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> Alice loans Bob $20 and then Bob goes and loans $20 to Charlie. The world now has $40 "more" in it, and remains that way until the loan is settled. Alice has

> Alice loans Bob $20 and then Bob goes and loans $20 to Charlie. The world now has $40 "more" in it, and remains that way until the loan is settled. Alice has $30 to spend. Bob and Charlie each have $10. After the loans you described Alice and Bob have $10 and Charlie has $30. That’s the same.

lesuorac 4y ago
There's only $50 physical dollars sure. But if they take all of their money out of the bank then Alice has $30, Charlie has $30 and Bob has $30 which adds up to $90 (aka $40 more). Charlie and Bob still owe $40 combined but the point is not the net amount of dollars change its that the assets/liabilities increased by $40.
- williamcotton 4y ago
  There is no bank in his description.
  - lesuorac 4y ago
    w/e, `sed 's/banks/Bob and Charlie/'`. Do you not get what he was getting at with the extra $40? https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier
    - williamcotton 4y ago
      I understand how debits and credits work in fractional reserve banking and how money is created in such a system. I don’t understand whatever OP was describing.
- williamcotton 4y ago
  Now that I have more time… Alice has: $10 and Bob’s IOUs for $20 Bob has: $10 and Charlie’s IOUs for $20 Charlie has: $30 Will Alice take Charlie’s IOUs for $20 from Bob to settle? Will Target take Charlie’s IOUs for $20 from Bob in exchange for socks and underwear? The answer is no. Charlie’s IOUs and Bob’s IOUs are like Lloyd’s Samsonite briefcase filled with scraps of paper in Dumb and Dumber. Worthless. However, if Alice deposited $20 in a bank and is issued a debit card for that bank, and then if Bob went to another bank and was loaned $20 and issued a debit card for that other bank, and then Charlie went to yet a third bank and did the same… Alice, Bob and Charlie have: $10 cash and $20 on their debit cards. Bob and Charlie also owe the bank money… but in the meantime all three can go to Target and buy $20 worth of socks and underwear and still have $10 in cash. If Alice, Bob and Charlie have a positive balance in their checking accounts, ACH will ultimately (via hand waving) handle settlement between Target’s bank and Alice, Bob and Charlie’s banks. When Alice deposited $20 at the bank one real and two accounting things happened: the bank put the $20 bill in their safe and debited $20 to their cash assets and credited $20 to Alice’s checking account, a liability on the banks books. This is called double-entry accounting. The same double-entry happens with a loan: Bob’s IOUs are a kinda risky asset but they are still balanced with $20 credited to Bob’s checking account. The system works for a few reasons, but mainly because everyone trusts each other’s banks and our banks trust each other. The Federal government instills a lot of trust and stability to the whole system. Banks can trade in cash, bank IOUs, and Target, Alice, Bob and Charlie IOUs and that enables quite a bit of commercial activity.

lesuorac 4y ago

There's only $50 physical dollars sure. But if they take all of their money out of the bank then Alice has $30, Charlie has $30 and Bob has $30 which adds up to $90 (aka $40 more). Charlie and Bob still owe $40 combined but the point is not the net amount of dollars change its that the assets/liabilities increased by $40.

williamcotton 4y ago
There is no bank in his description.
- lesuorac 4y ago
  w/e, `sed 's/banks/Bob and Charlie/'`. Do you not get what he was getting at with the extra $40? https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier
  - williamcotton 4y ago
    I understand how debits and credits work in fractional reserve banking and how money is created in such a system. I don’t understand whatever OP was describing.
williamcotton 4y ago
Now that I have more time… Alice has: $10 and Bob’s IOUs for $20 Bob has: $10 and Charlie’s IOUs for $20 Charlie has: $30 Will Alice take Charlie’s IOUs for $20 from Bob to settle? Will Target take Charlie’s IOUs for $20 from Bob in exchange for socks and underwear? The answer is no. Charlie’s IOUs and Bob’s IOUs are like Lloyd’s Samsonite briefcase filled with scraps of paper in Dumb and Dumber. Worthless. However, if Alice deposited $20 in a bank and is issued a debit card for that bank, and then if Bob went to another bank and was loaned $20 and issued a debit card for that other bank, and then Charlie went to yet a third bank and did the same… Alice, Bob and Charlie have: $10 cash and $20 on their debit cards. Bob and Charlie also owe the bank money… but in the meantime all three can go to Target and buy $20 worth of socks and underwear and still have $10 in cash. If Alice, Bob and Charlie have a positive balance in their checking accounts, ACH will ultimately (via hand waving) handle settlement between Target’s bank and Alice, Bob and Charlie’s banks. When Alice deposited $20 at the bank one real and two accounting things happened: the bank put the $20 bill in their safe and debited $20 to their cash assets and credited $20 to Alice’s checking account, a liability on the banks books. This is called double-entry accounting. The same double-entry happens with a loan: Bob’s IOUs are a kinda risky asset but they are still balanced with $20 credited to Bob’s checking account. The system works for a few reasons, but mainly because everyone trusts each other’s banks and our banks trust each other. The Federal government instills a lot of trust and stability to the whole system. Banks can trade in cash, bank IOUs, and Target, Alice, Bob and Charlie IOUs and that enables quite a bit of commercial activity.