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This is because when a bank loans out money in most modern countries they in turn borrow the money from a federal reserve bank which in turn just creates the mo

This is because when a bank loans out money in most modern countries they in turn borrow the money from a federal reserve bank which in turn just creates the money to be loaned out. This is how federal reserve banks create more money. The idea being that loans drive the economy through building businesses and infrastructure but it also has the side effect of driving up the cost (inflation) for consumers of everything that can be paid for with loans: houses, cars and higher education and most of those things don't grow the economy in the same way a business loan would.

HPsquared 5y ago
Commercial banks are where money is created. When a commercial bank 'makes' a loan, they do just that: increase the balance in the borrower's account (from the bank's perspective, this is counted as a liability), and the loan contract is also created (this is effectively a bond issued by the borrower, which is an asset now held by the bank). In a fractional reserve system, the commercial bank is allowed to loan out money in this way up to a set limit based on the amount of reserves they hold at the central bank. The interest rate of the central bank is the rate at which the central bank pays out interest on those reserves, not anything to do with the central bank lending money. This paper sets everything out in detail: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... EDIT: this explanation is the 'traditional' way, before central banks started doing QE. In QE, central banks purchase bonds and other assets, effectively 'lending' money out (the bond issuers will eventually, in theory, pay that money back). Still though, nobody is going to the central bank and borrowing money - the bank is buying assets (using money created from nothing, thereby increasing the money supply).

HPsquared 5y ago

Commercial banks are where money is created. When a commercial bank 'makes' a loan, they do just that: increase the balance in the borrower's account (from the bank's perspective, this is counted as a liability), and the loan contract is also created (this is effectively a bond issued by the borrower, which is an asset now held by the bank). In a fractional reserve system, the commercial bank is allowed to loan out money in this way up to a set limit based on the amount of reserves they hold at the central bank. The interest rate of the central bank is the rate at which the central bank pays out interest on those reserves, not anything to do with the central bank lending money. This paper sets everything out in detail: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... EDIT: this explanation is the 'traditional' way, before central banks started doing QE. In QE, central banks purchase bonds and other assets, effectively 'lending' money out (the bond issuers will eventually, in theory, pay that money back). Still though, nobody is going to the central bank and borrowing money - the bank is buying assets (using money created from nothing, thereby increasing the money supply).