8 ms·

A linguistic glitch tricks us into thinking bank deposits are deposited in banks

34 points by jpkoning 6y ago

recursivedoubts 6y ago
> "If this is you, you've made an error, and have fallen into the trap of thinking that banks 'lend out the water that I've put inside them'. This also means you've failed to make a distinction between the two forms of money in our society: state money ('water'), and bank money ('promise for water'). And both of these misunderstandings are facilitated by the linguistic glitch we are trying to deprogram." I don't think this clarifies much. Talking about categories like "state money" and "bank money" doesn't make the problem clear. I have come to the conclusion that the problem with fractionally reserved money isn't the fractional reservation mechanism at all. Rather, the problem is that banks effectively promise the same money to multiple people at the same time. There is one "piece" of money, but multiple people have claims on it. If deposits were timed (like CDs) and the banks could only loan out the money for the time it was tied up, there would be no problem. In fact, there would be no need for a reserve ratio, just loss provisions. A "piece" of money could be loaned out an infinite number of times, in fact. Every bank would just need to show a loanable amount curve over time as well as a loaned amount over time, and you could easily see if a bank was in trouble or not well in advance. Demand deposits could not be loaned, of course. Basically, force banks to borrow long and lend short. This is what I'd like to see tried.
- benlivengood 6y ago
  > I have come to the conclusion that the problem with fractionally reserved money isn't the fractional reservation mechanism at all. Rather, the problem is that banks effectively promise the same money to multiple people at the same time. There is one "piece" of money, but multiple people have claims on it. Banks get overnight loans to cover the case where creditors want more money than they currently have access to. There is no single piece of money anywhere anymore. When you deposit a $100 federal reserve note in the bank you are only giving that bank a means to pay taxes or pay back loans from Federal Reserve Banks. If you take a $100 note to a federal reserve bank they will look at you funny. The reason this works is that U.S. currency is so stable that any potential commodity you might desire as currency can be paid for with USD money from virtually any bank in the world. Banks are just an accounting system at this point who barely hold any physical thing of value, and only on a just-in-time delivery model. The rest of the economy satisfies the market for transactions between money and goods. Why doesn't it all fall apart? The federal reserve raises interest rates when there is too much money in circulation, urging banks to pay off their liabilities, thus destroying money.
- notahacker 6y ago
  Central banks already ensure that if multiple people the money is promised to want to make withdrawals at the same time, they can all have the cash. But if a mortgage requires people to lock away funds for quarter of a century (because the bank can only loan out the funds if someone has the money tied up for that long) then whoever's lending is [i] diverting the funds away from more productive activity [ii] going to expect a very high interest rate because they don't see their money for such a long time and [iii] likely to be richer on average than the current beneficiaries of banking activity. Reducing transfer from productive to unproductive activity and the scale of transfers from poor to rich are desirable: maturity transformation is therefore a feature of the system, not a bug [n.b. if you force banks to borrow long and lend short you've eliminated the fractional reserve mechanism anyway]
neilwilson 6y ago
The main mistake is thinking deposits are taken out of banks. Once you realise that a bank note is a receipt for a deposit at the central bank it all becomes clear. We just swap deposits between ourselves
pantaloony 6y ago
I can’t tell whether this is debunking a myth I didn’t believe to begin with, or if I do believe the myth but am too dumb to recognize that it’s what this article is about. This is bizarrely opaque for so many words about a fairly small (I think?) scope of knowledge.
- distantaidenn 6y ago
  I’m also not quite sure what the point of this was. It’s seems a long winded way to say that the money you deposit is not physically there regarding absolute ownership. That or I too am completely missing the point.
jessaustin 6y ago
This also means you've failed to make a distinction between the two forms of money in our society: state money ('water'), and bank money ('promise for water'). Technically the "state money" is also just a promise. In years long past, it was a promise of a particular quantity of precious metal. More recently, it's not a promise of that, but they strongly imply that one who possesses state money can use it to pay taxes to the state.
- ouid 6y ago
  You can also use state money to settle debts established by the courts. Money is not an illusion.
  - abfan1127 6y ago
    FRNs are not an illusion, just their intrinsic value. Originally, dollars were exchangeable for gold or silver. Now, we get the privilege of paying taxes and court fees with FRNs. Outside of those arbitrary fees, they have no value. Its current currency value is that everybody (in the US) takes them and most international markets are based on them. once the international markets switch to some other currency, the FRN will lose a rapid part of its value, and the real brunt of the inflationary principles the Fed has adopted will be felt. It will be quite painful.
    - derefr 6y ago
      > once the international markets switch to some other currency, the FRN will lose a rapid part of its value I mean, other countries manage to have inflationary monetary policies, without their currencies being the global reserve currency.
    - AnthonyMouse 6y ago
      There seems to be this meme that hyperinflation is always painful. Long-term hyperinflation is painful because nobody wants your currency and that causes all kinds of problems. Short-term hyperinflation is short-term disruptive, but it also has the result of effectively wiping out your debts (which would be helpful on net to most in the US, including the government), and then people just adjust to the new prices, which are higher but become stable, and wages rise to compensate. The main loss to the US from not being the reserve currency would be that they couldn't keep printing even more money without incurring the normal amount of inflation that usually implies for everybody else. But that's assuming the rest of the world is even interested in handing that power to somebody else. And who would that be? Everybody wants it to be themselves, which is what nobody else wants. Meanwhile all the powerful international holders of US debt have a huge interest in it continuing to be the US, since they're the ones the wiping out of dollar-denominated debts would hurt the most. And none of that seems especially likely in the immediate future, because the Fed is doing all it can right now to prevent deflation, by keeping interest rates on the floor and printing a ton of money. It would be so easy for them to prevent inflation right now that all they would have to do is stop actively doing half the things they're doing to prevent its opposite. So it only happens if they want it to.
ajb 6y ago
It sounds like he's saying that the banks should have a type system for money, maybe something like this: datatype Money = Deposit of int | Reserves of int (Or maybe a unit system) and we shouldn't think of these as comparable..
- cm2187 6y ago
  You just invented T-accounting!
  - Konohamaru 6y ago
    What is T-accounting?
    - cm2187 6y ago
      The basic concept behind accounting, the T represents the balance sheet which must be balanced at all time, and every change in the balance sheet is always a tuple of two operations, either on both sides of the balance sheet, or on two lines of the same side. So if you start with an empty balance sheet and a customer comes with cash to deposit, your first operation is: increase deposits | increase cash. Then the bank lends money to a borrower: decrease cash | increase loans to customers. Then the borrower pays an interest: increase cash | increase equity Then you pay some interest to the depositor: decrease cash | decrease equity etc.
    - rzzzt 6y ago
      Also called double-entry bookkeeping: https://en.wikipedia.org/wiki/Double-entry_bookkeeping https://en.wikipedia.org/wiki/Double-entry_bookkeeping
  - ajb 6y ago
    Lol - I wish, but the datastructure I posited is a discriminated union, not a tuple.
deleted 6y ago
[deleted]
kinkrtyavimoodh 6y ago
This feels like a bizarre article that seems to be 'fixing' a confusion no one actually has. Also, if the premise of your article is that the 'dictionary is wrong because I feel otherwise and that's why everyone is confused', then you should consider the parsimonious explanation that no one is actually confused, that the dictionary is right, and that it is you has invented a confusion.
- jljljl 6y ago
  People do have this confusion all the time though: they think the bank lends out the money they put in, when really what’s happening is money creation as described in the article.
  - derefr 6y ago
    The money is lent out, though, in the specific sense that a bank run during a crash of the economy can† result in the bank not having the cash-on-hand to give back to its depositors. † Or, at least, this was true in the US until 2007, after which savings banks were legally limited in their ability to leverage their deposits.
    - jljljl 6y ago
      This is a problem of not having enough reserves, and not quite of lending deposits. Banks encourage people to put their money in the bank in exchange for deposits so that they have these reserves. It’s like the article says: banks give out deposits in exchange for Government Cash, or for Valuable Long Term Promises. A run can kill a bank if they read the market wrong and can’t generate enough government cash to redeem the deposits.
  - kinkrtyavimoodh 6y ago
    But the two are independent ideas. You don't need lending or money creation for a bank to work, though even there the analogy is sound. The bank does lend money out and if a lot of people try to withdraw it at the same time, you get bank runs and collapses. That being said, in principle, it is possible to have a bank that literally takes the cash you give it and puts it in a giant vault, and when you come to ask for withdraw it, retrieves it and hands it back over. It is literally the idea that the author seems to be railing against. You come with your money (water) and deposit (pour) it into the bank's vault (glass). What exactly is the confusion?
Ijumfs 6y ago
It's not a linguistic trick. It used to be that banks had to keep a certain percentage of they money they had on deposit on the premises. Slowly, this amount (the "reserve rate) was lowered to 0% under Obama.
- jljljl 6y ago
  “Reserves” are a completely different thing from “deposits” though. I don’t think the bank is deliberately being tricky, but I think the idea of banks “lending out people’s deposits” is not quite true.
- SaltyLemonZest 6y ago
  It used to be that banks had a regulatory requirement to do it. That's very different from the mechanistic requirement most people envision, where it's just not possible for a bank to make a loan if they don't have enough money stashed in their vault.
- SilasX 6y ago
  Wait, I thought the reserve ratio was set to zero for the first time this year, because of the pandemic?
- gruez 6y ago
  >Slowly, this amount (the "reserve rate) was lowered to 0% under Obama. Source for this? AFAIK it was done this year, under trump not obama. >As of March 2020, the minimum reserve requirement for all deposit institutions was abolished, or more technically, fixed to zero percent of eligible deposits. The Board previously mandated a zero reserve requirement for banks with eligible deposits up to $16 million, 3% for banks up to $122.3 million, and 10% thereafter. The removal of reserve requirements followed the Federal Reserve's shift to an "ample-reserves" system, in which the Federal Reserve Banks pay member banks interest on reserves that they keep in excess of the required amount https://en.wikipedia.org/wiki/Reserve_requirement#United_States https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta...
  - thedudeabides5 6y ago
rkagerer 6y ago
I didn't find this article very enlightening. It uses too many words to explain a straightforward concept: You hand your cash over to a bank, in exchange they give you an IOU. They give out IOU's far in excess of the amount of cash assets they actually hold. The concept of "short-term promises in exchange for long-term promises" was a bit more illuminating. It might also be misleading to say the bank takes ownership of your deposits. More accurate to say they take custody, given the strong fiduciary obligations the transaction imposes on them (at least in developed economies). The intrusive sign-up-to-subscribe form a mere few paragraphs in doesn't win the author any love from me, and while I don't generally mind mspaint-flavored art I found the annotated illustrations somewhat amateur. The whole article feels like it was written by a youth who just discovered the concept of fractional reserve banking and wants to educate the world.
- noja 6y ago
  It is a linguistic trick. Same as "credit card" (a loan card), credit implies the opposite.
  - htfu 6y ago
    No. Credit, as in implied future payment, literally does mean loan, and another meaning of the word (opposite of debit) is also what happens when you use a credit card - an intermediate credits the merchant account so you don't need a separate line of credit for each one. You're making the same not-even-faulty assumption as the article author, that a word with several related meanings is somehow wrong or a trick or at all tough for the average person to comprehend.
    - noja 6y ago
      Sure it does, like many English words that have different meanings. And a marketer will choose the word with the fewest negative connotations.
      - htfu 6y ago
        You can use a credit card as a loan card, sure, by taking cash out an ATM or not paying your entire balance at the end of the month. And yes, loads of people obviously do that, and that's a trick. But can you really say it's a sleight of hand that soda isn't called 'liquid obesity, period.' by its manufacturers even though that's the result if used to the extent they'd want you to?
dmurray 6y ago
The point of this article is: a bank deposit is an asset for you, the depositor, and therefore a liability for the bank. A mortgage is a liability for you, and therefore an asset to the bank. Sometimes we get confused and we think that the bank deposits must be assets for the bank, and mortgages must be liabilities. This isn't because of some linguistic quirk. It's because its good for the bank to have a lot of deposits, because it means it's doing a lot of business. In the same way a company with a billion-dollar line of credit is likely doing better than a firm who can't borrow a cent.
- User23 6y ago
  Also, when the bank originates a loan it also creates a corresponding deposit. Therefore a bank having more deposits indirectly indicates it’s originating more loans.
  - dmurray 6y ago
    It's the other way round. The first part isn't true - the bank doesn't buttonhole some saver into giving them a few hundred grand when you take out a mortgage. (It might get the deed to your house, physically or metaphorically - but there are also unsecured loans). The second part is true: when you make a deposit the bank has some more cash and will surely invest it/loan it out/deposit it at another institution. Those three phrases all mean roughly the same thing: the bank will take the pile of copper and linen you gave it and use it to purchase another asset.
    - User23 6y ago
      I wrote nothing about savers. Both the loan (bank asset/customer liability) and the deposit (bank liability/customer asset) are created from nothing at the same time when the bank originates a loan. The loanable funds model, which it appears you are alluding to, is observably an operationally incorrect fantasy.
Patient0 6y ago
This speech by the SNB chairman describes fractional reserve banking well in my opinion: https://www.snb.ch/en/mmr/speeches/id/ref_20180116_tjn https://www.snb.ch/en/mmr/speeches/id/ref_20180116_tjn
pablobaz 6y ago
In Ireland, you make a lodgement when you are paying into a bank. I was in disbelief when I first realised that no-one in the UK knows what a lodgement is.
jonahbenton 6y ago
Lots of valid critique for this piece. Will add that "state money" and "bank money" is a poor way to talk about credit. In terms of references, tons and tons and tons of prior art defining money and so forth. A book I recently enjoyed a great deal is: The Nature Of Money, Geoffrey Ingham https://www.amazon.com/Nature-Money-Geoffrey-Ingham/dp/074560997X https://www.amazon.com/Nature-Money-Geoffrey-Ingham/dp/07456... And this more recent Bank of England paper is exceptional: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
adamsea 6y ago
Why even use the word "glitch"?
jasonhansel 6y ago
The "bank" in "bank deposits" is an attributive noun (a.k.a. a "noun adjunct"). In "oil deposit," since oil is a mass noun, we interpret the phrase as meaning "a deposit made of oil." But "bank" is a count noun--the phrase "a deposit made of bank" makes no sense--so the natural interpretation is "a deposit related to a bank." Essentially, "bank" is just a noun being used as an adjective (as in phrases like "horse race," "corn maze," "motor vehicle," "chicken noodle soup bowl," etc.)
josefrichter 6y ago
Eh, this sounds more like linguistic overengineering really. And that accounting example is wrong.

34 points by jpkoning 6y ago

> "If this is you, you've made an error, and have fallen into the trap of thinking that banks 'lend out the water that I've put inside them'. This also means you've failed to make a distinction between the two forms of money in our society: state money ('water'), and bank money ('promise for water'). And both of these misunderstandings are facilitated by the linguistic glitch we are trying to deprogram." I don't think this clarifies much. Talking about categories like "state money" and "bank money" doesn't make the problem clear. I have come to the conclusion that the problem with fractionally reserved money isn't the fractional reservation mechanism at all. Rather, the problem is that banks effectively promise the same money to multiple people at the same time. There is one "piece" of money, but multiple people have claims on it. If deposits were timed (like CDs) and the banks could only loan out the money for the time it was tied up, there would be no problem. In fact, there would be no need for a reserve ratio, just loss provisions. A "piece" of money could be loaned out an infinite number of times, in fact. Every bank would just need to show a loanable amount curve over time as well as a loaned amount over time, and you could easily see if a bank was in trouble or not well in advance. Demand deposits could not be loaned, of course. Basically, force banks to borrow long and lend short. This is what I'd like to see tried.

benlivengood 6y ago
> I have come to the conclusion that the problem with fractionally reserved money isn't the fractional reservation mechanism at all. Rather, the problem is that banks effectively promise the same money to multiple people at the same time. There is one "piece" of money, but multiple people have claims on it. Banks get overnight loans to cover the case where creditors want more money than they currently have access to. There is no single piece of money anywhere anymore. When you deposit a $100 federal reserve note in the bank you are only giving that bank a means to pay taxes or pay back loans from Federal Reserve Banks. If you take a $100 note to a federal reserve bank they will look at you funny. The reason this works is that U.S. currency is so stable that any potential commodity you might desire as currency can be paid for with USD money from virtually any bank in the world. Banks are just an accounting system at this point who barely hold any physical thing of value, and only on a just-in-time delivery model. The rest of the economy satisfies the market for transactions between money and goods. Why doesn't it all fall apart? The federal reserve raises interest rates when there is too much money in circulation, urging banks to pay off their liabilities, thus destroying money.
notahacker 6y ago
Central banks already ensure that if multiple people the money is promised to want to make withdrawals at the same time, they can all have the cash. But if a mortgage requires people to lock away funds for quarter of a century (because the bank can only loan out the funds if someone has the money tied up for that long) then whoever's lending is [i] diverting the funds away from more productive activity [ii] going to expect a very high interest rate because they don't see their money for such a long time and [iii] likely to be richer on average than the current beneficiaries of banking activity. Reducing transfer from productive to unproductive activity and the scale of transfers from poor to rich are desirable: maturity transformation is therefore a feature of the system, not a bug [n.b. if you force banks to borrow long and lend short you've eliminated the fractional reserve mechanism anyway]

neilwilson 6y ago

The main mistake is thinking deposits are taken out of banks. Once you realise that a bank note is a receipt for a deposit at the central bank it all becomes clear. We just swap deposits between ourselves

pantaloony 6y ago

I can’t tell whether this is debunking a myth I didn’t believe to begin with, or if I do believe the myth but am too dumb to recognize that it’s what this article is about. This is bizarrely opaque for so many words about a fairly small (I think?) scope of knowledge.

distantaidenn 6y ago
I’m also not quite sure what the point of this was. It’s seems a long winded way to say that the money you deposit is not physically there regarding absolute ownership. That or I too am completely missing the point.

jessaustin 6y ago

This also means you've failed to make a distinction between the two forms of money in our society: state money ('water'), and bank money ('promise for water'). Technically the "state money" is also just a promise. In years long past, it was a promise of a particular quantity of precious metal. More recently, it's not a promise of that, but they strongly imply that one who possesses state money can use it to pay taxes to the state.

ouid 6y ago
You can also use state money to settle debts established by the courts. Money is not an illusion.
- abfan1127 6y ago
  FRNs are not an illusion, just their intrinsic value. Originally, dollars were exchangeable for gold or silver. Now, we get the privilege of paying taxes and court fees with FRNs. Outside of those arbitrary fees, they have no value. Its current currency value is that everybody (in the US) takes them and most international markets are based on them. once the international markets switch to some other currency, the FRN will lose a rapid part of its value, and the real brunt of the inflationary principles the Fed has adopted will be felt. It will be quite painful.
  - derefr 6y ago
    > once the international markets switch to some other currency, the FRN will lose a rapid part of its value I mean, other countries manage to have inflationary monetary policies, without their currencies being the global reserve currency.
  - AnthonyMouse 6y ago
    There seems to be this meme that hyperinflation is always painful. Long-term hyperinflation is painful because nobody wants your currency and that causes all kinds of problems. Short-term hyperinflation is short-term disruptive, but it also has the result of effectively wiping out your debts (which would be helpful on net to most in the US, including the government), and then people just adjust to the new prices, which are higher but become stable, and wages rise to compensate. The main loss to the US from not being the reserve currency would be that they couldn't keep printing even more money without incurring the normal amount of inflation that usually implies for everybody else. But that's assuming the rest of the world is even interested in handing that power to somebody else. And who would that be? Everybody wants it to be themselves, which is what nobody else wants. Meanwhile all the powerful international holders of US debt have a huge interest in it continuing to be the US, since they're the ones the wiping out of dollar-denominated debts would hurt the most. And none of that seems especially likely in the immediate future, because the Fed is doing all it can right now to prevent deflation, by keeping interest rates on the floor and printing a ton of money. It would be so easy for them to prevent inflation right now that all they would have to do is stop actively doing half the things they're doing to prevent its opposite. So it only happens if they want it to.

ajb 6y ago

It sounds like he's saying that the banks should have a type system for money, maybe something like this: datatype Money = Deposit of int | Reserves of int (Or maybe a unit system) and we shouldn't think of these as comparable..

cm2187 6y ago
You just invented T-accounting!
- Konohamaru 6y ago
  What is T-accounting?
  - cm2187 6y ago
    The basic concept behind accounting, the T represents the balance sheet which must be balanced at all time, and every change in the balance sheet is always a tuple of two operations, either on both sides of the balance sheet, or on two lines of the same side. So if you start with an empty balance sheet and a customer comes with cash to deposit, your first operation is: increase deposits | increase cash. Then the bank lends money to a borrower: decrease cash | increase loans to customers. Then the borrower pays an interest: increase cash | increase equity Then you pay some interest to the depositor: decrease cash | decrease equity etc.
  - rzzzt 6y ago
    Also called double-entry bookkeeping: https://en.wikipedia.org/wiki/Double-entry_bookkeeping https://en.wikipedia.org/wiki/Double-entry_bookkeeping
- ajb 6y ago
  Lol - I wish, but the datastructure I posited is a discriminated union, not a tuple.

deleted 6y ago

[deleted]

kinkrtyavimoodh 6y ago

This feels like a bizarre article that seems to be 'fixing' a confusion no one actually has. Also, if the premise of your article is that the 'dictionary is wrong because I feel otherwise and that's why everyone is confused', then you should consider the parsimonious explanation that no one is actually confused, that the dictionary is right, and that it is you has invented a confusion.

jljljl 6y ago
People do have this confusion all the time though: they think the bank lends out the money they put in, when really what’s happening is money creation as described in the article.
- derefr 6y ago
  The money is lent out, though, in the specific sense that a bank run during a crash of the economy can† result in the bank not having the cash-on-hand to give back to its depositors. † Or, at least, this was true in the US until 2007, after which savings banks were legally limited in their ability to leverage their deposits.
  - jljljl 6y ago
    This is a problem of not having enough reserves, and not quite of lending deposits. Banks encourage people to put their money in the bank in exchange for deposits so that they have these reserves. It’s like the article says: banks give out deposits in exchange for Government Cash, or for Valuable Long Term Promises. A run can kill a bank if they read the market wrong and can’t generate enough government cash to redeem the deposits.
- kinkrtyavimoodh 6y ago
  But the two are independent ideas. You don't need lending or money creation for a bank to work, though even there the analogy is sound. The bank does lend money out and if a lot of people try to withdraw it at the same time, you get bank runs and collapses. That being said, in principle, it is possible to have a bank that literally takes the cash you give it and puts it in a giant vault, and when you come to ask for withdraw it, retrieves it and hands it back over. It is literally the idea that the author seems to be railing against. You come with your money (water) and deposit (pour) it into the bank's vault (glass). What exactly is the confusion?

Ijumfs 6y ago

It's not a linguistic trick. It used to be that banks had to keep a certain percentage of they money they had on deposit on the premises. Slowly, this amount (the "reserve rate) was lowered to 0% under Obama.

jljljl 6y ago
“Reserves” are a completely different thing from “deposits” though. I don’t think the bank is deliberately being tricky, but I think the idea of banks “lending out people’s deposits” is not quite true.
SaltyLemonZest 6y ago
It used to be that banks had a regulatory requirement to do it. That's very different from the mechanistic requirement most people envision, where it's just not possible for a bank to make a loan if they don't have enough money stashed in their vault.
SilasX 6y ago
Wait, I thought the reserve ratio was set to zero for the first time this year, because of the pandemic?
gruez 6y ago
>Slowly, this amount (the "reserve rate) was lowered to 0% under Obama. Source for this? AFAIK it was done this year, under trump not obama. >As of March 2020, the minimum reserve requirement for all deposit institutions was abolished, or more technically, fixed to zero percent of eligible deposits. The Board previously mandated a zero reserve requirement for banks with eligible deposits up to $16 million, 3% for banks up to $122.3 million, and 10% thereafter. The removal of reserve requirements followed the Federal Reserve's shift to an "ample-reserves" system, in which the Federal Reserve Banks pay member banks interest on reserves that they keep in excess of the required amount https://en.wikipedia.org/wiki/Reserve_requirement#United_States https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta...
- thedudeabides5 6y ago

rkagerer 6y ago

I didn't find this article very enlightening. It uses too many words to explain a straightforward concept: You hand your cash over to a bank, in exchange they give you an IOU. They give out IOU's far in excess of the amount of cash assets they actually hold. The concept of "short-term promises in exchange for long-term promises" was a bit more illuminating. It might also be misleading to say the bank takes ownership of your deposits. More accurate to say they take custody, given the strong fiduciary obligations the transaction imposes on them (at least in developed economies). The intrusive sign-up-to-subscribe form a mere few paragraphs in doesn't win the author any love from me, and while I don't generally mind mspaint-flavored art I found the annotated illustrations somewhat amateur. The whole article feels like it was written by a youth who just discovered the concept of fractional reserve banking and wants to educate the world.

noja 6y ago
It is a linguistic trick. Same as "credit card" (a loan card), credit implies the opposite.
- htfu 6y ago
  No. Credit, as in implied future payment, literally does mean loan, and another meaning of the word (opposite of debit) is also what happens when you use a credit card - an intermediate credits the merchant account so you don't need a separate line of credit for each one. You're making the same not-even-faulty assumption as the article author, that a word with several related meanings is somehow wrong or a trick or at all tough for the average person to comprehend.
  - noja 6y ago
    Sure it does, like many English words that have different meanings. And a marketer will choose the word with the fewest negative connotations.
    - htfu 6y ago
      You can use a credit card as a loan card, sure, by taking cash out an ATM or not paying your entire balance at the end of the month. And yes, loads of people obviously do that, and that's a trick. But can you really say it's a sleight of hand that soda isn't called 'liquid obesity, period.' by its manufacturers even though that's the result if used to the extent they'd want you to?

dmurray 6y ago

The point of this article is: a bank deposit is an asset for you, the depositor, and therefore a liability for the bank. A mortgage is a liability for you, and therefore an asset to the bank. Sometimes we get confused and we think that the bank deposits must be assets for the bank, and mortgages must be liabilities. This isn't because of some linguistic quirk. It's because its good for the bank to have a lot of deposits, because it means it's doing a lot of business. In the same way a company with a billion-dollar line of credit is likely doing better than a firm who can't borrow a cent.

User23 6y ago
Also, when the bank originates a loan it also creates a corresponding deposit. Therefore a bank having more deposits indirectly indicates it’s originating more loans.
- dmurray 6y ago
  It's the other way round. The first part isn't true - the bank doesn't buttonhole some saver into giving them a few hundred grand when you take out a mortgage. (It might get the deed to your house, physically or metaphorically - but there are also unsecured loans). The second part is true: when you make a deposit the bank has some more cash and will surely invest it/loan it out/deposit it at another institution. Those three phrases all mean roughly the same thing: the bank will take the pile of copper and linen you gave it and use it to purchase another asset.
  - User23 6y ago
    I wrote nothing about savers. Both the loan (bank asset/customer liability) and the deposit (bank liability/customer asset) are created from nothing at the same time when the bank originates a loan. The loanable funds model, which it appears you are alluding to, is observably an operationally incorrect fantasy.

Patient0 6y ago

This speech by the SNB chairman describes fractional reserve banking well in my opinion: https://www.snb.ch/en/mmr/speeches/id/ref_20180116_tjn https://www.snb.ch/en/mmr/speeches/id/ref_20180116_tjn

pablobaz 6y ago

In Ireland, you make a lodgement when you are paying into a bank. I was in disbelief when I first realised that no-one in the UK knows what a lodgement is.

jonahbenton 6y ago

Lots of valid critique for this piece. Will add that "state money" and "bank money" is a poor way to talk about credit. In terms of references, tons and tons and tons of prior art defining money and so forth. A book I recently enjoyed a great deal is: The Nature Of Money, Geoffrey Ingham https://www.amazon.com/Nature-Money-Geoffrey-Ingham/dp/074560997X https://www.amazon.com/Nature-Money-Geoffrey-Ingham/dp/07456... And this more recent Bank of England paper is exceptional: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

adamsea 6y ago

Why even use the word "glitch"?

jasonhansel 6y ago

The "bank" in "bank deposits" is an attributive noun (a.k.a. a "noun adjunct"). In "oil deposit," since oil is a mass noun, we interpret the phrase as meaning "a deposit made of oil." But "bank" is a count noun--the phrase "a deposit made of bank" makes no sense--so the natural interpretation is "a deposit related to a bank." Essentially, "bank" is just a noun being used as an adjective (as in phrases like "horse race," "corn maze," "motor vehicle," "chicken noodle soup bowl," etc.)

josefrichter 6y ago

Eh, this sounds more like linguistic overengineering really. And that accounting example is wrong.