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Say you have $1. Your friend has no money, but needs some. You lend him your dollar. Have you created money?

by kgwgk 7y ago

rags2riches 7y ago
Say I gave him an IOU for a dollar. When he goes to the supermarket, they will accept the IOU. So will the gas station, his landlord or anybody else he does business with. Their banks will also accept my IOUs. They have all accepted my IOUs before. They all have, or know people who have, converted my IOUs to hard cash before. The IOU is an account balance. Have I created money?
- JumpCrisscross 7y ago
  > Say I gave him an IOU for a dollar...Have I created money? Technically speaking, yes! (Neat, huh?) If the IOU is accepted as currency, that is. You have rights to the original dollar and the borrower has rights to the IOU. Practically speaking, however, you haven't created money because nobody treats your IOU as money. (Side note: this isn't a stupid question and doesn't deserve to be downvoted.)
  - rags2riches 7y ago
    Yes, that was my point. To spell it out: the whole difference is who will accept the IOU. When everyone will, that's money.
b_tterc_p 7y ago
No, because you don’t have the right to use $1 at any time. In a bank, Person A gives the bank a dollar, the bank loans out (let’s say the full dollar for simplicity) and, some steps later, the dollar is out back into the bank (let’s say person B does this for simplicity). Both A and B have title to a dollar, so yes, there’s more than one. The bank created it by creating a liability for themselves. This is ok because long term the loaning of the dollar should create more than a dollar in value, so the liability will be covered.
- kgwgk 7y ago
  So you don’t think the bank is creating money when it lends out the balance from savings accounts? (That is, the deposits that you do not have “the right to use at any time”.)
  - JumpCrisscross 7y ago
    > you don’t think the bank is creating money when it lends out the balance from savings accounts? Banks don't lend out balances. "Banks lend out balances" is just an analogy. (It was truer under the gold standard.) Banks create money through lending and destroy money via write-offs. Periodically (in the U.S., at the end of the day) banks count up what they owe and what they're owed and make sure the ratio is legal. If not, they borrow (from each other or from the Fed) to make up the difference. (For monetary purposes, savings accounts are checking accounts. Banks don't segregate savings from their balance sheets. Balances in savings account can be withdrawn just as easily as those in checking accounts.)
    - kgwgk 7y ago
      > And for monetary purposes, savings accounts are checking accounts There are different definitions of money and saving accounts are included in M2 (“money and close substitutes”) but not in M1. What about time deposits? For short maturities they are included in M3. And what about longer term depositss? Are banks creating money when they lend those out?
      - JumpCrisscross 7y ago
        > What about long-term deposits? Are banks creating money when they lend those out? You're hanging on to the "banks lend out deposits" mental model. Stop that. The Bank of England has an accessible write-up on this: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654 https://www.bankofengland.co.uk/-/media/boe/files/quarterly-.... Loans create deposits. Whether those deposits then end up in a checking account through a payroll service or a vendor's savings account through a payment for goods and then transfer is irrelevant.
occamschainsaw 7y ago
I think it is more along the lines of: Say you have no money. Your friend has no money too, and needs some. You lend him a dollar (because you are a bank and have special powers). Voila, new money!
- kgwgk 7y ago
  The superpower of banks is to take the dollar from you and lend 90 cents to your friend while promising that when you need your dollar they will have enough money around to make you whole. (When the time comes, they may or may not be able to keep their promise.)
  - RobertoG 7y ago
    Please, stop promoting this false conception of how banks operate. It makes really difficult to have serious discussions about the modern economy. From the Bank of England, banks are not intermediaries of loanable funds: https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...
    - kgwgk 7y ago
      I'm sorry you didn't like that simplification. Anyway, it's better than "you have no money but you can make it appear from nowhere and lend it because you are a bank and have special powers". The more details are given, the less interesting the special powers of commercial banks seem to be: not only is the amount of money that they can create limited to some multiple of the "real money" base, but they don't even lend that much out because it's not profitable.
      - rags2riches 7y ago
        But the "real money base" will expand on demand if the banks need it. It's not a limiting factor! The loan happens first. The base money is created (if needed) after the fact. It's not as if base money is pushed out there and then the base money is used to create loans. Loans pull base money into being.
scatters 7y ago
Only if his obligation to you is transferable - that is, if you can freely pass it onto another person, and then the debt is owed to that other person. For example, he could write you an IOU for one dollar, and then you could give that dollar IOU to another friend (possibly in exchange for goods and services). In that case yes, you have created money.

Say you have $1. Your friend has no money, but needs some. You lend him your dollar. Have you created money?

by kgwgk 7y ago

Say you have $1. Your friend has no money, but needs some. You lend him your dollar. Have you created money?

Say I gave him an IOU for a dollar. When he goes to the supermarket, they will accept the IOU. So will the gas station, his landlord or anybody else he does business with. Their banks will also accept my IOUs. They have all accepted my IOUs before. They all have, or know people who have, converted my IOUs to hard cash before. The IOU is an account balance. Have I created money?

JumpCrisscross 7y ago
> Say I gave him an IOU for a dollar...Have I created money? Technically speaking, yes! (Neat, huh?) If the IOU is accepted as currency, that is. You have rights to the original dollar and the borrower has rights to the IOU. Practically speaking, however, you haven't created money because nobody treats your IOU as money. (Side note: this isn't a stupid question and doesn't deserve to be downvoted.)
- rags2riches 7y ago
  Yes, that was my point. To spell it out: the whole difference is who will accept the IOU. When everyone will, that's money.

b_tterc_p 7y ago

No, because you don’t have the right to use $1 at any time. In a bank, Person A gives the bank a dollar, the bank loans out (let’s say the full dollar for simplicity) and, some steps later, the dollar is out back into the bank (let’s say person B does this for simplicity). Both A and B have title to a dollar, so yes, there’s more than one. The bank created it by creating a liability for themselves. This is ok because long term the loaning of the dollar should create more than a dollar in value, so the liability will be covered.

kgwgk 7y ago
So you don’t think the bank is creating money when it lends out the balance from savings accounts? (That is, the deposits that you do not have “the right to use at any time”.)
- JumpCrisscross 7y ago
  > you don’t think the bank is creating money when it lends out the balance from savings accounts? Banks don't lend out balances. "Banks lend out balances" is just an analogy. (It was truer under the gold standard.) Banks create money through lending and destroy money via write-offs. Periodically (in the U.S., at the end of the day) banks count up what they owe and what they're owed and make sure the ratio is legal. If not, they borrow (from each other or from the Fed) to make up the difference. (For monetary purposes, savings accounts are checking accounts. Banks don't segregate savings from their balance sheets. Balances in savings account can be withdrawn just as easily as those in checking accounts.)
  - kgwgk 7y ago
    > And for monetary purposes, savings accounts are checking accounts There are different definitions of money and saving accounts are included in M2 (“money and close substitutes”) but not in M1. What about time deposits? For short maturities they are included in M3. And what about longer term depositss? Are banks creating money when they lend those out?
    - JumpCrisscross 7y ago
      > What about long-term deposits? Are banks creating money when they lend those out? You're hanging on to the "banks lend out deposits" mental model. Stop that. The Bank of England has an accessible write-up on this: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654 https://www.bankofengland.co.uk/-/media/boe/files/quarterly-.... Loans create deposits. Whether those deposits then end up in a checking account through a payroll service or a vendor's savings account through a payment for goods and then transfer is irrelevant.

occamschainsaw 7y ago

I think it is more along the lines of: Say you have no money. Your friend has no money too, and needs some. You lend him a dollar (because you are a bank and have special powers). Voila, new money!

kgwgk 7y ago
The superpower of banks is to take the dollar from you and lend 90 cents to your friend while promising that when you need your dollar they will have enough money around to make you whole. (When the time comes, they may or may not be able to keep their promise.)
- RobertoG 7y ago
  Please, stop promoting this false conception of how banks operate. It makes really difficult to have serious discussions about the modern economy. From the Bank of England, banks are not intermediaries of loanable funds: https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters https://www.bankofengland.co.uk/working-paper/2015/banks-are...
  - kgwgk 7y ago
    I'm sorry you didn't like that simplification. Anyway, it's better than "you have no money but you can make it appear from nowhere and lend it because you are a bank and have special powers". The more details are given, the less interesting the special powers of commercial banks seem to be: not only is the amount of money that they can create limited to some multiple of the "real money" base, but they don't even lend that much out because it's not profitable.
    - rags2riches 7y ago
      But the "real money base" will expand on demand if the banks need it. It's not a limiting factor! The loan happens first. The base money is created (if needed) after the fact. It's not as if base money is pushed out there and then the base money is used to create loans. Loans pull base money into being.

scatters 7y ago

Only if his obligation to you is transferable - that is, if you can freely pass it onto another person, and then the debt is owed to that other person. For example, he could write you an IOU for one dollar, and then you could give that dollar IOU to another friend (possibly in exchange for goods and services). In that case yes, you have created money.