Worst Mis-Information By a Person in Authority
Eighth-grade. Consumer Math class.
It was a class to teach kids a little bit about managing your money. We learned about car loans and interest. We learned about mortgages and interest. (Very superficial level--this is eight grade.) Making a household budget. Etc.
Mixed in there was a massive piece of misinformation from the trusted person in authority--the teacher.
The mis-information? That banks receive Timmy's deposit, keep a small amount in the bank, and loan out the rest.
Only in the last ten years did I discover the mis-information. It's a half-truth. But, like most half-truths, the half that wasn't told was far worse.
First, let me focus on the mis-information.
The mis-information was that the bank keeps part of Timmy's deposit; and, loans out the rest. Lets say grandma enclosed a ten dollar bill in his birthday card with the admonition to save it for a rainy day. So, Timmy accompanies dad to the bank and deposits the ten dollars in his little savings account. According to the mis-information, the bank keeps one dollar in the bank, and loans out the other nine dollars. While my teacher didn't mention the ratio, neither did she mention something else: in any other business or transaction in the world, if you give two different people title to the same one piece of property you go to prison for fraud. My teacher didn't mention that. She didn't point out that by loaning nine dollars of Timmy's money to someone else, the bank was in fact committing fraud.
But, that is kinda beside the point, because the kid explanation is not the real explanation. The real explanation is far worse. The ratio is the same: nine to one. But, what the bank actually does is on a vastly higher plane. Instead of loaning out nine dollars of Timmy's deposit, the bank keeps all ten dollars and creates ninety dollars out of thin air. Same ratio, but a lot more opportunity to earn interest.
In times past, the issue was gold on deposit vs bank notes issued (think back to school days; recall the early 1800's when banks issued their own paper money). Banks printed up paper money and issued it as loans. Each bank note was redeemable on demand in gold according to the printing on the piece of paper money. But that was never totally true. If everybody came all at once to redeem their paper money for real gold coins (called a run on the bank), the bank would go under because they had actually issued far more paper money notes than they had gold to back it up. Paper checks were a great idea to bankers--you don't have to print paper money; just shuffle numbers around on a ledger. Coming forward in time, debit cards are even better--you don't even have to handle checks. Today, according to one report I saw about five years ago, only one-seventh of the "money" in America is paper cash and coin; the rest is just digits in computers.
Pretty big assertion on my part? Don't take my word for it. You can verify all this for yourself. Just start googling and reading. The banking system (the banks) do not deny it. In fact, they've invented a flowery vocabulary to get you to accept it. Take for example, one of the justifications for the establishment of the Federal Reserve. Part of their mission is to provide "elasticity" in the money supply. That's code for "print money out of thin air."
Why is this the worst mis-information I ever received? Because it covered up something massive. Money is just a commodity. Don't get me wrong, it is a special commodity because it can be used to purchase every other commodity. But, the laws of supply-and-demand still apply even to money. For example, the more there is of something, the less valuable it is. So, when banks create more and more money, it becomes worth less and less. That is to say, when you have more money chasing the same amount of goods, the price of the goods goes up/the value of the money goes down. When the value of the money goes down, that includes the money you already had in savings and investments.
This is huge economic datum that directly affects the purchasing power of my paycheck and my savings. And, if it has a huge affect on me, then the cumulative effect on everybody is also huge. Want to know why we had the Crash of '08? Very close to the fundamental explanation is that the central bank (The Federal Reserve) kept interest rates too low too long. Below that is the heart of the system. What would low interest rates have to do with anything? It was the ability of banks to create money out of thin air. Just ask yourself, "where did all the money for those home loans come from?" Its not like the rest of the economy was hyper-productive, creating huge amounts of wealth and money. It was banks creating the home loans out of thin air. Every recession since The Renaissance can be traced to banks creating money out of thin air.
My eight-grade teacher mis-informed me by giving me a wrong explanation. Nothing at all prevented her (or perhaps the school system) from giving me the correct initial datum--banks create money out of thin air. And, then building on that in coming school years.