Are banks creating currency or loaning back the actual cash value of the promissory note?
Creating currency. Banks are granted a special government license to create currency. With a paper currency, a mechanism must exist to continue growing the money supply. That mechanism is largely provided through bank loans. The currency loaned in a bank loan (the principal) represents the wealth created by property. That property is created by the community, sometimes by one individual and often by many. A promissory note has no cash value until the borrower receives consideration, that is, the currency being loaned. Once the currency is loaned, the bank owns the promissory note. The note then is considered an asset of the note holder, and represents the value of the object purchased with the loan.
