I'm kind of confused about how interest works, can anyone clarify this for me? (details below)?
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Now, while you were out shopping, the Warehouseman would sit in his warehouse watching your gold, and the gold of many others too. Then it dawned on him that he could make money by lending it out to people who did not have any. There was always gold in his Warehouse; some people would be depositing it with him, some would come with the the paper receipts and withdraw it, but there was always some to lend out. But, rather than lend out the actual gold, he would lend a paper receipt, backed by some of the gold in his Warehouse. He had noticed that even when he had given out paper receipts equal to the amount of gold on deposit that there was always a supply of gold in his Warehouse, so if anybody came by to redeem their paper receipts he always had some to honor them. Finally he realized that he could actually issue paper receipts for more than the reserves on hand. Finally, he was able to issue paper receipts with no gold in the Warehouse at all, like todays Federal Reserve Notes, that are backed by nothing except hot air and promises.
This is really where your question comes in. The bank is lending you "money" which is really nothing more than a promise to pay with other promises to pay. It used to be that the "money", warehouse recepts, or "silver certificates" were actually payable in real silver. Not so any more. The Federal Reserve notes are nothing more than a promise to pay, backed by nothing except the full faith and confidence in the Treasury. So all the paper money you have in your wallet is really worth nothing at all except for the government's promise to pay, and that payment really would be with other promises to pay. Can't get silver any more.
So now when you borrow money, you are not really borrowing real money, you are borrowing government promissory notes, which you promise to pay back with other promissory notes. The end result is that you really borrowed nothing but worthless paper promises and paid it back with other worthless paper promises for which you had to work your brains out to get. And yes, if you do not pay back the worthless promissory notes you borrowed with other worthless promissory notes they WILL come and repossess your chariot. If you had borrowed it from the Mafia then they'd take out your kneecaps. Sorry.
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