[NovemberWhiskey]

This is right, but then the house seller now has $0.9mm in cash. When she deposits it in her bank, that bank can make another loan but only for $0.81mm and so on and so on.

The geometric sum to infinity ends up being 1/reserve_ratio; so if that's 10% in this example, the theoretical money creation is 10x.

[luca3v]

Yes, this is correct! But some people, and perhaps not the grandparent comment, understand the "money creation" point as that money can be replicated infinitely, that is a bank get $1 mil deposit and makes $10 mil loans, and those loans, if deposited, could lead to $100 mil loans and so on

[majormajor]

I'd say that's creating circulation more than creating money.

If you had no bank deposits at all, and nobody ever saved money, saving is outlawed, you gotta spend it, you'd have 1M in total cash in the economy. It would be moving around a bunch, but if you froze the system and counted it, there's 1M available to be spent at any moment in time. Let's compare to 1M deposited in a bank. 900K of it is circulated to the house seller, etc... The total amount circulated follows the geometric sum.

But, if you freeze the system at any moment in time, there is NOT a geometric sum of money in cash or other places immediately available to be spent! Most of this is going to be in accounts with daily withdrawal limits, for instance. We're messing with time here much more than we're creating money - it's a bit of a magic trick, yes, but one that's based on "not everyone is going to want to move all their deposits at the same time, let's take advantage of that to make the system more efficient, at some risk of stability." Not based on infinitely printing money at retail banks. And the risk has, in the better part of the last century, been fine - it's distributed, it's insured, etc. We could have a big discussion about if it's gonna be ok for ever, but first, that's different from this claim of "banks have special privileges to create money that I wish I had."

And the bank still needs to make sure their loans were sensible and low-enough-risk - things have to balance up in the end as people do make various withdrawals at various points in time - and many of those loans also go into accounts at other institutions.

In a world without this sort of banking, you'd still have loans backed by other things, like interest and payment income, like credit cards, but not ones tied at all to deposits - and it should be pretty clear that credit card companies aren't printing money, they're just shuffling it around.