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As I understand it, fractional reserves doesn't mean that banks "loan out more money than they have on-hand". They loan out most of the money that they have on
by wisty 16y ago
As I understand it, fractional reserves doesn't mean that banks "loan out more money than they have on-hand". They loan out most of the money that they have on hand, and keep a small fraction in reserve. However, they end up "printing money" because the people who receive the money from those loans immediately put it back in the bank, thus the total credit and debits grows to something like 1/fr, where fr is the fraction that gets held in reserve.
I doubt Paypal invests their deposits (or if they do, they only put it in cash-equivalents), unlike banks which have the privilege of taking on short-term liabilities while they only hold long-term assets and a small amount of cash.
- loewenskind 16y ago>fractional reserves doesn't mean that banks "loan out more money than they have on-hand". That's exactly what it means. When you go to the bank and ask for e.g. $100k to buy a house they make an account entry to first create this money (assuming doing so wouldn't put them past their reserve threshold) and then give it to you. The money only exists because you've promised to pay it back. Put another way, the loan money they're giving you is like they went into the future, took all the money you paid into the loan account, deducted their fees, etc. came back to today and gave you what was left over.