Why Banks Don't Actually Lend Money

The standard story

Most people believe banks take deposits from savers and lend them to borrowers. This is incorrect. It is a description of a system that does not exist.

What actually happens

When a bank issues a loan, it does not transfer existing money from one account to another. It creates new money by crediting the borrower's account with a number that did not exist before. The loan is simultaneously an asset (the borrower's promise to repay) and a liability (the bank's obligation to honour the credited balance).

This is not a conspiracy theory. It is confirmed by central banks in their own publications. The Bank of England's 2014 paper "Money Creation in the Modern Economy" states explicitly: "Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."

Why this matters

1. Banks profit from creation, not intermediation. They collect interest on money they created from nothing. The borrower works for years to repay principal plus interest on a sum that cost the bank nothing to produce.

2. The interest cannot all be repaid. If all money is created as debt, then the total debt in the system always exceeds the total money supply. Someone must default. This is structural, not accidental.

3. Inflation is a feature, not a bug. New money creation dilutes the purchasing power of existing money. Savers pay a hidden tax. Those closest to new money (banks, asset holders) benefit. Those furthest from it (wage earners, renters) lose.

The LTU alternative

LTU is minted against verified productive contribution, not against a promise to repay with interest. No interest clock runs. No inflation tax. The person who delivers value earns the token — not the institution that created the credit.

This does not mean LTU replaces fiat currency. It means the obligation layer of economic activity can be structured more honestly, without a rent-seeking intermediary extracting a percentage of every transaction.