The money they create with a ledger entry into a checking account via a loan a customer has taken out through the magic of fractional reserve lending goes away as the loan principal gets paid off. So new credit money is created out of nothing when the loan is take out and goes away when the loan is paid off. The bank just gets the privileged of collecting the interest they are allowed to charge on this money that cost them nothing to create.

In fairness to the banks, especially your local business bank, this is not altogether free money. Banking is a competitive business. One bank competes against another. Your "free" checking account is not really free. they have to pay real wages to the cashiers that handle the account transactions, they have loan officers to pay, security officers to pay. Banks have lots of expenses. That "free" checking account is really just a loss leader to get your business. If they actually charged for all their overhead costs checking accounts would be fairly expensive. It also costs money to handle cash, which they do not get paid to do.

So the privilege the bank has of getting to collect interest on loans from money they get to create for free is used to pay for lots of other banking overhead costs that they do not charge for.

I've come down hard on banks many times, and I want to point out as I have before that my beef is not with your home town banker or any of the loan officers or tellers that work there. Most are honest people trying to make an honest living. Banking is usually a lucrative business to be in. The home town banker is rarely a poor fellow nor is the building they transact business the worst looking building in town - in good times banks do VERY well. In bad times their ultimate leverage business maybe not so well if they over extend. But because it is a good business and has a business privilege that no other business has (the ability to create money out of nothing and collect interest on it), doesn't mean there is not competition and that that competition does not drive prices down on things like checking accounts, having handy satelite branches for customer convenience, etc. It is still a competitive business that if the banker does not run properly he can loose his investment and go out of business. His expenses can exceed his income. It happens.

The problem I have is two fold. One is the too big to fail banks are allowed to play loose and fast with our deposits by gambling on high stakes derivatives at leverage levels that threatens to bring their industry down. Then when their bets go bad, they threaten to bring down the economy if they don't get bailed out with taxpayer money. The other problem is the way fractional reserve lending operates as a system. It tends to lend lots of money into the economy when it is booming and everyone is euphoric. This causes a business boom. Everybody is happy. But it causes a false boom because easy money causes investments that could not be justified if it were not for the cheap (low interest) money. Then the boom turns to bust. As loans default, the "money" that was created anew via fractional reserve lending is extinguished. Money is created when the loan is made and goes back away to the nether ether when the loan is paid off or forgiven. So once the economy gets used to the easy money, when lending stops or contracts, there is less money in circulation. thus the "deflation" and the bust. So that is the second problem I have. It is with the fractional reserve system itself, not the local banker, loan officers or tellers that are just operating a business in a legal manner no different than I would do myself if I were a banker. It is the unstable system we are under, not the local people operating it.

Under a 100% reserve system there would be no "free" checking accounts. You would have to pay for whatever service a bank provided based on what it cost to run the bank. It would not be cheap. It would mean less money loaned out in good times so the times would not be so good as if money were easier to get, but it would also mean growth would real growth, not artificial growth provided by an increase in the money supply via fractional reserve lending. That is fake growth. Temporary growth, temporary only until the inevitable bust comes about which it always does. Any growth would be slow and steady.

Everything I talk about would be good for the average working Joe. But it is not what we are taught. The reason we are not taught what would be best for us is because Wall Street and the financial industry siphon off massive amounts of wealth from the average person the way the current system is. So it is in the best interest of monied interests to maintain the current system. Follow the money and it is easy to understand why we have the current system rather than the system that would be best for the greatest number of people.

The only hope of changing things for the better is through education. And that education will not come from the main stream media, our schools, government entities or our politicians because all that they have is largely dependent on monied interests keeping the current system. They all have jobs that are dependent on the status quo.

John