Quote ="DaveO"I think you missed the point. The money that exists in the economy has to come from somewhere and by this I mean not your piggy bank or from your employer. All money in the economy is created in some way. Some of it is created by the mechanism I described.'"
The way you describe is not really creating money. You are counting the same money being deposited/loaned multiple times. If you were to net up all the positions you'd get back to a constant level (in the absence of any central bank action). So in your example the net position remains £10K - the first bank has a net position of £1K (+10K, -9K), the second a net position of £900 (+9K, -8.1K) and there's £8,100 lent onwards. There's no extra money in the economy here - you're just counting some of it multiple times. Summing up all the deposits etc. does have some meaning, which is why economists do it.
To come back to my [url=http://viewtopic.php?p=17079882&tsmp=1345835686#p17079882original question[/url, in reality where banks do not create money [ifrom nothing[/i, when a loan is repaid the money supply is reduced as that money is being counted one less time. Back to your example if the second bank is repaid and then repays the 9K to the first then the first bank now has £10K and that's your lot. The money the bank had "created" has now been "destroyed", if you like that terminology. I remain intrigued as to how LeighGionaire believes this works though (although I suspect he hasn't actually thought it through).
None of this makes interest in anyway special from any other charge any business makes for its products or services.
Quote ="DaveO"Another argument against it is that it is inherently fraudulent because the banks promise to pay depositors their cash on demand but have not got a hope in hell of doing so. They rely on a run on the banks never happening but some economist argue that isn't such an unlikely event e.g. Northern Rock.'"
They cannot pay all their depositors at the same time. A bank which could do so would be unable to pay any interest on deposits as it would be unable to make any money from the deposits. They would have to charge a fee for holding the money just to cover their overheads - you'd essentially just be renting some space in their safe. The only reason banks pay people for depositing money is because they (believe) they can make more money investing it themselves.
