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I’m genuinely curious from where you’ve developed this position that loans create deposits. My own understanding matches that of the person you’re replying to,

I’m genuinely curious from where you’ve developed this position that loans create deposits. My own understanding matches that of the person you’re replying to, and I’d like to read more on your alternative point of view. Do you know any books that expand on this idea?

rsj_hn 6y ago
This is common knowledge for people who work in banks, or understand how banks work. The idea that you go to a bank to borrow a million dollars, and they put you on hold as they wait for a million dollars to be deposited by some stranger is, well, bonkers. How could that possibly work? Does that match anyone's experience? Has anyone been turned away from a loan because the bank "ran out of deposits"? And how would you explain investment banks that don't even accept any retail deposits but make huge amounts of loans? It's just a very odd belief and I can't understand why econ texts don't describe this correctly. Yes, the full answer is a bit more complex, but surely econ textbooks can spend a few pages explaining this stuff. It's not that complicated. But then again, economists historically have not done well with understanding the financial system -- it seems to be a blind spot, as evidenced by their performance in the great financial crisis. There are alt economists like von Mises and the Austrian school that really harped on loans create deposits, but mainstream economists tend to ignore how the financial system works. For literature, I'd take a look at this educational primer published by the Bank of England. In general you need to turn to literature published by the banking industry. Here's a link: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Here is a quote: "In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks: * Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. * In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance."

rsj_hn 6y ago

This is common knowledge for people who work in banks, or understand how banks work. The idea that you go to a bank to borrow a million dollars, and they put you on hold as they wait for a million dollars to be deposited by some stranger is, well, bonkers. How could that possibly work? Does that match anyone's experience? Has anyone been turned away from a loan because the bank "ran out of deposits"? And how would you explain investment banks that don't even accept any retail deposits but make huge amounts of loans? It's just a very odd belief and I can't understand why econ texts don't describe this correctly. Yes, the full answer is a bit more complex, but surely econ textbooks can spend a few pages explaining this stuff. It's not that complicated. But then again, economists historically have not done well with understanding the financial system -- it seems to be a blind spot, as evidenced by their performance in the great financial crisis. There are alt economists like von Mises and the Austrian school that really harped on loans create deposits, but mainstream economists tend to ignore how the financial system works. For literature, I'd take a look at this educational primer published by the Bank of England. In general you need to turn to literature published by the banking industry. Here's a link: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... Here is a quote: "In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks: * Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. * In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits. Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance."