That is not the case at all.
Many borrowers will be disconcerted to find out that the bank is prohibited from lending out depositors' money, unless it has permission in writing from every one of those depositors. (Have you ever gone to your bank to withdraw your money and were told that the bank didn't have it, that they'd loaned it to someone else? Never!) Banks are not permitted to lend shareholders' money either; that money must be lodged as reserves with the central bank. And it is illegal for most banks to lend out their own credit or to 'kite' checks.
So where does the bank get the money it "loans"?
The truth is that the bank doesn't have any money to lend you. When you walk in the door, their eyes light up because you've brought the money with you. What they need from you is your signature, on a loan application or promissory note. While you may think you've just given them a signed pledge to pay them back their money, you've actually given them a signed check for the full amount of the loan.
The promissory note you've gifted to them is a negotiable instrument that a bank can quickly convert to cash, sell to an investment bank, or use to purchase government bonds. The bank treats your promissory note like a check and stamps the back of it "pay to the order of ABC bank, without recourse" and lodges it in a transaction account in your name, as an asset of the bank. (But they don't tell you that.)
We know that promissory notes are valuable and are used to fund loans because the Federal Reserve Bank tells us so. In Modern Money Mechanics, published by the Federal Reserve Bank of Chicago, it says on page 6:
"[The banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by [the amount of the loan]. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system."
There is a lot of information in those six sentences. Here we have it confirmed from the Fed itself, one of the biggest central banks in the world, that money is not loaned out of customers' deposits because no additional money would be created. Therefore, each new loan must create new money. In order to bring this new money into existence the bank monetizes your promissory note and lodges it as an asset of the bank. Of course, they also balance it on their books as a liability because this money is legitimately owed back to you.
The key word in the above excerpt from Modern Money Mechanics is "exchange". The bank enters credit in your account in exchange for your promissory note. So, when you signed up for a loan you actually gave the bank the money to fund it.
The Fed clearly says that reserves are unchanged by the loan transactions, confirming that they did not loan you any of their money. The money unquestionably came from you. Again the Fed clearly states that your promissory note constitutes new additions to the total deposits of the banking system. The Fed further admits that it is you, the borrower, who funds the loan when they say that assets and liabilities both rise by the amount of the loan. This can only happen when new money is deposited with the bank -- your money. Assets and liabilities would never both rise if the bank loaned you existing funds belonging to its depositors or its shareholders.
Banks are obliged to follow Generally Accepted Accounting Principles (GAAP), or equivalent standard, a method of accounting that lies at the core of the double-entry bookkeeping system called the Matching Principle. They use the "T" account format whereby assets are matched by liabilities and must always balance to zero.
Modern Money Mechanics, page 5, states:
"The basic working tool is the "T" account, which provides a simple means of tracing, step by step, the effects of these transactions on both the asset and liability sides of bank balance sheets. Changes in asset items are entered on the left half of the "T" and changes in liabilities on the right half. For any one transaction, of course, there must be at least two entries in order to maintain the equality of assets and liabilities."
Therefore, when a bank accepts bullion, coin, currency, checks, drafts, promissory notes, or other similar instruments from clients, it deposits or records the instruments as assets of the bank. At the same time, it must record offsetting liabilities that match those assets. These liabilities represent the amounts that the bank owes the clients, i.e., funds that originally came from clients themselves.
For example, if you lodge $1,000 cash or a check with the bank, it records this deposit on the left side of the "T" ledger as an asset of the bank, to be used in any way the bank sees fit. But at the same time, the bank records a liability to itself on the right side of the ledger, representing a similar amount that is owed back to you. In reality, you have loaned the bank $1,000 and you fully expect to get it back.
When the bank receives your promissory note it treats it similarly to a cash or check deposit; it records the note as an asset of the bank and records a matching liability in a transaction account in your name (without telling you). According to the bank's bookkeeping records, its assets have gone up by the full amount of the promissory note but, at the same time, its liabilities show that it owes this same amount of money back to you. You have gifted the bank the full amount of the "loan" that you are seeking from them. Because you are unaware of what you've done, the bank takes full advantage of your ignorance and unlawfully holds on to your money.
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