1. When a bank customer gets loan from a bank the bank is essentially issuing new currency into circulation. The new currency is in bank deposit form (rather than paper form). So, each loan is a new currency being created by the bank. The money supply (currency supply) increases when the loan is funded (the act of funding a loan is just a book entry in the bank's ledgers -- nothing more!).
2. When the loan is paid back the currency supply (money supply) goes down because unless the money is re-lended it is out of circulation for use by the public. Prolonged decreases (due lack of re-lending returned currency/money) in currency supply lead to a severe economic recession and ultimately an economic depression.
3. If the economy has the capacity to grow then re-lending continues and actually more has to be lent out as time goes on because not only principal has to paid back by previous borrowers but interest also on previous loans. The currency supply has to constantly increase (by ever more lending) in order to pay back principal and interest. The banking system cannot operate in backwards (i.e., decreasing currency supply for a prolonged period).
4. This type of banking (constantly increasing money supply by lending and re-lending) is called Fractional Reserve Banking.
5. Most currency (about 90%) is issued (created) by banks and not by the government through the process of Fractional Reserve Lending described above.
6. Economy can ONLY grow if the following is true:
- cheap source(s) of energy are available to extract and process raw materials (iron ore, copper, lumber, etc.), transport raw materials to a factory, manufacture and send finished goods to the markets. Not to mention "low cost" energy needed to heat and cool homes and transport people and grow food (fertilizer is made from natural gas, water is pumped out of the ground, pesticides are made from oil ). Farm machinery runs on oil. Most electricity generation plants run on fossil fuels.
- Skilled labor is plentiful (engineering knowledge and management knowledge and medical knowledge).
- Free/fair markets and entrepreneurship and investment facilitating firms.
- A Decent government (peace, security and rule of law).
Growth is not possible anymore because 95% of our energy comes from fossil fuels (coal, natural gas and oil). We need not only energy but "low cost" energy for economic growth. Fossil fuels are depleting very fast (the cheap/easy oil is very hard to find). Peak Oil has been reached (in 1998 crude was $11 a barrel and now it is around $95 per barrel). Per BLS inflation numbers $11 in 1998 equals $15 in 2013. Therefore, the price of gasoline has far, far outpaced the inflation rate.
If we don't have economic growth the banking system WILL collapse as it did during the great depression.
But we cannot get out of a depression by spending money anymore because during 1930's "low cost energy" was available so all the government had to do is print money and have a huge war and get demand going and get currency in the hands of consumers via the war effort jobs.
Our monitary system must be re-designed to be not based on bank-lending created currency. But this will not happen until a much worst banking collapse to come in the next five years.
Even after the re-designed monetary system (which will cause much, much chaos for lots of reasons: most bonds will be worthless and stocks will fall by 90%) we will not have much growth ever again unless we find a "cheap" source of energy. Some people are praying for cold fusion technology to be developed soon.
If usury (lending based currency issuance) is NOT abandoned we will have mass global starvation because checks will not clear and supply chains will breakdown.
May God (Allah) protect us, bless us and guide us. We will certainly need his help in the next five years when the economy has to be totally redesigned to use less energy.