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A riddle

7 July 2019, translated from Dutch by the author, using DeepL and bilingual postediting. Or in fact a complete rewrite in this case.

The discussion

On March 18, 2018, Twitterer Silver Surfer asked a question, which despite the unserious mood and atmosphere in that thread, did make quite some sense. It takes the form of a riddle:

Now, let’s suppose there is no money yet. The bank creates a 100 pounds out of thin air. It lends that to a client, at 10%. So the client has to pay back 110 pounds, but there is only a hundred in circulation. Where do we find those missing 10 pounds?

He (or she, I don't know) insisted again later, on July 6, 2018 and more recently on July 4, 2019.

The solution was obvious to me pretty soon, but I didn’t have the time to write it down properly. At the time the question was asked, the answer had already been on my website for almost five years, as I mentioned on March 17, 2018, and repeated on July 6 and Septem­ber 8, 2018. But participants refused to read it and understand it, and it met with general mockery. Well, that’s their freedom.

Solution

OK, so here’s the solution to the riddle.

That “client”, who is an entrepreneur in my example, who had borrowed the 100 pounds from the bank, uses that to buy a second hand bicycle and a ladder. She starts a window cleaning company. Can you imagine? A window cleaner on her bicycle, with a five-metre long ladder on her back? Weird, but possible, and you have to start somewhere.

Her first customer happens to be that bank. She washes part of the bank building’s windows, and receives 10 pounds in payment for that. That enables her to pay the interest for the first year. If she washes even more windows, for the bank or for other customers, she can also pay back part of the loan, and earn a living.

So that’s where we find those missing 10 pounds”. From money creation by the bank, which happens whenever it pays for expenses. I already explained that in 2013, in my article number 20. Bookkeeping transactions are: debit: building maintenance costs; credit: the bank account of the window cleaner. By definition only the credit side counts as money. It has increased, so money creation has taken place, more money has come into circulation.

It’s that simple. Once you get it.


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