Our monetary system might seem simple, but it’s actually a complex interplay of many rules and mathematical effects. If it were simple, we wouldn’t need advisors, and many citizens would probably be much more outraged about what goes on in the economy.

Many years ago, I heard a story that has stuck with me ever since, and which I like to retell when I get the chance—now, here on the blog. This story shows that debt and the amount of money in circulation are not related. But first the story, then my thoughts.

A business traveler entered a hotel to stay the night. Being very picky, he wanted to inspect the room first. The hotel owner agreed to his request, on the condition that he leave a security deposit of €100. No sooner said than done. €100 on the counter, and off to the room he went.

The hotel owner seized the opportunity and took the money to the auto repair shop. He still owed the mechanic €100, which he paid off, becoming debt-free. The mechanic was also pleased, as he could go straight to the hairdresser and settle his €100 debt there. The hairdresser, in turn, went to his favorite prostitute and paid back his €100 debt to her.

She then ran to the hotel and settled her debt with the hotel owner using the €100 bill. Just then, the guest returned to the reception desk and explained that the room wasn’t to his liking and he wanted his €100 back. The hotel owner gave him the money, and everyone went on their way, debt-free.

What can we learn from this story? In the initial situation, four people each have €100 in debt. The local economy is therefore indebted by a total of €400. With an additional €100 temporarily put into circulation, all debts are settled, and the €100 is back with its owner.

So, it becomes clear that debt and the actual money supply are unrelated. But it also shows that you could resolve debts very quickly with little money, if only you understood how they are intertwined. And in the end, you see how easily a bank can make a lot of money out of a little. The bank can lend money that it has. If all debtors are with one bank, then the debts of the first are considered an asset of the bank.

Customer A has €100 in their bank account. The bank is allowed to lend out roughly 90% of that. So, it lends €90 to Customer B, who uses it to pay Customer C, who is also with the same bank. Poof, the bank now has capital of €190. And so on. This is how banks create money out of thin air. If you go down the chain in reverse, the debts are paid off very quickly. Confusing, fascinating, and in my opinion, also dangerous.