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Ah seems someone has a real understand how these things work. I always wondered: how do you “print” money these days!? How does the credit transaction brings m

Ah seems someone has a real understand how these things work. I always wondered: how do you “print” money these days!? How does the credit transaction brings money into the system?

colejohnson66 5y ago
It’s banks lending out the money in accounts (where savings interest comes from). If the bank has $1B from user accounts and lends out $300M of that, $300M was created out of thin air because the accounts still have $1B (fractional reserve). But then the question becomes: when the loan is paid back, is the money “destroyed” (less interest)?
- shoto_io 5y ago
  Ok, and how do banks get the money in the first place?
  - deleted 5y ago
    [deleted]
  - dragonwriter 5y ago
    > Ok, and how do Banks get the money in the first place? They create it from the air. They note the debt on one side and the balance on the other when they issue a loan.
    - shoto_io 5y ago
      And how is the central bank involved in this?
      - nradov 5y ago
        The central bank provides liquidity to member banks in case of a bank run, and imposes limits on money creation (lending) based on capital reserves and other factors.
      - dragonwriter 5y ago
        > And how is the central bank involved in this? Via reserve requirements and coordinating interbank lending: https://www.investopedia.com/terms/i/interbankrate.asp https://www.investopedia.com/terms/i/interbankrate.asp
- palunon 5y ago
  > when the loan is paid back, is the money “destroyed” Yes, of course. Interest too. Money in a non-central bank account (or actual coins and bills) is just a number written in the bank ledger. If you borrow money from the bank, the bank just has to increase the number written in your account (and thus creates money). When you pay it back the bank just decreases it (and thus destroy money). And when you pay the interest, the bank also destroy the money by decreasing that number. Of course, the bank needs to make sure it will not default on its central bank account if you do transfer that money to another bank/into cash, but since those are mostly symmetrical the bank is able to lend much more money than it has in its central bank account. And worst case scenario, another bank may lend them some central-dollars (and if they don't, you get an interbank lending crisis).
  - colejohnson66 5y ago
    The big disconnect for me is how it’s just a number on a ledger. So, if I cash a $1M check at another bank than the writer of said check, their ledgers are adjusted, but what happens to the physical cash in vaults?
    - oneplane 5y ago
      There is no physical cash in vaults to back that.
    - dragonwriter 5y ago
      > So, if I cash a $1M check at another bank than the writer of said check, their ledgers are adjusted, but what happens to the physical cash in vaults? The bank you cash it at takes $1M out of their vault. If this results in them having too little in the vault for expected needs, they take action to replenish it.
      - deleted 5y ago
        [deleted]
    - rsj_hn 5y ago
      First, it is offset with all the money going in the other direction. So banks only need to balance the net at the end of each day. As for that net, when banks send/receive money from each other, they do not transact in shipments of cash, they transact with electronic money -- reserves. Bank A and Bank B have accounts at a reserve bank in their area. The reserve banks in turn are part of the Federal reserve system, networked together. Thus just as a deposit is a liability of a regular bank, a reserve is a special kind of deposit that is the liability of the reserve bank -- the central bank. And just as households are the deposit holders of regular banks, other banks are the deposit holders of the reserve bank. Fun Fact 1: It is illegal for individuals to hold an account at the Federal Reserve. Only banks are allowed to do this. See https://www.federalreserve.gov/faqs/does-the-federal-reserve-maintain-accounts-for-individuals-can-individuals-use-such-accounts-to-pay-bills-and-get-money.htm https://www.federalreserve.gov/faqs/does-the-federal-reserve... There has been a push to open this system up to more retail banking instead of forcing people to use private banks. Fun Fact 2: Before the creation of the Federal Reserve System, private Reserve banks sprung up -- banks for banks. These banks were also called "clearinghouses" because banks would settle each other's liabilities there without the need for pairwise settlement (n is better than n(n+1)/2). Then when banking crisis hit, it obviously put great strain on the clearinghouse, which led to the creation of the Federal Reserve, to replace the private reserve banks. The Federal Reserve could not run out of money because its liabilities were legal tender. One of the most famous private reserve banks was the Suffolk Bank of Boston. See also https://en.wikipedia.org/wiki/Suffolk_System https://en.wikipedia.org/wiki/Suffolk_System Going back to our story, let's say the net is 1 million dollars on a given day. Then one bank transfers 1 million of dollars of reserves to the other bank, which just consists of the reserve bank marking up one account and marking down the other account. What happens if Bank A doesn't have 1 million of reserves to spare? Well that depends on whether Bank A believes the situation is temporary or permanent. Banks hire liquidity management professionals for this reason. These are the people, like weathermen, that look at historical cash flow patterns and use statistics to try to minimize overall bank expenses. Cash pays no interest, but you pay a penalty if you need to borrow it. Reserves pay very little interest and you pay the same small penalty. So banks want to minimize holdings of both cash and reserves while maintaining smooth operation. If the reserve shortfall is believed to be temporary, then Bank A borrows the reserves from other banks in the overnight market. That overnight interest rate is the rate that the Federal reserve targets. Making sure that the entire banking system as a whole has enough reserves is the job of the Federal Reserve, which adds reserves to the banking system by purchasing bonds, and removes reserves by selling some of the bonds it purchased previously. Assuming the overall banking system has enough reserves, there will be some other bank in the system with excess reserves that is willing to lend to Bank A at the policy rate. If the Bank believes the reserve deficiency is longer lasting, the bank can tap the longer term funding markets by selling more commercial paper, or a longer term bond, or it can sell off some marketable asset (point being to go short something). This is again the job of professionals that manage the overall position of the bank. By means of going short something of longer duration, the bank will increase inflow from some other bank (the bank that provides financial services for the purchaser of the asset), and so will increase its own reserve holdings back to the level required. In the extreme case of some financial market disruption in which you can't sell assets to the private market, the bank could show up at the discount window of the Federal reserve and borrow money from the Fed, collateralized by some qualifying asset such as a government insured bond), and of course at a penalty rate. Again, banks want to avoid doing this but it's there as a last resort. Bottom line, banks don't send each other trucks filled with cash in pairwise relationships, they centralize their deposits in a clearinghouse and that handles reserve management. None of this interbank settlement requires cash. Banks do not get cash from each other. The use of vault cash is purely for purposes of customer demand. When a customer wants cash, the bank opens the vault. When the bank has excess cash, the bank sells some of the cash for reserves. When the bank has too little cash, it sells some of the reserves for cash. So banks can convert electronic reserves to physical cash, and that is where you get the trucks carrying cash from the government to the bank in a hub and spoke system rather than point to point. Cash is used only outside the banking system, to provide currency to bank customers.
- imtringued 5y ago
  A loan is just a negative bank balance. Interest is a fee that the bank charges and therefore the profit margin of the bank and the savers at the bank. When you pay the loan back you just end up with a $0 balance and interest has bounced back and forth between you and the bank. Money is destroyed in the sense that nobody has a positive balance at the end of the loan but when you add all negative and positive account balances together you end up with $0 so money doesn't really "exist" in a way that can be "destroyed".
imtringued 5y ago
Debtors go to the bank and promise to pay (e.g. through future work). This is a liability for the debtor and asset to the bank. The bank determines the risk of the promise and creates an equivalent amount of credit also known as bank money. By bank money I mean the balance on your account. That money is a liability for the bank and effectively a claim on your debt. It's like someone threw all the bonds in a blender and created $0.01 mini bonds. It's actually not much different from an investment fund with the huge caveat that the USD is a shared medium and has a mandatory insurance scheme. In fractional reserve banking banks do not take your deposits and give them to someone else. That should be obvious, because your deposits don't disappear, they are only gone once you spend them. The central bank also gives banks as many reserves as they need so deposits themselves aren't the limiting factor in money creation. It is capital requirements that limit loan creation. You should think of banking and money as an accounting system where regulations are intended to keep the banks alive, not to limit money creation as a goal in itself. It's the central bank's job to limit money creation and thereby limit inflation.

Ah seems someone has a real understand how these things work. I always wondered: how do you “print” money these days!? How does the credit transaction brings money into the system?

colejohnson66 5y ago

It’s banks lending out the money in accounts (where savings interest comes from). If the bank has $1B from user accounts and lends out $300M of that, $300M was created out of thin air because the accounts still have $1B (fractional reserve). But then the question becomes: when the loan is paid back, is the money “destroyed” (less interest)?

shoto_io 5y ago
Ok, and how do banks get the money in the first place?
- deleted 5y ago
  [deleted]
- dragonwriter 5y ago
  > Ok, and how do Banks get the money in the first place? They create it from the air. They note the debt on one side and the balance on the other when they issue a loan.
  - shoto_io 5y ago
    And how is the central bank involved in this?
    - nradov 5y ago
      The central bank provides liquidity to member banks in case of a bank run, and imposes limits on money creation (lending) based on capital reserves and other factors.
    - dragonwriter 5y ago
      > And how is the central bank involved in this? Via reserve requirements and coordinating interbank lending: https://www.investopedia.com/terms/i/interbankrate.asp https://www.investopedia.com/terms/i/interbankrate.asp
palunon 5y ago
> when the loan is paid back, is the money “destroyed” Yes, of course. Interest too. Money in a non-central bank account (or actual coins and bills) is just a number written in the bank ledger. If you borrow money from the bank, the bank just has to increase the number written in your account (and thus creates money). When you pay it back the bank just decreases it (and thus destroy money). And when you pay the interest, the bank also destroy the money by decreasing that number. Of course, the bank needs to make sure it will not default on its central bank account if you do transfer that money to another bank/into cash, but since those are mostly symmetrical the bank is able to lend much more money than it has in its central bank account. And worst case scenario, another bank may lend them some central-dollars (and if they don't, you get an interbank lending crisis).
- colejohnson66 5y ago
  The big disconnect for me is how it’s just a number on a ledger. So, if I cash a $1M check at another bank than the writer of said check, their ledgers are adjusted, but what happens to the physical cash in vaults?
  - oneplane 5y ago
    There is no physical cash in vaults to back that.
  - dragonwriter 5y ago
    > So, if I cash a $1M check at another bank than the writer of said check, their ledgers are adjusted, but what happens to the physical cash in vaults? The bank you cash it at takes $1M out of their vault. If this results in them having too little in the vault for expected needs, they take action to replenish it.
    - deleted 5y ago
      [deleted]
  - rsj_hn 5y ago
    First, it is offset with all the money going in the other direction. So banks only need to balance the net at the end of each day. As for that net, when banks send/receive money from each other, they do not transact in shipments of cash, they transact with electronic money -- reserves. Bank A and Bank B have accounts at a reserve bank in their area. The reserve banks in turn are part of the Federal reserve system, networked together. Thus just as a deposit is a liability of a regular bank, a reserve is a special kind of deposit that is the liability of the reserve bank -- the central bank. And just as households are the deposit holders of regular banks, other banks are the deposit holders of the reserve bank. Fun Fact 1: It is illegal for individuals to hold an account at the Federal Reserve. Only banks are allowed to do this. See https://www.federalreserve.gov/faqs/does-the-federal-reserve-maintain-accounts-for-individuals-can-individuals-use-such-accounts-to-pay-bills-and-get-money.htm https://www.federalreserve.gov/faqs/does-the-federal-reserve... There has been a push to open this system up to more retail banking instead of forcing people to use private banks. Fun Fact 2: Before the creation of the Federal Reserve System, private Reserve banks sprung up -- banks for banks. These banks were also called "clearinghouses" because banks would settle each other's liabilities there without the need for pairwise settlement (n is better than n(n+1)/2). Then when banking crisis hit, it obviously put great strain on the clearinghouse, which led to the creation of the Federal Reserve, to replace the private reserve banks. The Federal Reserve could not run out of money because its liabilities were legal tender. One of the most famous private reserve banks was the Suffolk Bank of Boston. See also https://en.wikipedia.org/wiki/Suffolk_System https://en.wikipedia.org/wiki/Suffolk_System Going back to our story, let's say the net is 1 million dollars on a given day. Then one bank transfers 1 million of dollars of reserves to the other bank, which just consists of the reserve bank marking up one account and marking down the other account. What happens if Bank A doesn't have 1 million of reserves to spare? Well that depends on whether Bank A believes the situation is temporary or permanent. Banks hire liquidity management professionals for this reason. These are the people, like weathermen, that look at historical cash flow patterns and use statistics to try to minimize overall bank expenses. Cash pays no interest, but you pay a penalty if you need to borrow it. Reserves pay very little interest and you pay the same small penalty. So banks want to minimize holdings of both cash and reserves while maintaining smooth operation. If the reserve shortfall is believed to be temporary, then Bank A borrows the reserves from other banks in the overnight market. That overnight interest rate is the rate that the Federal reserve targets. Making sure that the entire banking system as a whole has enough reserves is the job of the Federal Reserve, which adds reserves to the banking system by purchasing bonds, and removes reserves by selling some of the bonds it purchased previously. Assuming the overall banking system has enough reserves, there will be some other bank in the system with excess reserves that is willing to lend to Bank A at the policy rate. If the Bank believes the reserve deficiency is longer lasting, the bank can tap the longer term funding markets by selling more commercial paper, or a longer term bond, or it can sell off some marketable asset (point being to go short something). This is again the job of professionals that manage the overall position of the bank. By means of going short something of longer duration, the bank will increase inflow from some other bank (the bank that provides financial services for the purchaser of the asset), and so will increase its own reserve holdings back to the level required. In the extreme case of some financial market disruption in which you can't sell assets to the private market, the bank could show up at the discount window of the Federal reserve and borrow money from the Fed, collateralized by some qualifying asset such as a government insured bond), and of course at a penalty rate. Again, banks want to avoid doing this but it's there as a last resort. Bottom line, banks don't send each other trucks filled with cash in pairwise relationships, they centralize their deposits in a clearinghouse and that handles reserve management. None of this interbank settlement requires cash. Banks do not get cash from each other. The use of vault cash is purely for purposes of customer demand. When a customer wants cash, the bank opens the vault. When the bank has excess cash, the bank sells some of the cash for reserves. When the bank has too little cash, it sells some of the reserves for cash. So banks can convert electronic reserves to physical cash, and that is where you get the trucks carrying cash from the government to the bank in a hub and spoke system rather than point to point. Cash is used only outside the banking system, to provide currency to bank customers.
imtringued 5y ago
A loan is just a negative bank balance. Interest is a fee that the bank charges and therefore the profit margin of the bank and the savers at the bank. When you pay the loan back you just end up with a $0 balance and interest has bounced back and forth between you and the bank. Money is destroyed in the sense that nobody has a positive balance at the end of the loan but when you add all negative and positive account balances together you end up with $0 so money doesn't really "exist" in a way that can be "destroyed".

imtringued 5y ago

Debtors go to the bank and promise to pay (e.g. through future work). This is a liability for the debtor and asset to the bank. The bank determines the risk of the promise and creates an equivalent amount of credit also known as bank money. By bank money I mean the balance on your account. That money is a liability for the bank and effectively a claim on your debt. It's like someone threw all the bonds in a blender and created $0.01 mini bonds. It's actually not much different from an investment fund with the huge caveat that the USD is a shared medium and has a mandatory insurance scheme. In fractional reserve banking banks do not take your deposits and give them to someone else. That should be obvious, because your deposits don't disappear, they are only gone once you spend them. The central bank also gives banks as many reserves as they need so deposits themselves aren't the limiting factor in money creation. It is capital requirements that limit loan creation. You should think of banking and money as an accounting system where regulations are intended to keep the banks alive, not to limit money creation as a goal in itself. It's the central bank's job to limit money creation and thereby limit inflation.