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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 borro
by 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 agoIt 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.