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You're completely correct. The assets and liabilities do balance out, and the bank isn't creating a $720k profit. The total money supply has grown though. From
by tonyarkles 9y ago
You're completely correct. The assets and liabilities do balance out, and the bank isn't creating a $720k profit.
The total money supply has grown though. From an initial $300k, they now have 4 people who all, looking at their bank statements, have deposits totaling $1M. If they all tried to withdraw that at the same time, there'd be trouble, but fractional reserve banking rests on the assumption that they won't.
And yeah, there's a pretty significant spread on interest rates between deposits and loans.
The GP post was talking about "creating a dollar". This is precisely how banks "create dollars". As those loans are repaid and the deposits are withdrawn, they're subsequently "destroying" those dollars from a money supply perspective.
- perl4ever 9y agoIsn't the building of the houses (the actual economic activity) what expanded the money supply, not the bank(s)? And isn't this exactly how the economy should function - we create more stuff, so all else being equal, the numbers that denote how much stuff we have get larger? Saying the banks create dollars implies they are controlling the money supply.
- tonyarkles 9y agoNope. If I sell you my (fully owned) house for $300k, no additional money has been created. There's still only $300k of money. It's the act of lending out some fraction of your deposits/loans from the central bank that allows commercial banks to "create" money. And yes, the banks are controlling the money supply. See https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking for more detail.
- perl4ever 9y agoIt seems to me the loans are assets, and the deposits are liabilities, so the loans don't create any money in the economy. Edit: why do you say withdrawing money destroys it? It removes it from a bank's balance sheet, but not from the economy...