Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times
more than they actually have in reserves.

But very few people - with the exception of those in the banking industry and financial experts - know where credit really comes from.

Germany's central bank - the Deutsche Bundesbank (German for German Federal Bank) - has admitted in writing that banks create credit out of thin air.

As the Bundesbank states in a publication entitled "Money and Monetary Policy" (pages
88-93; translation provided by Google translate, but German speaker and
economic writer Festan von Geldern confirmed the basic translation):

4.4 Creation of the banks money

Money is created by "money creation". Both [central banks] and private commercial banks can create money. In the euro monetary system [money creation] arises mainly through the granting
of loans, as well as the fact that central banks or commercial banks to
buy assets such as gold, foreign currencies, real estate or securities.
If the central bank granted a loan from a commercial bank and crediting
the amount in the account of the bank at the central bank, created
“central bank money.”

***

Money creation by commercial banks

The commercial banks can create money itself, the so-called bank money. The money creation process through which commercial banks can be explained by the related postings:
If a commercial bank to a customer a loan, they booked in its balance
sheet as an asset against a loan receivable the client - for example,
100,000. At the same time, the bank writes down the customer's checking
account, which is run on the liabilities of the bank's balance sheet,
100,000 euros good. This credit increases the deposits of customers on
its current account - it creates deposit money, which increases the
money supply.

In other words, money is created as book-entry by purchasing assets or entering credits on the left side of
the balance-sheet and corresponding deposits on the right side. In
other words, credit is created
out of thin air.

Frontiers of money creation

The above description might leave the impression that the commercial banks are able to draw an infinite amount of money in bank accounts. If this were really so, this could be inflationary.
The central bank therefore takes effect on the extent of lending and
money creation. It requires commercial banks to hold the reserve.

As I've previously pointed out, the Federal Reserve is taking the same
tack, creating conditions that guarantee that American banks will have
huge excess reserves so
as to prevent inflation. Back to the publication:

Central banks, commercial banks can typically obtain only by the fact that the central bank granted them credit. For these loans, commercial banks have
to pay the central bank interest rate. Increase this rate, the central
bank, the "prime rate", the commercial banks usually raise their part,
the rates at which they lend themselves. There will be a general rise in
interest rates. This, however, dampens the tendency of businesses and
households, the demand for loans. By raising or lowering the key
interest rate the central bank can thus influence the business sector
demand for credit - and thus on Lending and bank money creation.

The commercial banks need central bank money to cover not only for the reserve, but also to the cash needs of its customers. Each bank customer
may be credit in the bank account into cash to pay off. If the stocks
of the banks in cash to be in short supply, the central bank can create
only remedy. Because only they are permitted to bring additional notes
in circulation. To meet the cash needs of its clients, the commercial
bank must therefore include, where appropriate, with the central bank
for a loan. This leads to the creation of central bank money. The
so-purchased assets for central bank money can pay off the commercial
bank in cash let. Thus, the cash is in circulation: from
the central bank to commercial banks and from these to the bank
customers.

Central Bank money is also to cover the non-cash payments are required: a customer transfers money from its credit to a customer at another bank, this results in many cases led to
the sending bank central bank needs to transfer money to the receiving
bank. The central banks then moves from one bank to another.

***

The commercial banks can use the surplus of central bank money and to award
additional credits to businesses and households. As previously
described, arises from the award of additional credits additional demand
for central bank money - which can be covered in this special situation
of great uncertainty among banks by the existing excess liquidity. The
abundant supply of liquidity relief, a bank that wants to provide a
loan, from the traditional consideration of how much money they need after the
award of credit is, how it is constituted, and at what cost.
Using the so-called money creation multiplier can be estimated how large
the potential for additional Credit limit is.

Do you get it now?

Private banks don't make loans because they have extra deposits lying around. The process is the exact opposite:

(1) Each private bank "creates" loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding
liabilities are created on their books at the same time. But see below);
then

(2) If the bank doesn't have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);

(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.

It's not just Bernanke ... the central banks and their owners - the private commercial banks - have been running the printing presses for hundreds of years.

Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won't
even have to borrow from the Fed or other banks after the fact to have
reserves. Instead, they can just enter into as many loans as they want
and create endless money out of thin air (within Basel I and Basel II's
capital requirements - but since governments are backstopping their
giant banks by overtly and covertly throwing bailout money, guarantees
and various insider opportunities at them, capital requirements are
somewhat meaningless).

The system is no longer based on assets (and remember that the giant banks have repeatedly
become insolvent) It is based on creating new debts, and then backfilling from
there.

It is - in fact - a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing
presses (with some limited exceptions, like North Dakota), and thus have to pay
the monopolists to run them (in the form of interest on the loans).

See this and this.

At the very least, the system must be changed so that it is not - by definition - perched atop a mountain of debt, and the monetary base must
be maintained by an authority that is accountable to the people.

Note: When I receive a better translation I will post it.

http://www.washingtonsblog.com/2010/03/german-central-bank-admits-t..., March 19, 2010