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You are talking about credit, not money. Banks create actual state-backed money, which can be physically (or more likely electronically) paid to a third party a

You are talking about credit, not money. Banks create actual state-backed money, which can be physically (or more likely electronically) paid to a third party after they've loaned it to you. A better example would be if you were in the bar alone, and had no money, and instead just wrote an IOU on a bit of paper with your contact details. If we lived in a mythical 100% trustful utopia, then the barman would just accept this as money and so would anyone else in future who the barman needed to pay for anything. But we obviously don't live in such a society so unfortunately no, not anyone can just create money!

seanhunter 4y ago
Banks don't create state-backed money either. The central bank creates money and gets it into the financial system by performing open market activities (eg buying treasuries with it) or depositing it into the accounts it holds with various banks.
- Kiro 4y ago
  No, the banks create money. If you've watched all these explainer videos surely you must understand basic FRB.
  - seanhunter 4y ago
    Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed. The explainer videos I have seen are wildly wrong. I learned this stuff by reading the Basel accords [2], working with banking regulators and central bankers, working on banks' capital reserve models etc. That is to say I know how this actually works because I have been inside the sausage-making process for good or ill - I didn't learn it second-hand from someone who probably also learned it second-hand which is the feel I get from these videos. Almost any time you see someone "explain" fractional reserve banking it is about 99% probably total bullshit. It's got to the point where "fractional reserve" is almost a trigger phrase for me - I know when I hear it that it is highly likely the speaker doesn't know what they are talking about. Almost like when you hear the word "fiat currency" you know it's very likely someone is going to try to shill you some crypto. An explanation which is not nonsense is here. [3] Fractional reserve banking means the bank doesn't need to keep the full amount of deposits in reserve, but can use some percentage to make loans. These loans are assets the bank has, but as with the example I gave above where you lend to a friend, no additional money is created in this process and when a bank does it, it's not fundamentally any different. [1] You can find the definitions of M1 and M2 money and a good explanation of what's included in the definition of "money" here https://www.investopedia.com/terms/m/moneysupply.asp https://www.investopedia.com/terms/m/moneysupply.asp [2] Which are not secret by the way - you don't have to be initiated into the templars or something to understand them. They are boring as all hell to read but otherwise reasonably understandable with a little bit of background https://www.bis.org/basel_framework/ https://www.bis.org/basel_framework/ [3] https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin...
    - tome 4y ago
      > Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. Yes, it creates credit that people think is money. I suspect that's a big problem with it. People think their money is in the bank. Instead the bank is just extending them some credit that they can pass on to others when they "purchase" something.
    - NovemberWhiskey 4y ago
      I feel like there are quite a lot of people here that do not understand that the relationship between theories of money and the actual day-to-day operations of banks is about as close as that between weather forecasting and umbrella manufacturing.
    - joelhaus 4y ago
      This is the way. It's too bad this can't be pinned to the top. Thanks for laying this out so clearly.
      - kgwgk 4y ago
        It may be clear but it's not correct. https://news.ycombinator.com/item?id=35108659 https://news.ycombinator.com/item?id=35108659
    - kgwgk 4y ago
      > Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed. When a bank gives someone a loan M1/M2 increases (unlike in your loan-between-friends example). The increase in "currency in circulation plus deposits" is the very thing that those numbers try to measure.
      - NovemberWhiskey 4y ago
        You assert that the act of individual act of lending creates the money - this is known as the credit creation theory of money; the GP asserts that the central bank creates the money and banks are just moving it around - this is known as the financial intermediation theory of money. That also happens to be the theory that underlies most banking regulation, like the various Basel Accords. You can look at it either way; or indeed you can take a third view, the fractional reserve theory of money, which suggests that the banking system as a whole creates money in aggregate, but not individual banks. All of these are theories with their adherents and none has yet been proven right or wrong. The only wrong position is a failure to acknowledge that discussion is still open on this point, or to believe that these are anything other than macroeconomic models.

seanhunter 4y ago

Banks don't create state-backed money either. The central bank creates money and gets it into the financial system by performing open market activities (eg buying treasuries with it) or depositing it into the accounts it holds with various banks.

Kiro 4y ago
No, the banks create money. If you've watched all these explainer videos surely you must understand basic FRB.
- seanhunter 4y ago
  Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed. The explainer videos I have seen are wildly wrong. I learned this stuff by reading the Basel accords [2], working with banking regulators and central bankers, working on banks' capital reserve models etc. That is to say I know how this actually works because I have been inside the sausage-making process for good or ill - I didn't learn it second-hand from someone who probably also learned it second-hand which is the feel I get from these videos. Almost any time you see someone "explain" fractional reserve banking it is about 99% probably total bullshit. It's got to the point where "fractional reserve" is almost a trigger phrase for me - I know when I hear it that it is highly likely the speaker doesn't know what they are talking about. Almost like when you hear the word "fiat currency" you know it's very likely someone is going to try to shill you some crypto. An explanation which is not nonsense is here. [3] Fractional reserve banking means the bank doesn't need to keep the full amount of deposits in reserve, but can use some percentage to make loans. These loans are assets the bank has, but as with the example I gave above where you lend to a friend, no additional money is created in this process and when a bank does it, it's not fundamentally any different. [1] You can find the definitions of M1 and M2 money and a good explanation of what's included in the definition of "money" here https://www.investopedia.com/terms/m/moneysupply.asp https://www.investopedia.com/terms/m/moneysupply.asp [2] Which are not secret by the way - you don't have to be initiated into the templars or something to understand them. They are boring as all hell to read but otherwise reasonably understandable with a little bit of background https://www.bis.org/basel_framework/ https://www.bis.org/basel_framework/ [3] https://www.investopedia.com/terms/f/fractionalreservebanking.asp https://www.investopedia.com/terms/f/fractionalreservebankin...
  - tome 4y ago
    > Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. Yes, it creates credit that people think is money. I suspect that's a big problem with it. People think their money is in the bank. Instead the bank is just extending them some credit that they can pass on to others when they "purchase" something.
  - NovemberWhiskey 4y ago
    I feel like there are quite a lot of people here that do not understand that the relationship between theories of money and the actual day-to-day operations of banks is about as close as that between weather forecasting and umbrella manufacturing.
  - joelhaus 4y ago
    This is the way. It's too bad this can't be pinned to the top. Thanks for laying this out so clearly.
    - kgwgk 4y ago
      It may be clear but it's not correct. https://news.ycombinator.com/item?id=35108659 https://news.ycombinator.com/item?id=35108659
  - kgwgk 4y ago
    > Fractional reserve banking absolutely does not create money[1]. It creates credit exactly the same as if you lend a friend of yours some of your money. You now have an asset (the loan) and your friend has a liability (the debt) and the amount of M1 or M2 money in supply has not changed. When a bank gives someone a loan M1/M2 increases (unlike in your loan-between-friends example). The increase in "currency in circulation plus deposits" is the very thing that those numbers try to measure.
    - NovemberWhiskey 4y ago
      You assert that the act of individual act of lending creates the money - this is known as the credit creation theory of money; the GP asserts that the central bank creates the money and banks are just moving it around - this is known as the financial intermediation theory of money. That also happens to be the theory that underlies most banking regulation, like the various Basel Accords. You can look at it either way; or indeed you can take a third view, the fractional reserve theory of money, which suggests that the banking system as a whole creates money in aggregate, but not individual banks. All of these are theories with their adherents and none has yet been proven right or wrong. The only wrong position is a failure to acknowledge that discussion is still open on this point, or to believe that these are anything other than macroeconomic models.