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This depends very much on the definition of "all US dollars in existence". If I put a dollar in my savings account and the bank loans it out to someone else, w

This depends very much on the definition of "all US dollars in existence". If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? It's on my balance, but it's in their pocket. How many dollars are there? This is the question of money supply, it's very complicated but the TLDR is there is no fixed "all dollar" amount. This scenario just further muddies the question, but also explains why stable coins keep central bankers awake at night.

tshaddox 4y ago
> If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? Note that for every dollar you put into a U.S. bank account that's subject to reserve requirements (I believe just checking accounts?), the bank can loan out much more than 1 dollar, based on the legally required liquidity ratio or "reserve requirement ratio." Note also that since 2020 that reserve requirement ratio is zero.
- whatshisface 4y ago
  That is a common misconception that got started as a misunderstanding of Milton Friedman's (reasonable) money multiplier equation. Banks cannot lend more money than they have - if they could, then you could start a bank and multiply your own money. The money multiplication that banks can do is take the money that party B has received for selling something and loan it back to to party A, who can use it to buy something from party B again. A zero percent reserve requirement does not lead in all cases to infinite inflation, because banks are also afraid of a default. Bank's desire to avoid defaults adds another fraction to their reserve ratio and limits money multiplication even when the Fed would technically allow it to proceed infinitely. Another thing you should know is that Fed chairmen have said that Friedman's equation underestimates bank's ability to create money, because in practice the Fed will allow any bank that desires liquidity to borrow it. The Fed, especially post-great-depression, will happily loan banks however much they needed to cover their reserve requirements, meaning that even before the ratio was set at zero, the number of times a single dollar could be spent was decided primarily by a balance of interest rates and fear of defaults.
  - tshaddox 4y ago
    Is there a misconception in the text of my previous comment? You seem to be describing a misconception that as far as I can tell isn't one I hold or one I expressed in my previous comment.
    - stonemetal12 4y ago
      > loan out much more than 1 dollar They can't loan out more than the deposits they have.
      - charcircuit 4y ago
        Why not? A bank could have 0 depsitors, but could have received money from investors.
        majormajor 4y ago
        That's not the sort of bank being talked about here in terms of "money multiplication." That's more like a VC firm or other institution. If you could open a bank, accept 10 dollars in deposits, and loan out 100, you'd do it! You'd loan it out to your best friend and keep the cycle going until you're rich AF. You can't loan out more than you have, but even loaning out 10 of 10 dollars has some risk - if someone comes for their money and you can't get your money back from the people you loaned it to. And it definitely increases money in circulation since it's not parked there. But it's not a magic money printing machine.
        stonemetal12 4y ago
        The Federal Reserve says you may loan out 100% of your deposits. They didn't say you could loan out however much you have in investors' money, or 200% of your deposits.
    - lottin 4y ago
      The misconception in your comment is that the reserve requirement is what limits a bank's ability to create money by extending loans.
- jcranmer 4y ago
  The reserve requirement ratio does not do what you think it does. It is the amount of money that the bank is required to keep in its account at a Federal Reserve Bank as a ratio of deposits. Note that literal cash sitting in a vault does not count one iota towards satisfying this reserve ratio. Bank regulations have moved one from having such a specific requirement. Nowadays, you essentially need a minimum amount of equity per risk-weighted assets. So you need something like $8 in cash for every $100 in loans you give out.
vanjajaja1 4y ago
> but also explains why stable coins keep central bankers awake at night. Can you elaborate on this?
- whatshisface 4y ago
  The sounds of the crashes are very loud and occur all hours.
majormajor 4y ago
There are far more "fake dollars" in the world than just that, even. Ask someone with non-cash investments their net worth. They'll give you a number that includes a lot of non-cash assets. They can borrow against them. They expect to be able to cash many of them out, so they often spend as if they're "real" dollars. But they aren't "real" printed dollars.
vishnugupta 4y ago
> If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? I don't think that's how banks work; at least in the US and England. Below is an extract from an excellent article/tutorial from The Bank of England[1] 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: 1. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. 2. 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. [1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

tshaddox 4y ago

> If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? Note that for every dollar you put into a U.S. bank account that's subject to reserve requirements (I believe just checking accounts?), the bank can loan out much more than 1 dollar, based on the legally required liquidity ratio or "reserve requirement ratio." Note also that since 2020 that reserve requirement ratio is zero.

whatshisface 4y ago
That is a common misconception that got started as a misunderstanding of Milton Friedman's (reasonable) money multiplier equation. Banks cannot lend more money than they have - if they could, then you could start a bank and multiply your own money. The money multiplication that banks can do is take the money that party B has received for selling something and loan it back to to party A, who can use it to buy something from party B again. A zero percent reserve requirement does not lead in all cases to infinite inflation, because banks are also afraid of a default. Bank's desire to avoid defaults adds another fraction to their reserve ratio and limits money multiplication even when the Fed would technically allow it to proceed infinitely. Another thing you should know is that Fed chairmen have said that Friedman's equation underestimates bank's ability to create money, because in practice the Fed will allow any bank that desires liquidity to borrow it. The Fed, especially post-great-depression, will happily loan banks however much they needed to cover their reserve requirements, meaning that even before the ratio was set at zero, the number of times a single dollar could be spent was decided primarily by a balance of interest rates and fear of defaults.
- tshaddox 4y ago
  Is there a misconception in the text of my previous comment? You seem to be describing a misconception that as far as I can tell isn't one I hold or one I expressed in my previous comment.
  - stonemetal12 4y ago
    > loan out much more than 1 dollar They can't loan out more than the deposits they have.
    - charcircuit 4y ago
      Why not? A bank could have 0 depsitors, but could have received money from investors.
      - majormajor 4y ago
        That's not the sort of bank being talked about here in terms of "money multiplication." That's more like a VC firm or other institution. If you could open a bank, accept 10 dollars in deposits, and loan out 100, you'd do it! You'd loan it out to your best friend and keep the cycle going until you're rich AF. You can't loan out more than you have, but even loaning out 10 of 10 dollars has some risk - if someone comes for their money and you can't get your money back from the people you loaned it to. And it definitely increases money in circulation since it's not parked there. But it's not a magic money printing machine.
      - stonemetal12 4y ago
        The Federal Reserve says you may loan out 100% of your deposits. They didn't say you could loan out however much you have in investors' money, or 200% of your deposits.
  - lottin 4y ago
    The misconception in your comment is that the reserve requirement is what limits a bank's ability to create money by extending loans.
jcranmer 4y ago
The reserve requirement ratio does not do what you think it does. It is the amount of money that the bank is required to keep in its account at a Federal Reserve Bank as a ratio of deposits. Note that literal cash sitting in a vault does not count one iota towards satisfying this reserve ratio. Bank regulations have moved one from having such a specific requirement. Nowadays, you essentially need a minimum amount of equity per risk-weighted assets. So you need something like $8 in cash for every $100 in loans you give out.

vanjajaja1 4y ago

> but also explains why stable coins keep central bankers awake at night. Can you elaborate on this?

whatshisface 4y ago
The sounds of the crashes are very loud and occur all hours.

majormajor 4y ago

There are far more "fake dollars" in the world than just that, even. Ask someone with non-cash investments their net worth. They'll give you a number that includes a lot of non-cash assets. They can borrow against them. They expect to be able to cash many of them out, so they often spend as if they're "real" dollars. But they aren't "real" printed dollars.

vishnugupta 4y ago

> If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? I don't think that's how banks work; at least in the US and England. Below is an extract from an excellent article/tutorial from The Bank of England[1] 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: 1. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. 2. 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. [1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...