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> Seignorage is what the government does when it creates dollars (or when bitcoin is created). That truly is creating money for nothing. Institutions such as b

> Seignorage is what the government does when it creates dollars (or when bitcoin is created). That truly is creating money for nothing. Institutions such as banks and credit unions are also able to create money 'from nothing', via lending. When they make a loan, it's not as though they deduct the amount loaned (or any part of it) from someone else's account, and typically they're allowed to make loans totaling many times (9x? 11x? I forget) the amount of deposits they possess.

kgwgk 9y ago
When a bank makes a loan it will deduct it from it’s own account. And it will not loan more than it has in deposits, however it’s true that it only has to keep it its balance sheet (i.e. not loan) a fraction of the deposits.
- usefulcat 9y ago
  I read up some more, and I see that I've over simplified it. I like your description better. I think I must have been assuming a situation along the lines of "bank loans out 90% of its deposits, and then all those debts are moved to other institutions", in which case I expect the bank would be left with 10% of its original deposits plus the loan agreements, the total value of the latter being equal to ~9x the value of the remaining deposits.
  - kgwgk 9y ago
    That description seems correct, if the bank has $100 in deposits (which are a liability for the bank, it owes that money to depositors) on the asset side it will have loans for $90 (the money owned to the bank) and the remaining $10 will be the reserves.
eli 9y ago
How could they make loans multiple times the deposits they have unless they too are borrowing money from somewhere?
- carapace 9y ago
  They just do. > Because banks hold reserves in amounts that are less than the amounts of their deposit liabilities, and because the deposit liabilities are considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank. https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking It is literally just paperwork. Fractional-reserve banking is the greatest scam ever, or a pillar of our economic system, depending on whom you ask.
  - perl4ever 9y ago
    This doesn't happen - if banks had the power to multiply money by 10, we would have hyperinflation.
    - carapace 9y ago
      I'm not sure what to tell you. I'm just quoting the wikipedia article. In any event... > hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in export prices, or other crises that make it difficult for the government to collect tax revenue. ~ https://en.wikipedia.org/wiki/Hyperinflation https://en.wikipedia.org/wiki/Hyperinflation Banks generally give loans to people who they believe are very likely to repay them. Typically this means that you get a loan if you have a good plan for repaying it and a history of doing so. (Leading to the old complaint, "The only people who can get loans don't need them.") These are two different kinds of "money creation". IANAEconomist
      - perl4ever 9y ago
        I don't think Wikipedia is wrong; I think you and many other people don't follow what it is saying, which is why you are susceptible to the claim banking is a scam. Reserves are not the amount of assets the bank has on its balance sheet - if they had less assets than their liabilities (aka deposits), they would be insolvent. Capital ratios and reserve ratios are different concepts - just as solvency and liquidity are different.

kgwgk 9y ago

When a bank makes a loan it will deduct it from it’s own account. And it will not loan more than it has in deposits, however it’s true that it only has to keep it its balance sheet (i.e. not loan) a fraction of the deposits.

usefulcat 9y ago
I read up some more, and I see that I've over simplified it. I like your description better. I think I must have been assuming a situation along the lines of "bank loans out 90% of its deposits, and then all those debts are moved to other institutions", in which case I expect the bank would be left with 10% of its original deposits plus the loan agreements, the total value of the latter being equal to ~9x the value of the remaining deposits.
- kgwgk 9y ago
  That description seems correct, if the bank has $100 in deposits (which are a liability for the bank, it owes that money to depositors) on the asset side it will have loans for $90 (the money owned to the bank) and the remaining $10 will be the reserves.

eli 9y ago

How could they make loans multiple times the deposits they have unless they too are borrowing money from somewhere?

carapace 9y ago
They just do. > Because banks hold reserves in amounts that are less than the amounts of their deposit liabilities, and because the deposit liabilities are considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank. https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking It is literally just paperwork. Fractional-reserve banking is the greatest scam ever, or a pillar of our economic system, depending on whom you ask.
- perl4ever 9y ago
  This doesn't happen - if banks had the power to multiply money by 10, we would have hyperinflation.
  - carapace 9y ago
    I'm not sure what to tell you. I'm just quoting the wikipedia article. In any event... > hyperinflation is often associated with some stress to the government budget, such as wars or their aftermath, sociopolitical upheavals, a collapse in export prices, or other crises that make it difficult for the government to collect tax revenue. ~ https://en.wikipedia.org/wiki/Hyperinflation https://en.wikipedia.org/wiki/Hyperinflation Banks generally give loans to people who they believe are very likely to repay them. Typically this means that you get a loan if you have a good plan for repaying it and a history of doing so. (Leading to the old complaint, "The only people who can get loans don't need them.") These are two different kinds of "money creation". IANAEconomist
    - perl4ever 9y ago
      I don't think Wikipedia is wrong; I think you and many other people don't follow what it is saying, which is why you are susceptible to the claim banking is a scam. Reserves are not the amount of assets the bank has on its balance sheet - if they had less assets than their liabilities (aka deposits), they would be insolvent. Capital ratios and reserve ratios are different concepts - just as solvency and liquidity are different.