Banks, money from credit, and NFT’s

Debt is money, and credit is money. In this post we learn how, and even how this so similar to NFT's.

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In my previous post, I covered the idea of marbles as money. I also introduced a couple of other ideas, specifically the idea of credit, debt and notes. Allow me to elaborate: as I became a better and better marble player, and as I accumulated the marbles, when kids would come borrow my marbles for their own games, or they would simply come play for me and “pay” a use fee the value of my marbles slowly increased. And as the value increased and I recruited the larger kids to help me protect the marbles, as soon as other kids started letting me store their marbles for safety, I basically became a bank. Sometimes some other kid would have a marble that I didn’t have and someone would come to me to “rent” that marble and as long as I knew the owner wasn’t going to come calling for their marble, I could earn an interest on the use of a marble that didn’t belong to me … and even the illusion that I was holding “all” the marbles, whether I was the owner or not, I had all the marbles, and I would give these kids a piece of paper with my signature and a description of their marble, sometimes we would even put a removable mark to distinguish one marble from another, although in the case where the marbles were indistinguishable, nobody cared.

One day, a boy came to me with one of my notes and said, I’m here to collect my marble. But it wasn’t the original owner so I asked him what happened, and soon I learned that the kids were starting to trade my notes, often increasing the value of a particular note way beyond the value of the marble behind it. So I got the idea to make the notes look pretty and “official” and soon the notes were trading on their own as a separate game, these “tokens” or notes, represented value and in and of itself had no value, except what was given by the other children.

This really made me thing about how value is so ephemeral, so ummm, virtual. My notes of ownership had become money themselves, and had established a value of their own. Soon I noticed that even my debt notes, when someone borrowed a marble and signed a paper promising to return it or pay some crazy price if they lost the marble, I noticed that these debt notes were starting to be used for trading as some kids decided to risk some money to own the marble in question — clearly much more risky since the marble was actually out in circulation and might get lost. Yet the debt notes were being used to trade one marble for the marble described in the note. I was good for it though, if someone came calling in a debt note when the marble was still out in circulation I would often pay them premium for not having the marble in my possession.

I had become, in a very real sense, a marble bank. In this post I want to cover the fact that banks are not government institutions, they’re not really anything special, they’re just a business who applied for a license to issue money in the form of debt. Think about it, banks are not required to have a dollar in their vault, an actual physical dollar to issue a loan. And think of what happens when you borrow 10 bucks from the bank; the bank makes an entry in their computer system, issues a note that you sign saying you’ll pay back the money, and the note is used to create the 10 bucks. Now the governments do try to put some control over the system deciding whether one bank or another has to have a fractional reserve backing their loans, ie. for every 1 buck in their depository they can issue 10 dollars of debt (credit), but usually it’s much greater more like 30, 50, and even 100 times and in certain circumstances, no reserver is required. Here’s the real mind bender, when I go get my 10 bucks to buy my marble, the bank uses my signed promissory note to create the money in their debt account, then they transfer the 10 bucks to my account and viola! the m0ney is created. (yes i know that’s not how you spell it)

Most of us though, we get a loan and we don’t go get cash out, we go to the store and we use our debit card, or venmo, or something tied to our bank account and transfer, we deposit into the other person’s account … which means the new deposit is now able to back yet another 10,30,50, or 100 times its value in new loans, ad infinitum!

As debt is repaid, once the principal is back, the note is destroyed, that money in essence is “burned”. But the downstream effects of that single piece of debt are amazing and huge. And we haven’t even discussed the fact that when I get a mortgage from my bank, the bank seldom holds the paper note (the note I signed) for very long. Investment funds, and other speculative people show up buying debt from each other, analyzing risk and trading on the risk, if I’m a good customer and always pay my debts, my credit is money to these folks, literally, they bank on me paying back my debt. After all, if someone shows up to my bank wanting to trade back my note for the 10 bucks that it represents, and if my bank deems me a worthy customer, the bank will happily buy back their own note and sell it to someone else again.

It’s estimated that 95-97%% of all money in existence is created by the banks — governments account for less than 5% of all money created. All the cash in the world accounts for less than 5% of the money, which mens, up to 97% is debt notes used as money (quoting from Forbes).

Yet another thing we won’t cover but I want you to think about is this: when you borrow the 10 bucks from the bank they want 1 buck back in interest … here’s the kicker, we know the bank created the 10 bucks with the promissory note, but who creates the extra buck to pay for the interest? It should be obvious to anyone, that in this system, there will always be a deficit built into the system, which can never catch up. Let’s say the government issues new notes to cover the deficit from the bank loans, how is this money distributed? Once again, through banks … who will distributed the newly created currency back to the general population, but this new buck of value has no intrinsic “value” attached to it … the 10 bucks created by the bank are at least tied to the 10 marbles I bought with the loan, but there are no new marbles created to cover the interest and as the banks (and their owners) use the interest money, the total value of the currency, the fiat, the cash becomes less, and the cost of things is adjusted, through inflation, unless the governments create a way to “burn” actual debt, to make it disappear.

Boy this post got out of hand, so I apologize, but wow, this topic is so deep, I didn’t want to stop too short, maybe in the future I’ll break it up into three parts to make it more digestible, but think about it this way:

Banks create money through debt.
Debt becomes money itself and in fact forms over 95% of all money in the world.
The system is in a state of perpetual deficit, i.e. the interest system will always require money that cannot be created inside the system.
Inflation is a natural consequence of our monetary system.

And finally, let me give you a quick teaser, because we have to go through a few more concepts before we really dive into the topic, but as I hear people talk and argue about how unstable crypto currency is, as I think back to my notes, or the bank notes, it occurs to me, these notes are truly similar to NFT’s. These notes have no real intrinsic value, certainly the cost of the paper and even the process itself is not anywhere close to the value of the car or house it represents and holds as security, and yet it can be traded separately and generate value of its own through its own exchange systems and mechanisms. Think about it when people talk about NFT’s being such a new thing … nah … I was minting NFT’s when i was 8 years old in my rough neighborhood.

p.s. we will cover crypto and NFT’s in much bigger detail in a near future … this is your promissory note