Where does all the rest come from? Well, astonishingly, nobody agrees. But most people seem to accept that it is lent into existence by the commercial banks. When you stash money in the bank, they must keep around 8% of that loan on deposit - in case there's a run on the bank - but all the rest is lent out again many times over. In other words, most of our mortgages and bank loans are created as if by magic by a stroke of the pen.
And one day it will have to be paid back, plus interest to the bank, when it can be used as the 8% backing for yet more loans. And so it goes on. It's a magical money-making system that is surprisingly little commented on, limited these days by only two things: the regulations of the Bank for International Settlements in Basle, and fear of having to pay it back if the loan fails - and a good 10% usually do fail.
That's the strange truth behind modern money. We don't mine it, we don't find it on a beach, it bears no relation to anything real, but still some people have vast amounts of it and some people have none at all. And we hardly ever talk about it.
Money: Whence it came, where it went
John Kenneth Galbraith
Penguin, 1975 ISBN 0140234799
