[rocqua]

It's not quite right that banks don't loan out their depositors money. They need depositors to be able to make loans. Stashing depositors money at the Fed keeps the bank from making loans.

Stashing money at the Fed is possible by the way, and effectively does destroy the money (or rather, takes it out of the economy). Banks can deposit money at the Fed earning exactly the interest rate that the Fed controls. This effectively takes that money out of the economy. That is generally rather bad, because it stifles growth. But in case of inflation, it can sort of help. That is part of why the Fed interest rate helps regulate inflation.

But generally speaking, you want loans to be made! It helps good and productive ideas get of the ground. It is core to Western economies. Hence the Fed is quite scared of narrow banking. They want to be the 'borrower of last resort'.

[imtringued]

>They need depositors to be able to make loans

I've never asked my loans to be paid out in cash or transferred to another bank. When people say commercial banks create/issue money they mean that cash/central bank reserves have become irrelevant other than as a rudimentary payment method or network to transmit between banks.

If you wanted to make the point that banks lends existing deposits you would have to basically argue that people never wire money and always pay with cash and deposit their cash paychecks manually and pay taxes in cash. Curiously, my government points me at major banks and their ATMs when I want to pay my taxes in cash.

[makomk]

Presumably you didn't just keep that money sitting in your own bank account though - you used it to buy something or pay someone, and their account was often at another bank. If a bank issues too many loans where the money ends up at other banks without counterbalancing transfers of money in, it eats away at the reserves they have available to settle those transfers with and that's how deposits actually limit banks' ability to make loans. The Bank of England article that someone linked further down explains this in more detail (page 18 in the PDF): https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...