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That's almost what banks actually do. In the Federal Reserve system a bank can literally write new money into existence with a flick of a pen. What you're spen

That's almost what banks actually do. In the Federal Reserve system a bank can literally write new money into existence with a flick of a pen. What you're spending on food, rent, and iPhones day-to-day is a substance called bank credit that sprung into existence when someone, somewhere, applied for a loan. When they spend that bank credit it goes into circulation and eventually winds up in your paycheck. The issuing bank doesn't need to find real money to service that credit until they either have to correct an imbalance with another bank (call for a Brinks truck), or increase their deposit with the Federal Reserve to cover their mandatory 9:1 credit ratio. It's all paper money and bits now.

j_baker 17y ago
It's been that way for as long as banks have existed. The only difference is that prior to the 60s, people were passing around notes that represent theoretical gold somewhere, some place. And the bank also has to find real money when you withdraw it.
- shamir 17y ago
  And even before 1973, the gold in the Fed's vaults did not back all the currency in circulation, only a fraction of ith (thats why it was called the fractional reserve system). Also, banks cannot actually create money. Before a bank can lend money to a customer, it has to receive money from another customer. During any given business day they may end up lending more money than they received (or vice versa), but at the end of the day they just borrow it in the overnight Fed Funds market (or lend the excess). The only agency that actually creates money (electronically or physically) in the US is the Federal Reserve. They typically do this by creating money electronically, and then buying bonds, so that the money enters circulation.