credit Agreement [aka promise-to-pay]
• Agreement-to-Pay = Promise-to-Pay = "Treated-as-Cash"
• Customer MUST hand over the security BEFORE the Bank can advance the funds (note the words: advance the funds, not loan the money)!
• Every ‘loan’ creates a new deposit
• Banks do NOT loan money! Banks have no money!

Possible Arguments Against You

Banks have been known to argue that they perform a “currency exchange”.

• Paper Promise in exchange for Electronic Digits.
• To RE-pay the ‘loan’, customers must work, spend-time, and burn energy in exchange for Electronic-Digits which can then be used to "re-pay" the "loan".

The Almost Legal Info

Every ‘Loan’ is comprised of two parts:

• Customer Loans the Bank a paper security, deposited with the Bank
• Bank Loans the Customer Electronic-Digits which don't exist in reality.

Helpful Paragraphs:

When a loan is paid back, what MUST the Bank return to the Customer?

(think pawn broker, and what he/she (the pawn-broker) would do with the item deposited as security, once the loan has been paid back).

Need More Help?

Ultimately, it starts with you. If you’ve suddenly realised that what you’ve been led to believe about bank loans isn’t the entire truth, and or if you feel misled in respect of what the banking fraternity have been passing off as "loans" all these years; then here’s your chance to level the playing field.

We’ve put together some examples of how we’ve successfully challenged “loan” facilities; putting the Bank into a position where it cannot pursue you. In each case, the customer did not have to pay! So, if you want a more detailed guide check the Toolbox for the Get Out Of Debt Webinar