[spiralx]

Banks don't lend out deposits though - a $100 loan creates both a $100 liability - the value in the customer's account - and a $100 (plus interest) asset - the loan itself - which also balances out to $0. The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all. The constraints on making loans come from central bank requirements and regulations, not deposits made.

The fractional reserve model makes sense for commodity-backed money or things such as stablecoins that are backed 1:1 in some way, just not for banking in the modern economy where physical money is only a small part of the money supply.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[perl4ever]

>which also balances out to $0

>The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all

If the assets and liabilities balance, why describe it as "literally creating money"?

It makes it sound to me like someone gained something, like banks have a special privilege, and like money is a physical resource.

And being able to lend money without deposits is possible whenever a bank has money from another source. Are you suggesting that there is something non-obvious going on that permits bootstrapping from nothing?

[spiralx]

> If the assets and liabilities balance, why describe it as "literally creating money"?

1) Say you have an account at FooBank with a balance of $1000, and I have an account there with a balance of $0. The total supply of money at this point is $1000.

2) I apply for a loan of $1000 and get it. My account now has a balance of $1000, and your account still has a balance of $1000. The total supply of money is now $2000!

Adding another layer:

1) I have an account at FooBank with a balance of $0. You have $1000 in cash in your pocket. FooBank has $0 of assets and $0 of liabilities. The money supply is $1000 of cash.

2) You open an account at FooBank and deposit your $1000 of cash. FooBank now has $1000 of assets (your cash) and $1000 of liabilities (your deposit), balancing out still. The money supply is also still $1000, now made up of $1000 of bank deposits and $0 cash.

3) I apply for a loan of $1000 and get it. My account now has a balance of $1000, and your account still has a balance of $1000. The bank now has $2000 of assets ($1000 cash plus my $1000 loan) and $2000 of liabilities ($1000 in each of our accounts), which still balances out. However the money supply is now $2000, made up of $2000 of bank deposits and $0 cash.

The money supply here is M1 or "broad money" which consists of the total of coins and bank notes plus deposits in checking/current accounts, which you can roughly think about as the total amount of money held by households and companies.

4) I withdraw $1000 in cash from my account at FooBank, leaving me with $1000 cash and $0 in my account. FooBank has assets of $1000 (my loan) and liabilities of $1000 (your account). The money supply is still $2000 but now comprises $1000 of cash and $1000 of bank deposits.

The bank's accounting of assets and liabilities always match up, as do ours - you started with $1000 of assets and no liabilities and ended up with exactly the same, while I started with $0 assets and $0 liabilities and ended up with $1000 of assets and a $1000 liability. However the total of our cash and bank deposit assets has gone from $1000 to $2000 i.e. the money supply has increased.

So yes, banks really do have a special role in the economy in that most "money" is in the form of bank deposits and most transactions involve moving money between bank accounts. It's not super-intuitive and doesn't quite fit the "common sense" view money as a set of tokens that just get moved about that's ingrained in our thinking - that works for cash, commodity money or cryptocurrencies, but not when viewing modern economies and fiat currencies where money is an IOU between two parties.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

https://www.investopedia.com/articles/investing/022416/why-b...

[perl4ever]

"1) Say you have an account at FooBank with a balance of $1000, and I have an account there with a balance of $0. The total supply of money at this point is $1000.

2) I apply for a loan of $1000 and get it. My account now has a balance of $1000, and your account still has a balance of $1000. The total supply of money is now $2000!"

The money supply didn't change as far as I can see.

At first: Me: $1000, FooBank: $-1000, You: $0

After your loan: Me: $1000, FooBank: $0, You: -$1000

The sum was $2000 before and $2000 after. Do you have an issue with any of the six numbers above?

You could, I suppose, say "I prefer to count the proceeds of my loan, rather than the debt, and not use a negative sign". Ok, but since we're adding the absolute values to get the total, it's still the same number.

After working it out painfully and slowly, it seems to me where you're going wrong is you think there is a fundamental difference between deposits and loans, other than the direction they're going in. I believe that's an error.

When I deposit money in the bank, that's just a type of loan. To the bank, rather than from the bank.

I'm pretty sure millions of people believe in and spread your meme about creating money, so feel free to explain why the majority is right.

[gizmo686]

Counting money is complicated. When I deposit $1000 in the bank, then even if the bank loans out a portion of it, my account still has $1000, and I still act like I have $1000.

Put another way, there are essentially 2 types of money: central bank money and commercial bank money.

When you deposit $1000 of real cash into a bank you exchange $1000 of central bank money, for $1000 of commercial bank money.

When the bank loans out $1000 to someone else, they credit that person's account with $1000, creating $1000 of commercial bank money out of nothing. The recipient of the loan is entitled to redeem that for $1000 of central bank money, but they probably wont, because cash is inconvenient and you can do most things with commercial bank money anyway.

[perl4ever]

>Counting money is complicated.

Is it?

>When I deposit $1000 in the bank, then even if the bank loans out a portion of it, my account still has $1000, and I still act like I have $1000.

I...think I agree. Check my previous comment. The depositor "Me" has $1000. No negative sign, is there?

Maybe you meant to say something about the bank.

>When you deposit $1000 of real cash into a bank you exchange $1000 of central bank money, for $1000 of commercial bank money.

If you exchange $1000 in "blue" money for "pink" money, you've got $1000 more "pink" money, I guess. But you've got $1000 less "blue" money.

>When the bank loans out $1000 to someone else, they credit that person's account with $1000, creating $1000 of commercial bank money out of nothing.

"SomeoneElse" who got the loan has $1000, right.

It's the bank who doesn't have $1000. The $1000 deposit of "Me" plus the loan to "SomeoneElse" of $1000, means they have a total of $0.

[gizmo686]

> Is it?

Take a look at https://en.m.wikipedia.org/wiki/Money_supply

You have M0, MB, M1, M2, M3, M4, and MZM.

I suppose the difficulty is more in defing money than counting. Apart from the M0 component (included in all counts) counting should just be a matter of aggragating data from all banks and the fed.

> "SomeoneElse" who got the loan has $1000, right.

Define $. "SomeoneElse" has $1000 of bank money. But the bank still has the $1000 of cash you deposited.

It might be easier to look at this through the definitions:

M0: Total amount of physical money. This is $1000 throughout the story. Only the Treasury is allowed to create M0.

M1: M0 + checking and savings accounts.

M0 is unchanged at $1000. However, there are 2 checking accounts with $1000, so M1 is $3000.

[dragonwriter]

> The money supply didn't change as far as I can see.

Your numbers (1) look like a attempt to assess net assets and liabilities rather than money supply and (2) are wrong even for that.

Money supply (I’ll use M1 here because it's simple, but M2 or M3 wouldn't differ in any way material to the example, since the example consists entirely of cash and demand deposits) is the sum of all cash, demand deposits, travelers checks, and certain other highly liquid deposits in the economy.

At first: You have $1,000 in demand deposits. M1 is $1,000.

After the loan, you still have $1,000 in demand deposits and the loan recipient has $1,000 in cash (or, more likely, a demand deposit, because they probably get and deposit a check.) M1 is $2,000.

[perl4ever]

I think I agree, if you divide assets into "money" and "other stuff" buckets then when you move something between them, "money" is created.

I don't think people intend to say this and only this, when they talk about creating money. Because it's trivial.

But I can't really engage with you about stuff other people wrote and what they might mean. I belatedly realized there were a bunch of people tag-teaming me.

[dragonwriter]

> I think I agree, if you divide assets into "money" and "other stuff" buckets then when you move something between them, "money" is created.

A new loan doesn't move assets between buckets it creates a new asset and a new liability. The asset is money, the liability is not money (nor is it negative money).

> I don't think people intend to say this and only this, when they talk about creating money. Because it's trivial.

Money creation is fairly trivial if somewhat counterintuitive, but people talk about it because it is important in its economic effects.

[spiralx]

> The sum was $2000 before and $2000 after. Do you have an issue with any of the six numbers above?

Well clearly because that's not what I wrote. You're mixing liabilities with assets and also redefining the money supply to include the bank. Not sure how borrowing $1000 leaves me with "-$1000" in assets or what that's supposed to mean.

The money supply is the total cash and bank deposit assets of all individuals and corporations. Central bank money is different and isn't part of it.

[perl4ever]

>Well clearly because that's not what I wrote. You're mixing liabilities with assets and also redefining the money supply to include the bank

Wait, I thought the entire point is that FooBank is creating money? Do you want to pretend they don't exist?

>Not sure how borrowing $1000 leaves me with "-$1000" in assets or what that's supposed to mean

Ok, fine, you can have the $1000, it's not a loan after all.

Lemme update it:

At first:

   Me: $1000 in deposits
   FooBank: $1000 in assets - $1000 in deposits, total of $0
   You: $0

After your non-loan:

   Me: $1000 in deposits
   FooBank: $1000 in liabilities, no assets
   You: $1000

But! FooBank can never return my deposit at this point.

So the cold hard truth is...

   Me: $0 in deposits
   FooBank: (bust)
   You: $1000

And so in the end, there is the same $1000 that there was in the beginning, no money created.

In sort-of real life, the FDIC would bail me out, I guess, and then I would have $1000, but that certainly would be the opposite of the bank creating it.