[ClumsyPilot]

"Money is created when money is loaned out against collateral. Money is destroyed when the loan is repaid and the collateral returned. It's a natural process."

But there is nothing natural about it - the limit on money supply is how easy it is to get a loan. Bank could give out mortgages with 0% deposit, they could give out loans equal to 120% of the house value, and they indeed have done so.

What regulates the money supply is not 'natural process' but the rules set by the regylator on minimum reguirements. Is having no rules free market? But then it will be creating 2008 style event every tuesday.

Furthermore, this whole thing only creates money in our current floating-money system, right?

If you have medieval-style economy where you count literal gold coins, you can not create money, you would just be loaning out other people's deposits. The amount of money in the system would stay fixed, right?

So then the only 'natural' money supply is your ability to mine gold?

[WalterBright]

BTW, this will blow your mind. Let's say you have $300 in your bank checking account. You borrow $1000 from the bank. You bank checking account now has a balance of $1300.

Where did the thousand bucks come from? Where was it moved from?

Nowhere!

The bank just changed the amount in the electronic ledger from 300 to 1300.

Crazy, right?

[webXL]

Yes, crazy, but not exactly "nowhere". It "comes from" future earnings and the (projected) demand for US military protection and access to the markets which it enables. The bank (really the government) is helping you shift future consumption to the present, because you didn't save enough in the past. And why should you or anyone else be held personally accountable for not saving in the past? /s Because the US and its allies have god-like firepower, baby!

My mind was actually blown recently learning that fractional reserve banking has turned into a widely believed myth. Banks are still making low-interest loans and there's no reserve requirement!

[WalterBright]

> But there is nothing natural about it

The natural pressures are the law of supply and demand. If the bank creates too much money relative to the collateral, it risks a run on the bank. Too little, and the bank goes out of business because it isn't making money.

> Is having no rules free market?

Yes (other than you cannot force people to do business with you nor can you defraud them).

> The amount of money in the system would stay fixed, right?

Nope. You don't actually loan out the coins. You loan out a receipt for the coins. As long as people don't redeem the receipts, you can loan out a multiple of the coins in the vault. This is called "fractional reserve banking". After a while, instead of trading coins, people trade the receipts. The receipts evolved into bank notes.

It's a fascinating history.

> So then the only 'natural' money supply is your ability to mine gold?

Lots of commodities would work. People in colonial America used tobacco leaves. Today people "mine" bitcoins.

[ClumsyPilot]

'If the bank creates too much money relative to the collateral, it risks a run on the bank.... This is called "fractional reserve banking". '

I dont fully understand the system, and its clear neither do you, or most people commenting here

We have not been using fractional reserve banking for at least 60 years now, as you sibling comment and this paper by the bank of England Explains. The only thing limiting hiw much bank can loan are capital requirements in the rules passed by parliament.

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

[WalterBright]

It is true that the FDIC has eliminated the risk of a bank run.

It's still a fractional reserve system, at least in the US. The "capital requirements" sound like fractional reserve, too.