3 ms·

There's a lot of misleading stuff said about fractional reserve banking. People imply that banks are allowed to just create as much new money as they want out o

There's a lot of misleading stuff said about fractional reserve banking. People imply that banks are allowed to just create as much new money as they want out of nowhere, when it just means lending some of the money that they've received in deposits. Sure it does increase the money supply, but it's not "minting their own currency".

nicoburns 8y ago
> Sure it does increase the money supply Not only does it increase the money supply, but the extra money created belongs to the bank. It's pretty much equivalent to being able to print money (with the caveat that there are limit's on how much hey can "print"). We could have a system where that money was simply given to people, not given to banks who then loan it out to people. And IMO that would have a very positive effect om our economy.
- ascorbic 8y ago
  It doesn't belong to the bank. They've borrowed it from the depositors, who can take it back at any time. It's only created in the sense that the person they've lent it to can spend it while the depositor still has it in their account. Edit: to illustrate this, try this thought experiment. Borrow $10 from a friend. Lend $5 of that to another friend. Congratulations, you've just increased the money supply by $5. That's the exact same method used by banks, but you'd not claim that you're now $5 richer or that you've effectively printed $5.
  - JetSpiegel 8y ago
    Fractional reserve banking is actually the opposite. Borrow 5 bucks from a friend (central bank) and lend 10 bucks to your clients. Your example does not increase yhe money supply. The ratio is closer to 11%.
    - ascorbic 8y ago
      No, banks can't lend more than they borrow (and most of the money they borrow is deposits from customers and loans from other banks, not the central bank). They can lend part of the money they take in deposits, but they must hold a fraction of it in reserve – hence fractional-reserve banking. The minimum reserve is set in law.
  - EliRivers 8y ago
    Your thought experiment is, I believe, invalid. The bank does not hand around five dollar bills. The bank simply changes a number, and in doing so changes the contents of an account, increasing it by five dollars. Five dollars that can now be spent. I would argue that this five dollars has effectively been printed. It was magiced out of thin air. How is it not five dollars? I can spend it. I believe your thought experiment should be worded thus: Have a friend write "ten dollars" on a piece of paper (bank account), and give it to you. Everyone will accept this as ten dollars. Write "five dollars" on another piece of paper (bank account), and give it to another friend. Everyone will accept this as five dollars. All the other pieces of paper (bank accounts) that existed beforehand still exist. You now also have two new pieces of paper, which will be accepted as fifteen dollars. Fifteen dollars, magiced out of nowhere. This is how the banks do it; they just write on the bank account how much money is in it.
    - ascorbic 8y ago
      Fractional reserve banking still works with dollar bills (and did for hundreds of years). It even works with gold. Customer 1 deposits ten dollar bills. Bank records it in their ledger. Bank then lends five of those bills to customer 2. Now there's an extra $5 in the money supply, because the deposit in cutomer 1's account counts as money, and the $5 lent to customer 2 also counts as money. Nobody is any richer, as customer 2 owes the $5 to the bank, and the bank owes the $5 to customer 1, but there's an extra $5 in circulation. No printing required.
      - nicoburns 8y ago
        Actually the bank is richer by $5 * the difference in interest rate they charge customer 1 vs customer 2.
  - dwild 8y ago
    We all had 50$. Me: 50$ Friend 1: 50$ Friend 2: 50$ Total: 150$ I borrow 10$ from Friend 1: Me: 60$ Friend 1: 40$ Friend 2: 50$ Total: 150$ Friend 2 borrow 5$ from me: Me: 55$ ( I owe 10$) Friend 1: 40$ Friend 2: 55$ Total: 150$ I didn't increased the money supply. > It's only created in the sense that the person they've lent it to can spend it while the depositor still has it in their account. That's the thing, the depositor can still use that money. Friend 1 can't spend 50$ right now, only 40$, while the depositor in a bank, can still spend 50$.
    - ascorbic 8y ago
      It increases the money supply because instant access deposits are counted as money. My thought experiment isn't strictly correct, as the money lent by our friend isn't going to meet the criteria for instant access deposits, but the principle is the same. The "magic" thing about banks is that when you lend them money, it still counts as money that you have. The workings in your example if I am a bank: Me: $50, customer 1: $50, customer 2: $50. Total $150. Customer 1 deposits $5 with me and I lend it to customer 2. Me: $50 (my reserves are unchanged), customer 1: $50 (because for the purposes of money supply, the deposit still counts as their money). Customer 2: $55. Total $155. The counter intuitive bit is the fact that money supply treats deposits as money.
EliRivers 8y ago
People imply that banks are allowed to just create as much new money as they want out of nowhere, when it just means lending some of the money that they've received in deposits I disagree. They are not simply lending out money that other people deposited. They created new money, out of nowhere. There is a limit on how much of this they can do, but they are not simply lending out money that other people deposited. The bank of England is pretty clear that this money is magiced up out of nowhere; that it is money that did not exist before. "Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account." https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c...
- ascorbic 8y ago
  It's magiced out of nowhere because even though they need to take a deposit before they lend it, the original deposit remains as a line in the customer's account after it's been lent. It works because people don't normally all try to withdraw their money at the same time.
  - EliRivers 8y ago
    I don't disagree with that; I disagreed with the assertion that they weren't magicing it out of nowhere, but I see that you do actually state that it is magiced out of nowhere.

nicoburns 8y ago

> Sure it does increase the money supply Not only does it increase the money supply, but the extra money created belongs to the bank. It's pretty much equivalent to being able to print money (with the caveat that there are limit's on how much hey can "print"). We could have a system where that money was simply given to people, not given to banks who then loan it out to people. And IMO that would have a very positive effect om our economy.

ascorbic 8y ago
It doesn't belong to the bank. They've borrowed it from the depositors, who can take it back at any time. It's only created in the sense that the person they've lent it to can spend it while the depositor still has it in their account. Edit: to illustrate this, try this thought experiment. Borrow $10 from a friend. Lend $5 of that to another friend. Congratulations, you've just increased the money supply by $5. That's the exact same method used by banks, but you'd not claim that you're now $5 richer or that you've effectively printed $5.
- JetSpiegel 8y ago
  Fractional reserve banking is actually the opposite. Borrow 5 bucks from a friend (central bank) and lend 10 bucks to your clients. Your example does not increase yhe money supply. The ratio is closer to 11%.
  - ascorbic 8y ago
    No, banks can't lend more than they borrow (and most of the money they borrow is deposits from customers and loans from other banks, not the central bank). They can lend part of the money they take in deposits, but they must hold a fraction of it in reserve – hence fractional-reserve banking. The minimum reserve is set in law.
- EliRivers 8y ago
  Your thought experiment is, I believe, invalid. The bank does not hand around five dollar bills. The bank simply changes a number, and in doing so changes the contents of an account, increasing it by five dollars. Five dollars that can now be spent. I would argue that this five dollars has effectively been printed. It was magiced out of thin air. How is it not five dollars? I can spend it. I believe your thought experiment should be worded thus: Have a friend write "ten dollars" on a piece of paper (bank account), and give it to you. Everyone will accept this as ten dollars. Write "five dollars" on another piece of paper (bank account), and give it to another friend. Everyone will accept this as five dollars. All the other pieces of paper (bank accounts) that existed beforehand still exist. You now also have two new pieces of paper, which will be accepted as fifteen dollars. Fifteen dollars, magiced out of nowhere. This is how the banks do it; they just write on the bank account how much money is in it.
  - ascorbic 8y ago
    Fractional reserve banking still works with dollar bills (and did for hundreds of years). It even works with gold. Customer 1 deposits ten dollar bills. Bank records it in their ledger. Bank then lends five of those bills to customer 2. Now there's an extra $5 in the money supply, because the deposit in cutomer 1's account counts as money, and the $5 lent to customer 2 also counts as money. Nobody is any richer, as customer 2 owes the $5 to the bank, and the bank owes the $5 to customer 1, but there's an extra $5 in circulation. No printing required.
    - nicoburns 8y ago
      Actually the bank is richer by $5 * the difference in interest rate they charge customer 1 vs customer 2.
- dwild 8y ago
  We all had 50$. Me: 50$ Friend 1: 50$ Friend 2: 50$ Total: 150$ I borrow 10$ from Friend 1: Me: 60$ Friend 1: 40$ Friend 2: 50$ Total: 150$ Friend 2 borrow 5$ from me: Me: 55$ ( I owe 10$) Friend 1: 40$ Friend 2: 55$ Total: 150$ I didn't increased the money supply. > It's only created in the sense that the person they've lent it to can spend it while the depositor still has it in their account. That's the thing, the depositor can still use that money. Friend 1 can't spend 50$ right now, only 40$, while the depositor in a bank, can still spend 50$.
  - ascorbic 8y ago
    It increases the money supply because instant access deposits are counted as money. My thought experiment isn't strictly correct, as the money lent by our friend isn't going to meet the criteria for instant access deposits, but the principle is the same. The "magic" thing about banks is that when you lend them money, it still counts as money that you have. The workings in your example if I am a bank: Me: $50, customer 1: $50, customer 2: $50. Total $150. Customer 1 deposits $5 with me and I lend it to customer 2. Me: $50 (my reserves are unchanged), customer 1: $50 (because for the purposes of money supply, the deposit still counts as their money). Customer 2: $55. Total $155. The counter intuitive bit is the fact that money supply treats deposits as money.

EliRivers 8y ago

People imply that banks are allowed to just create as much new money as they want out of nowhere, when it just means lending some of the money that they've received in deposits I disagree. They are not simply lending out money that other people deposited. They created new money, out of nowhere. There is a limit on how much of this they can do, but they are not simply lending out money that other people deposited. The bank of England is pretty clear that this money is magiced up out of nowhere; that it is money that did not exist before. "Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account." https://www.bankofengland.co.uk/knowledgebank/how-is-money-created https://www.bankofengland.co.uk/knowledgebank/how-is-money-c...

ascorbic 8y ago
It's magiced out of nowhere because even though they need to take a deposit before they lend it, the original deposit remains as a line in the customer's account after it's been lent. It works because people don't normally all try to withdraw their money at the same time.
- EliRivers 8y ago
  I don't disagree with that; I disagreed with the assertion that they weren't magicing it out of nowhere, but I see that you do actually state that it is magiced out of nowhere.