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So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? W

So this begs the question: how come private banks can do this (create money + a matching liability, that is, with no interest), but private individuals can't? Why can't I, if I want to buy a car, not simply give myself 20,000€ cash and register a 20,000€ liability, which I will pay back in due course? The bank creates zero-cost virtual cash and then earns interest by loaning it as if it was real! This is already questionable ethically, but the fact that they can do it but I can't, I have to pay the tithe to them... That's just wrong. Correct me if I'm missing something :)

whimsicalism 5y ago
Yes, there are plenty of powers that we limit to a subset of chartered organizations. If you want to have a share in this power, you can buy ownership in a bank - a share of JP Morgan is about $160. I disagree that it is intrinsically wrong that some people can do something that you cannot do.
- andrepd 5y ago
  Well that's a very unsatisfactory answer. As to the 1st paragraph: what do you mean? That's not at all what I'm saying, buying shares in JPMorgan doesn't give me money creation privileges. As to the 2nd: if you restrict rights and privileges to one group of people you better have a good reason why! Just saying "it is so" is not a good reason :)
- majormajor 5y ago
  You don't have to be a chartered bank to have this power. If your neighbor lent you a hundred bucks and you loan ninety bucks of it to a different neighbor, you've done the same sort of thing. Of course, if you do it at a small scale, you're at high risk of having empty pockets if that neighbor wants their hundred back at an unexpected time. But do it to a thousand neighbors on either side of the exchange, and you can probably get away with re-lending most of it for a long time. They aren't granted special money-making abilities; more the reverse: they are under regulations to prevent this power - which is, in happy times, very good for the economy - from being abused. We can argue about if those regulations are strong enough or not, but I think the "money is bullshit cause banks print it out of thin air" arguments are intentionally misleading from opponents of a system that otherwise isn't actually terribly complicated.
rich_sasha 5y ago
Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. The money creation is a carefully choreographed juggling act where balls can’t fall on the ground. The extra money created is effectively money someone doesn’t need right now (deposit) that can be temporarily used, and returned eventually, by someone else. When it works, it works very well, but when it doesn’t, banks go bankrupt and someone generally loses money (deposits are insured but then the insurance scheme loses). It’s not a bad thing overall, our capitalist world would be impossible without it, but this money creation craziness is a necessary component.
- andrepd 5y ago
  > Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. Eehhhhhhh........ Sounds like that isn't working out so well is it? x) With the only difference of course that if _I_ fail my obligations I don't get a taxpayer-funded bailout financed by cuts to people's salaries and pensions, instead my house gets reposessed and I go live with my kids to a homeless shelter. But anyways. So give me similar rules: asset/liability ratios, cash flow minimums, the works!, to determine how much I can create by this mechanism. > The extra money created is effectively money someone doesn’t need right now (deposit) that can be temporarily used, and returned eventually, by someone else. That's not true in fractional reserve banking, and we're actually well last that, we're into no-reserve banking now.
  - rich_sasha 5y ago
    Yeah, we’ll, the credit crunch was an enormous fuck up. I kind of blame the regulators for letting the wolves self-regulate sheep herding, though of course it was ultimately a team effort. But that was all a textbook example of regulating banks the wrong way. > That's not true in fractional reserve banking, and we're actually well last that, we're into no-reserve banking now. How so? In Europe at least, banks lend from their own loans (a mix of deposits, bonds and commercial papers), plus need capital at a fraction of assets (ie loans made).
  - majormajor 5y ago
rahimnathwani 5y ago
"not simply give myself 20,000€ cash" Only the ECB and national central banks can create € notes (by which I mean central bank cash money). Nothing is stopping you from creating your own notes denominated in €, but these would be obligations (IOUs) issued by andrepd. Just like bank deposits, these notes are private money, not central bank money. It might be tough for you to find a car dealer willing to accept these andrepd € notes, though. "The bank creates zero-cost virtual cash" Making loans changes banks' reserve requirements, so they're not zero-cost.
- andrepd 5y ago
  But the point is that the money they create is 100% fungible with central bank banknotes! It is passed onto the economy as cash. It does not come with a tag saying "created by Santander" or whatever. > Making loans changes banks' reserve requirements, so they're not zero-cost. Okay! So give me similar requirements! Asset/liability ratios, reserve requirements, cash flow requirements, the works, to determine given my finances how much liabilities I can create.
  - rahimnathwani 5y ago
    Sure, go ahead. Instructions here: https://www.bankofengland.co.uk/prudential-regulation/new-bank-start-up-unit https://www.bankofengland.co.uk/prudential-regulation/new-ba...
OscarCunningham 5y ago
When banks create money with a matching liability, they face the risk that the customer will try to take the money out in cash, or transfer it to an account at a different bank. In order to accommodate this they actually have to have the cash on hand, or borrow it from another bank with interest. Likewise if you have 20,000€ on hand, or can borrow it from somewhere, you can use it to buy a car. You can then keep a mental note that you 'owe yourself' this money, but doing so makes no real difference.
- kgwgk 5y ago
  > they face the risk that the customer will try to take the money out in cash, or transfer it to an account at a different bank “They face the risk” seems a huge understatement. It would be quite unusual for someone to take a loan from a bank and leave the money sitting there at the bank.
  - NovemberWhiskey 5y ago
    Almost the entire business of a bank is to profit from maturity mismatch by borrowing short, lending long and taking the interest margin.
codeulike 5y ago
You could buy a lawn mower and keep it in your garage. Then you go and knock on the door of ten other houses on your street, and say "I've bought you a lawnmower for Christmas! You just need to keep it in my garage though, rather than your own. Come and use it whenever you like! Please put it back afterwards". And then, hey presto, you have created 10 lawnmowers out of nothing. Unless of course, there's a run on lawnmowers and two of your neighbours need to use it at the same time.
- chewz 5y ago
  Buy a reserve lawnmower
majormajor 5y ago
It sounds like "creating money out of thin air" here more specifically means "increasing the amount of currency in circulation by exchanging it for liens or other obligations for payback." Not just printing money in a vaccum. I don't think a bank without deposits would get very far issuing loans. My understanding: The bank isn't required to hold 100% of the money you deposit in cash, though. It can lend it out up to certain limits. So if everyone tries to cash out all at once, shit will go sideways. But it's not because the money didn't exist before: the bank has a claim to a lot of assets to still attempt to balance it out in the case of collateralized loans. If the bank wasn't there, we'd have to P2P all our lending. The bank just acts as a bigger, hopefully-more-efficient middleman, with a bunch of government regulation trying to balance out the risk/reward. If you, as an individual lender, chose the wrong person to lend to, your money would be at risk - similarly to if you choose a bank that massively fucks it up. But the deposit bank would have to fuck up way worse, under normal circumstances.
- rahimnathwani 5y ago
  "I don't think a bank without deposits would get very far issuing loans." When a bank issues you a loan, it creates a deposit for exactly the same amount in your account. So what you said is true, almost by definition. But many loans are issued by entities other than banks. You can lend profitably without being a bank. (google 'nonbank lenders')
  - majormajor 5y ago
    I mean that if you created a new bank, and never accepted any customer deposits, you are going to run into problems if you simply offer a bunch of loans. If your loan customer wants cash, or wants to move some of that loaned money into another institution... whatcha gonna do? Your nonbank credit card company would run into similar problems if they didn't have any income and simply were letting people buy products with magic printed money, but "credit cards create money out of thin air" doesn't get tossed around in the same way as it does for banks. (Also, your claim about the deposit is entirely false for many loans. Every car loan I've had, for instance, has been either paper or electronic checks for delivery to the dealer, I've never had that money in my own deposit accounts. It goes straight to a deposit account at (usually) another institution, where it would damn well be noticed if the lending bank couldn't actually make good on the funds.)
k2enemy 5y ago
When banks "create money" there is a matching liability already in place -- the claim that some depositor has on that money. The bank isn't "richer" by having made that loan. An imperfect analogy is if you buy a car for 20,000€ using a credit card. You haven't paid any real money, but now you have a liability that the credit card company will eventually claim.
luca3v 5y ago
This is not exactly how fractional reserve banking works. I think that there is a misconception that if, for example, there is a bank regulation that allows 10% fractional reserve banking, then if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans, with $9 million being "created out of thin hair". In fact, if a bank has $1 million in deposits it can make only $900k in loans. Indeed, suppose you are a bank and you have $1 mil in deposits, which you keep as reserve with the central bank. Now someone asks for a $900k loan. Now you have $1.9 mil in deposits ($1.9 mil liabilities), and you have $1 mil kept with the central bank in cash, and $900k owed from the guy with the loan (total $1.9 mil in assets, it checks out). Now the guy with the loan withdraws his $900k to pay for his house or whatever; the bank gives him the $900k from the cash account it has at the central bank. Now the bank has $1 mil in liabilities (the checking accounts of the depositors), $100k in cash with the central bank, and $900k owed from the guy with the loan. Everything still checks out, but now the cash on hand is just $10% of the assets. The bank has reached the fractional reserve limit, and it is not allowed to make any more loans.
- louloulou 5y ago
  You should read the article, because it seems you're the one with the misconception. how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" not how it works -> "if a bank has $1 million in deposits it can make only $900k in loans"
  - kgwgk 5y ago
    What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits. “By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.”
dcolkitt 5y ago
Both you and the bank can create liabilities and use it to buy assets. The difference is the bank’s liabilities (e.g. deposits in a checking account) are generally viewed as interchangeable with money. Whereas Steve’s personal IOUs are not. This all comes down to how safe and liquid people view the liabilities. Steve’s IOUs are at substantially higher risk of default than the banks checking account. There’s also not an easy or liquid market or facility for easily converting those IOUs to other money assets. Whereas with a checking account, I can just go to the ATM or send a wire transfer to another bank. With instruments like money market funds, I can easily sell the assets at the push of a button. To a certain extent this is because the central bank guarantees the safety of the bank. Any gaps in a Wells Fargo checking account would just be made up by the Fed making the account holders whole with newly printed dollars. But even absent that guarantee, the senior liabilities and term deposits of banks are considered pretty damn money like. That’s largely because banks as institutions bend over backwards to be as conservative and trustworthy as possible when it comes to their liabilities. A bank would never do the equivalent of spending a years income on a new car. For example Berkshire Hathaway isn’t a bank and it’s not backed by the central bank. But when they issue 30 day commercial paper, then it’s treated as essentially equivalent to money. In fact there’s probably some in your money market fund right now.
IncRnd 5y ago
You can do this, but the car owner likely won't accept your paper as having monetary value.

whimsicalism 5y ago

Yes, there are plenty of powers that we limit to a subset of chartered organizations. If you want to have a share in this power, you can buy ownership in a bank - a share of JP Morgan is about $160. I disagree that it is intrinsically wrong that some people can do something that you cannot do.

andrepd 5y ago
Well that's a very unsatisfactory answer. As to the 1st paragraph: what do you mean? That's not at all what I'm saying, buying shares in JPMorgan doesn't give me money creation privileges. As to the 2nd: if you restrict rights and privileges to one group of people you better have a good reason why! Just saying "it is so" is not a good reason :)
majormajor 5y ago
You don't have to be a chartered bank to have this power. If your neighbor lent you a hundred bucks and you loan ninety bucks of it to a different neighbor, you've done the same sort of thing. Of course, if you do it at a small scale, you're at high risk of having empty pockets if that neighbor wants their hundred back at an unexpected time. But do it to a thousand neighbors on either side of the exchange, and you can probably get away with re-lending most of it for a long time. They aren't granted special money-making abilities; more the reverse: they are under regulations to prevent this power - which is, in happy times, very good for the economy - from being abused. We can argue about if those regulations are strong enough or not, but I think the "money is bullshit cause banks print it out of thin air" arguments are intentionally misleading from opponents of a system that otherwise isn't actually terribly complicated.

rich_sasha 5y ago

Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. The money creation is a carefully choreographed juggling act where balls can’t fall on the ground. The extra money created is effectively money someone doesn’t need right now (deposit) that can be temporarily used, and returned eventually, by someone else. When it works, it works very well, but when it doesn’t, banks go bankrupt and someone generally loses money (deposits are insured but then the insurance scheme loses). It’s not a bad thing overall, our capitalist world would be impossible without it, but this money creation craziness is a necessary component.

andrepd 5y ago
> Banks are regulated through the nose (in most places at most times) to make sure they don’t mess it up. Eehhhhhhh........ Sounds like that isn't working out so well is it? x) With the only difference of course that if _I_ fail my obligations I don't get a taxpayer-funded bailout financed by cuts to people's salaries and pensions, instead my house gets reposessed and I go live with my kids to a homeless shelter. But anyways. So give me similar rules: asset/liability ratios, cash flow minimums, the works!, to determine how much I can create by this mechanism. > The extra money created is effectively money someone doesn’t need right now (deposit) that can be temporarily used, and returned eventually, by someone else. That's not true in fractional reserve banking, and we're actually well last that, we're into no-reserve banking now.
- rich_sasha 5y ago
  Yeah, we’ll, the credit crunch was an enormous fuck up. I kind of blame the regulators for letting the wolves self-regulate sheep herding, though of course it was ultimately a team effort. But that was all a textbook example of regulating banks the wrong way. > That's not true in fractional reserve banking, and we're actually well last that, we're into no-reserve banking now. How so? In Europe at least, banks lend from their own loans (a mix of deposits, bonds and commercial papers), plus need capital at a fraction of assets (ie loans made).
- majormajor 5y ago

rahimnathwani 5y ago

"not simply give myself 20,000€ cash" Only the ECB and national central banks can create € notes (by which I mean central bank cash money). Nothing is stopping you from creating your own notes denominated in €, but these would be obligations (IOUs) issued by andrepd. Just like bank deposits, these notes are private money, not central bank money. It might be tough for you to find a car dealer willing to accept these andrepd € notes, though. "The bank creates zero-cost virtual cash" Making loans changes banks' reserve requirements, so they're not zero-cost.

andrepd 5y ago
But the point is that the money they create is 100% fungible with central bank banknotes! It is passed onto the economy as cash. It does not come with a tag saying "created by Santander" or whatever. > Making loans changes banks' reserve requirements, so they're not zero-cost. Okay! So give me similar requirements! Asset/liability ratios, reserve requirements, cash flow requirements, the works, to determine given my finances how much liabilities I can create.
- rahimnathwani 5y ago
  Sure, go ahead. Instructions here: https://www.bankofengland.co.uk/prudential-regulation/new-bank-start-up-unit https://www.bankofengland.co.uk/prudential-regulation/new-ba...

OscarCunningham 5y ago

When banks create money with a matching liability, they face the risk that the customer will try to take the money out in cash, or transfer it to an account at a different bank. In order to accommodate this they actually have to have the cash on hand, or borrow it from another bank with interest. Likewise if you have 20,000€ on hand, or can borrow it from somewhere, you can use it to buy a car. You can then keep a mental note that you 'owe yourself' this money, but doing so makes no real difference.

kgwgk 5y ago
> they face the risk that the customer will try to take the money out in cash, or transfer it to an account at a different bank “They face the risk” seems a huge understatement. It would be quite unusual for someone to take a loan from a bank and leave the money sitting there at the bank.
- NovemberWhiskey 5y ago
  Almost the entire business of a bank is to profit from maturity mismatch by borrowing short, lending long and taking the interest margin.

codeulike 5y ago

You could buy a lawn mower and keep it in your garage. Then you go and knock on the door of ten other houses on your street, and say "I've bought you a lawnmower for Christmas! You just need to keep it in my garage though, rather than your own. Come and use it whenever you like! Please put it back afterwards". And then, hey presto, you have created 10 lawnmowers out of nothing. Unless of course, there's a run on lawnmowers and two of your neighbours need to use it at the same time.

chewz 5y ago
Buy a reserve lawnmower

majormajor 5y ago

It sounds like "creating money out of thin air" here more specifically means "increasing the amount of currency in circulation by exchanging it for liens or other obligations for payback." Not just printing money in a vaccum. I don't think a bank without deposits would get very far issuing loans. My understanding: The bank isn't required to hold 100% of the money you deposit in cash, though. It can lend it out up to certain limits. So if everyone tries to cash out all at once, shit will go sideways. But it's not because the money didn't exist before: the bank has a claim to a lot of assets to still attempt to balance it out in the case of collateralized loans. If the bank wasn't there, we'd have to P2P all our lending. The bank just acts as a bigger, hopefully-more-efficient middleman, with a bunch of government regulation trying to balance out the risk/reward. If you, as an individual lender, chose the wrong person to lend to, your money would be at risk - similarly to if you choose a bank that massively fucks it up. But the deposit bank would have to fuck up way worse, under normal circumstances.

rahimnathwani 5y ago
"I don't think a bank without deposits would get very far issuing loans." When a bank issues you a loan, it creates a deposit for exactly the same amount in your account. So what you said is true, almost by definition. But many loans are issued by entities other than banks. You can lend profitably without being a bank. (google 'nonbank lenders')
- majormajor 5y ago
  I mean that if you created a new bank, and never accepted any customer deposits, you are going to run into problems if you simply offer a bunch of loans. If your loan customer wants cash, or wants to move some of that loaned money into another institution... whatcha gonna do? Your nonbank credit card company would run into similar problems if they didn't have any income and simply were letting people buy products with magic printed money, but "credit cards create money out of thin air" doesn't get tossed around in the same way as it does for banks. (Also, your claim about the deposit is entirely false for many loans. Every car loan I've had, for instance, has been either paper or electronic checks for delivery to the dealer, I've never had that money in my own deposit accounts. It goes straight to a deposit account at (usually) another institution, where it would damn well be noticed if the lending bank couldn't actually make good on the funds.)

k2enemy 5y ago

When banks "create money" there is a matching liability already in place -- the claim that some depositor has on that money. The bank isn't "richer" by having made that loan. An imperfect analogy is if you buy a car for 20,000€ using a credit card. You haven't paid any real money, but now you have a liability that the credit card company will eventually claim.

luca3v 5y ago

This is not exactly how fractional reserve banking works. I think that there is a misconception that if, for example, there is a bank regulation that allows 10% fractional reserve banking, then if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans, with $9 million being "created out of thin hair". In fact, if a bank has $1 million in deposits it can make only $900k in loans. Indeed, suppose you are a bank and you have $1 mil in deposits, which you keep as reserve with the central bank. Now someone asks for a $900k loan. Now you have $1.9 mil in deposits ($1.9 mil liabilities), and you have $1 mil kept with the central bank in cash, and $900k owed from the guy with the loan (total $1.9 mil in assets, it checks out). Now the guy with the loan withdraws his $900k to pay for his house or whatever; the bank gives him the $900k from the cash account it has at the central bank. Now the bank has $1 mil in liabilities (the checking accounts of the depositors), $100k in cash with the central bank, and $900k owed from the guy with the loan. Everything still checks out, but now the cash on hand is just $10% of the assets. The bank has reached the fractional reserve limit, and it is not allowed to make any more loans.

louloulou 5y ago
You should read the article, because it seems you're the one with the misconception. how it works -> "if a bank has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the bank can make $10 million in loans" not how it works -> "if a bank has $1 million in deposits it can make only $900k in loans"
- kgwgk 5y ago
  What the article says is that to lend out more than $900k it has to increase it reserves (maybe borrowing from other banks). Not that it can lend out $10m with just $1m in deposits. “By attracting new deposits, the bank can increase its lending without running down its reserves, as shown in the third row of Figure 2. Alternatively, a bank can borrow from other banks or attract other forms of liabilities, at least temporarily. But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending.”

dcolkitt 5y ago

Both you and the bank can create liabilities and use it to buy assets. The difference is the bank’s liabilities (e.g. deposits in a checking account) are generally viewed as interchangeable with money. Whereas Steve’s personal IOUs are not. This all comes down to how safe and liquid people view the liabilities. Steve’s IOUs are at substantially higher risk of default than the banks checking account. There’s also not an easy or liquid market or facility for easily converting those IOUs to other money assets. Whereas with a checking account, I can just go to the ATM or send a wire transfer to another bank. With instruments like money market funds, I can easily sell the assets at the push of a button. To a certain extent this is because the central bank guarantees the safety of the bank. Any gaps in a Wells Fargo checking account would just be made up by the Fed making the account holders whole with newly printed dollars. But even absent that guarantee, the senior liabilities and term deposits of banks are considered pretty damn money like. That’s largely because banks as institutions bend over backwards to be as conservative and trustworthy as possible when it comes to their liabilities. A bank would never do the equivalent of spending a years income on a new car. For example Berkshire Hathaway isn’t a bank and it’s not backed by the central bank. But when they issue 30 day commercial paper, then it’s treated as essentially equivalent to money. In fact there’s probably some in your money market fund right now.

IncRnd 5y ago

You can do this, but the car owner likely won't accept your paper as having monetary value.