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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
by 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 agoAnd 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.