Money is created when a bank creates a loan, by starting with nothing and then splitting that nothing into a credit in one account (the borrower’s checking account, usually) and a debit in another (the borrower’s loan balance). From there, most transactions are digital where an ACH transfer or similar results in some numbers being subtracted from one account and added to another.
Almost all of this happens on computers, and even before computers it just happened literally on a paper ledger, with paper checks.
You might ask, “wait where does the bank get its money from to be able to allow money to be withdrawn or transferred to another bank?” If the bank doesn’t have the liquidity to do so, it can always borrow money from other banks or the government, with the last resort in the United States being the federal reserve banks, who by the way also print all the paper currency. So having that backstop is important for regular banks to have the power to create money, but the actual creation of money happens digitally to begin with, regardless of whether the bank later needs to distribute paper bills or borrow from the federal reserve.
It’s how all of it works. Money is just balances on double-entry bookkeeping, and the paper currency essentially is a piece of paper that the bearer of that paper is good for moving the balances in that ledger system.
By that logic any bank could grow arbitrarily large by just underwriting more loans. Then there’d be no competition between any of them and my job would be so much easier.
Yes, the limit to commercial bank lending is creditworthiness and default risk (because the bank is left holding the bag when a borrower doesn’t repay), and the cost of maintaining liquidity (the bank can borrow against the loans it owns, but it may cost a higher interest rate than they’d earn on the cash they’ve lent out). This paper lays it out pretty clearly, and is basically the near unanimous view among macroeconomists.
Or, in some regulatory environments, banks are required to maintain a minimum fractional reserve, which limits the total amount of loans it can lend out with its underlying assets.
But the money is created when the loans are created, and destroyed when the loans are repaid. The other stuff behind the scenes to give the system stability is important, but doesn’t actually create or destroy money.
Exactly. The bank can borrow, for which they need collateral, which sufficiently proves that what you’re saying is wrong.
They have to manage their balance sheet actively, and your original statement was in the lines of ‘it’s all made up and they have infinite equity supply’.
Read my original comment again. I explicitly talk about banks borrowing to maintain liquidity. It’s an important limit on their ability to create money, and nobody said anything about infinite money supply.
But it doesn’t change the fact that the act of money creation is caused by a bank creating a loan, and the money comes into being without a single physical act of manufacturing: it happens on a computer, and before computers it happened on paper.
So without claiming that money was unlimited, I did point out that money itself is overwhelningly digital in the modern age. And the limits don’t come from any physical constraints.
Fitting username. Explaining this to people irl who respect and listen to me is hard; can’t imagine trying to inform someone online who’s simultaneously trying to win the conversation you’re having
Sure. Empty statement though. I can withdraw all I own and turn it into gold or pebbles if I like. That’s what currency is always meant for. Technology made it easier.
Money is created when a bank creates a loan, by starting with nothing and then splitting that nothing into a credit in one account (the borrower’s checking account, usually) and a debit in another (the borrower’s loan balance).
That’s wrong and that’s also not what the paper is implying. Banks don’t have an unlimited balance sheet. Your ‘nothing’ is an expansion of the balance sheet and you’re grisly misrepresenting double entry bookkeeping. The borrower provides an asset (collateral) and the bank provides an asset (savings from third parties). If the borrower spends that loan, on e.g. food, real money is moving around. Finally you’re also misrepresenting capital adequacy regulations.
From there, most transactions are digital where an ACH transfer or similar results in some numbers being subtracted from one account and added to another.
Who cares what percentage of the transactions are digital? That’s where loro and nostro accounts are for. The underlying cash exists and is tangible.
Almost all of this happens on computers, and even before computers it just happened literally on a paper ledger, with paper checks.
Oh my god, computers? Like sand and electricity? Voodoo I say. Don’t trust that.
You might ask, “wait where does the bank get its money from to be able to allow money to be withdrawn or transferred to another bank?” If the bank doesn’t have the liquidity to do so, it can always borrow money from other banks or the government, with the last resort in the United States being the federal reserve banks, who by the way also print all the paper currency. So having that backstop is important for regular banks to have the power to create money, but the actual creation of money happens digitally to begin with, regardless of whether the bank later needs to distribute paper bills or borrow from the federal reserve.
You can’t borrow money from the government. That’s not how central banks work. You still need collateral, which you can’t pledge multiple times.
Not exactly. The central banks acting as a lender of last resort encourage the commercial banks to create money in this way, but be assured that the actual creation occurs whether the bank needs to borrow money or not. The definition of money supply looks to the balances in checking accounts, and creating and disbursing a loan increases the balance in a checking account (while simultaneously increasing the negative balance in a loan account, but loan balances don’t shrink the money supply), and as that money is spent it increases balances in someone else’s checking account.
Not how it works. a bank can’t just magically issue loans in a vacuum without caring about liquidity, because the second a borrower spends that money, the bank has to cough up real central bank reserves to settle with another institution or go broke.
We already have mostly digital currency.
Money is created when a bank creates a loan, by starting with nothing and then splitting that nothing into a credit in one account (the borrower’s checking account, usually) and a debit in another (the borrower’s loan balance). From there, most transactions are digital where an ACH transfer or similar results in some numbers being subtracted from one account and added to another.
Almost all of this happens on computers, and even before computers it just happened literally on a paper ledger, with paper checks.
You might ask, “wait where does the bank get its money from to be able to allow money to be withdrawn or transferred to another bank?” If the bank doesn’t have the liquidity to do so, it can always borrow money from other banks or the government, with the last resort in the United States being the federal reserve banks, who by the way also print all the paper currency. So having that backstop is important for regular banks to have the power to create money, but the actual creation of money happens digitally to begin with, regardless of whether the bank later needs to distribute paper bills or borrow from the federal reserve.
That’s not how any of it works though.
It’s how all of it works. Money is just balances on double-entry bookkeeping, and the paper currency essentially is a piece of paper that the bearer of that paper is good for moving the balances in that ledger system.
And almost all of those ledgers are now digital.
By that logic any bank could grow arbitrarily large by just underwriting more loans. Then there’d be no competition between any of them and my job would be so much easier.
Yes, the limit to commercial bank lending is creditworthiness and default risk (because the bank is left holding the bag when a borrower doesn’t repay), and the cost of maintaining liquidity (the bank can borrow against the loans it owns, but it may cost a higher interest rate than they’d earn on the cash they’ve lent out). This paper lays it out pretty clearly, and is basically the near unanimous view among macroeconomists.
Or, in some regulatory environments, banks are required to maintain a minimum fractional reserve, which limits the total amount of loans it can lend out with its underlying assets.
But the money is created when the loans are created, and destroyed when the loans are repaid. The other stuff behind the scenes to give the system stability is important, but doesn’t actually create or destroy money.
Exactly. The bank can borrow, for which they need collateral, which sufficiently proves that what you’re saying is wrong.
They have to manage their balance sheet actively, and your original statement was in the lines of ‘it’s all made up and they have infinite equity supply’.
Read my original comment again. I explicitly talk about banks borrowing to maintain liquidity. It’s an important limit on their ability to create money, and nobody said anything about infinite money supply.
But it doesn’t change the fact that the act of money creation is caused by a bank creating a loan, and the money comes into being without a single physical act of manufacturing: it happens on a computer, and before computers it happened on paper.
So without claiming that money was unlimited, I did point out that money itself is overwhelningly digital in the modern age. And the limits don’t come from any physical constraints.
Fitting username. Explaining this to people irl who respect and listen to me is hard; can’t imagine trying to inform someone online who’s simultaneously trying to win the conversation you’re having
Okay, let’s break it down yeah?
Sure. Empty statement though. I can withdraw all I own and turn it into gold or pebbles if I like. That’s what currency is always meant for. Technology made it easier.
That’s wrong and that’s also not what the paper is implying. Banks don’t have an unlimited balance sheet. Your ‘nothing’ is an expansion of the balance sheet and you’re grisly misrepresenting double entry bookkeeping. The borrower provides an asset (collateral) and the bank provides an asset (savings from third parties). If the borrower spends that loan, on e.g. food, real money is moving around. Finally you’re also misrepresenting capital adequacy regulations.
Who cares what percentage of the transactions are digital? That’s where loro and nostro accounts are for. The underlying cash exists and is tangible.
Oh my god, computers? Like sand and electricity? Voodoo I say. Don’t trust that.
You can’t borrow money from the government. That’s not how central banks work. You still need collateral, which you can’t pledge multiple times.
Well only central banks can create it out of thin air. Normal banks lend other people’s money (fractional reserve banking)
Not exactly. The central banks acting as a lender of last resort encourage the commercial banks to create money in this way, but be assured that the actual creation occurs whether the bank needs to borrow money or not. The definition of money supply looks to the balances in checking accounts, and creating and disbursing a loan increases the balance in a checking account (while simultaneously increasing the negative balance in a loan account, but loan balances don’t shrink the money supply), and as that money is spent it increases balances in someone else’s checking account.
Not how it works. a bank can’t just magically issue loans in a vacuum without caring about liquidity, because the second a borrower spends that money, the bank has to cough up real central bank reserves to settle with another institution or go broke.