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>through deposits or other liabilities This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this.

>through deposits or other liabilities This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this. i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10

kgwgk 5y ago
The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended). It seems we all agree that “if a bank has $1 million in deposits it can make only $900k in loans.” In the aggregate banking system there are now $900k more, some bank may use the reserves created by that deposit to lend $810k, etc. That’s not the same as 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" which is wrong.
- louloulou 5y ago
  I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time. The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.
  - kgwgk 5y ago
    You didn’t say "if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans] You said "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" [which is wrong unless you assume that every loan remains in that bank as a deposit so the “banking system as a whole” case is recovered] Of course that bank could get more reserves to be able to make additional loans. But then it could lend much more than $10m if it gets enough deposits/reserves! [One bank =/= The banking system as a whole] Edit: by the way, I’m curious what is the thing in my previous comment that you find “simply wrong”.
    - louloulou 5y ago
      I mean apologies if I'm misunderstanding what you're saying - but as far as I can tell you're claiming the leverage ratio for a bank is 0.9:1 and I'm saying it is 9:1. If that's the case only one of us can be correct. It doesn't help that you're conflating the terms "deposits" and "reserves". Deposits are liabilities of the bank, while reserves are assets held in their account at the central bank. If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.
      - kgwgk 5y ago
        What I’m saying is that if you create a bank and I make a $1m deposit [0] your bank has Liabilities : deposit $1m Assets : reserves $1m Now you can lend $900k to someone, who takes the money and tranfers it to someone else’s account in another bank to buy bitcoins or whatever. Your bank has now Liabilities : deposit $1m Assets : reserves $100k, loan $900k And you cannot make more loans until you increase your reserves which means getting new deposits (so we’re no longer talking about a bank with $1m in deposits). Say you get an additional million in deposits, your bank has now Liabilities : deposits $2m Assets : reserves $1.1m, loan $900k And it could lend and additional $900k. Alternatively, it could get funding from another source like borrowing from banks of issuing bonds. For example Liabilities : deposit $1m, bond $1m Assets : reserves $1.1m, loan $900k I don’t think any of this is controversial, let alone wrong. By the way, for simplicity in those balanced sheets the “reserves” is all the funding available which has not been lent, not just the required reserves ($100k for $1m in deposits, etc.) > If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1. One of the main points of the paper under discussion is that this doesn’t happen. Reserves are not a binding constraint on lending. [0] I don’t know if it makes much sense to talk about whether it is “actual cash”. Maybe my employer took a loan to pay me, maybe not. Maybe it was in cash, maybe by cheque, maybe by bank transfer. Would that change anything?
        louloulou 5y ago
        That's no different than what I said, except you're conflating the ledger money created by banks with their reserves at the Central Bank. Only Central Bank reserves and cash are considered "money" in this system. And I'm saying the "money" is leveraged 9:1 in our toy example, whereas you seem to be saying assets must always be greater than liabilities - which obviously I agree with. Since if they weren't, the bank would be insolvent.
- iso1210 5y ago
  > The money created doesn’t necessarily go back to the bank Very little will be kept in a matress or burnt. Almost all will go back to a bank. $1m in Bank A $1m in bank B Charlie borrows $900k from Bank B, gives to Dave, puts into Bank A Eric borrows $900k from Bank A, gives to Felicity, who puts it in bank B.
  - kgwgk 5y ago
    "A bank" is not the same as "the bank". In your example, the money borrowed by Charlie from B does later go back to bank B. But if you remove the last transaction it doesn't. Hence, it doesn't necessarily happen.
    - iso1210 5y ago
      Bank A $0 deposit Bank B $1m deposit Total deposits: $1m Fred borrows $900k from Bank B and gives to Geraldine who puts it in Bank A Bank A $900k deposit with no loan Bank B $1m deposit with 900k loan (90%) Total deposits $1.9m (90% above initial deposits) Henry borrows 800k from Bank A and gives to Iris who puts it into Bank A Bank A $1.7m with 800k loans (loans at 60%) Bank B $1m deposit (loans at 90%) Total deposits $2.7m (170% above initial deposits) And the cycle continues, doesn't matter how many banks.
      - deleted 5y ago
        [deleted]
      - kgwgk 5y ago
        There is no cycle for bank B there. It went from Bank B $1m deposit [$100k required reserves + $900k excess reserves] to Bank B $1m deposit with 900k loan (90%) [$100k required reserves + zero excess reserves] and it's still there at the end. It doesn't have excess reserves, it cannot make new loans if it cannot get more money. To be clear, my original comment was: "The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank." The bank =/= A bank One bank =/= The banking system [Of course when another bank gets more reserves it increases their capacity to extend new loans. The question was whether a bank with $1m in deposits can lend $9m, not whether the whole banking system could.]

>through deposits or other liabilities This is entirely the point. The money created goes back to the bank as deposits and new money is created on top of this. i.e. 0.9^0+0.9^1+0.9^2+0.9^3+... = 10

kgwgk 5y ago

The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank. Then the bank that gave you those $900k still has just $1m in reserves and cannot lend anymore. Unless it gets some deposits or additional funding from another bank (maybe the one where those $900k ended). It seems we all agree that “if a bank has $1 million in deposits it can make only $900k in loans.” In the aggregate banking system there are now $900k more, some bank may use the reserves created by that deposit to lend $810k, etc. That’s not the same as 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" which is wrong.

louloulou 5y ago
I'm afraid you're simply wrong and need to do some more research. There's no magical point in time where money is "in use". It is always credited to someone's bank account at any given point in time. The baking system as a whole is leveraged about 9:1 based on the previous example. A bank deposit is a bank deposit, regardless of which bank it is at.
- kgwgk 5y ago
  You didn’t say "if the banking system as a whole has $1 million in deposits (of actual cash that people gave to the bank to put in their checking accounts) the system banking as a whole can make $10 million in loans" [and there will be in the end $11m in deposits in the banking system as a whole, offsetting the $1m in reserves and $10m in loans] You said "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" [which is wrong unless you assume that every loan remains in that bank as a deposit so the “banking system as a whole” case is recovered] Of course that bank could get more reserves to be able to make additional loans. But then it could lend much more than $10m if it gets enough deposits/reserves! [One bank =/= The banking system as a whole] Edit: by the way, I’m curious what is the thing in my previous comment that you find “simply wrong”.
  - louloulou 5y ago
    I mean apologies if I'm misunderstanding what you're saying - but as far as I can tell you're claiming the leverage ratio for a bank is 0.9:1 and I'm saying it is 9:1. If that's the case only one of us can be correct. It doesn't help that you're conflating the terms "deposits" and "reserves". Deposits are liabilities of the bank, while reserves are assets held in their account at the central bank. If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1.
    - kgwgk 5y ago
      What I’m saying is that if you create a bank and I make a $1m deposit [0] your bank has Liabilities : deposit $1m Assets : reserves $1m Now you can lend $900k to someone, who takes the money and tranfers it to someone else’s account in another bank to buy bitcoins or whatever. Your bank has now Liabilities : deposit $1m Assets : reserves $100k, loan $900k And you cannot make more loans until you increase your reserves which means getting new deposits (so we’re no longer talking about a bank with $1m in deposits). Say you get an additional million in deposits, your bank has now Liabilities : deposits $2m Assets : reserves $1.1m, loan $900k And it could lend and additional $900k. Alternatively, it could get funding from another source like borrowing from banks of issuing bonds. For example Liabilities : deposit $1m, bond $1m Assets : reserves $1.1m, loan $900k I don’t think any of this is controversial, let alone wrong. By the way, for simplicity in those balanced sheets the “reserves” is all the funding available which has not been lent, not just the required reserves ($100k for $1m in deposits, etc.) > If the banking system as a whole is leveraged 9:1, that implies each individual bank is leveraged approximately 9:1. One of the main points of the paper under discussion is that this doesn’t happen. Reserves are not a binding constraint on lending. [0] I don’t know if it makes much sense to talk about whether it is “actual cash”. Maybe my employer took a loan to pay me, maybe not. Maybe it was in cash, maybe by cheque, maybe by bank transfer. Would that change anything?
      - louloulou 5y ago
        That's no different than what I said, except you're conflating the ledger money created by banks with their reserves at the Central Bank. Only Central Bank reserves and cash are considered "money" in this system. And I'm saying the "money" is leveraged 9:1 in our toy example, whereas you seem to be saying assets must always be greater than liabilities - which obviously I agree with. Since if they weren't, the bank would be insolvent.
iso1210 5y ago
> The money created doesn’t necessarily go back to the bank Very little will be kept in a matress or burnt. Almost all will go back to a bank. $1m in Bank A $1m in bank B Charlie borrows $900k from Bank B, gives to Dave, puts into Bank A Eric borrows $900k from Bank A, gives to Felicity, who puts it in bank B.
- kgwgk 5y ago
  "A bank" is not the same as "the bank". In your example, the money borrowed by Charlie from B does later go back to bank B. But if you remove the last transaction it doesn't. Hence, it doesn't necessarily happen.
  - iso1210 5y ago
    Bank A $0 deposit Bank B $1m deposit Total deposits: $1m Fred borrows $900k from Bank B and gives to Geraldine who puts it in Bank A Bank A $900k deposit with no loan Bank B $1m deposit with 900k loan (90%) Total deposits $1.9m (90% above initial deposits) Henry borrows 800k from Bank A and gives to Iris who puts it into Bank A Bank A $1.7m with 800k loans (loans at 60%) Bank B $1m deposit (loans at 90%) Total deposits $2.7m (170% above initial deposits) And the cycle continues, doesn't matter how many banks.
    - deleted 5y ago
      [deleted]
    - kgwgk 5y ago
      There is no cycle for bank B there. It went from Bank B $1m deposit [$100k required reserves + $900k excess reserves] to Bank B $1m deposit with 900k loan (90%) [$100k required reserves + zero excess reserves] and it's still there at the end. It doesn't have excess reserves, it cannot make new loans if it cannot get more money. To be clear, my original comment was: "The money created doesn’t necessarily go back to the bank. When you take a loan you use the money for something, not to keep it in an account at that bank. It will typically end in another bank." The bank =/= A bank One bank =/= The banking system [Of course when another bank gets more reserves it increases their capacity to extend new loans. The question was whether a bank with $1m in deposits can lend $9m, not whether the whole banking system could.]