| How does this example supposed to work? When you deposit money you get an asset (an IOU from the bank), while the bank gets money + liability (they are short the IOU). Your property after the deposit is the IOU, not the money (you gave the money away in exchange for the IOU!). There is contract + law that governs how the IOU can be redeemed for money (up to a limit the federal government guarantees some kinds of IOUs via FDIC/etc). Once the bank has your money (for which they gave you the IOU), they in fact can use the money at their own discretion (it is their money!) subject to some legal limitations. Those limitations are not about how banks use other people’s money (because normal banks aren’t custodial), they are limitations based on risk and collaterization of IOUs (the bank’s liabilities). These limitations are not expression of your property rights, they are in fact limitations on bank’s property rights (their freedom to deploy capital) since historically banks were not very responsible and blew up (in which case they failed to cover their liabilities, so IOUs were redeemed for less than their face value). Edit: as an aside, this money => money + IOU + IOU short Is exactly how most of “money” in circulation is produced. People take the IOU and spend it like money, banks take the money and lend it collaterized by houses/factories/etc. So you get people spending more than total cash in circulation (because they spend IOUs), while banks accumulate large IOU short position (again, collaterized through stuff like houses, factories, etc). Nothing bad about this, this is in fact working as intended. |