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I have been reading about this topic recently and still don't really understand how 'new money' is being created. In a loan, the bank creates an IOU that didn't
by lbsnake7 4y ago
I have been reading about this topic recently and still don't really understand how 'new money' is being created. In a loan, the bank creates an IOU that didn't exist before and doesn't point to a stack of $$ on the shelf. But it does point to the bank, and the bank itself has tons of customer deposits. And if I take that IOU and give it to a car dealership who puts it in their bank, for the transfer my bank will take actual money from the general pool of customer deposits. AND I have to pay back the loan which goes into the general pool. So while specific money isn't earmarked, the IOU represents money that the bank has right?
I guess a way to ask the question would be: if i were to liquidate all assets of a bank and call in every loan, would that be >= all customer deposits?
- rashkov 4y agoAlso been thinking about this. If you look at this article, read section titled “money creation process” https://en.m.wikipedia.org/wiki/Fractional-reserve_banking https://en.m.wikipedia.org/wiki/Fractional-reserve_banking If I deposit $5 in my bank account, and then the bank keeps $1 in reserve and lends out $4, then they just added $4 to the money supply. I can withdraw my $5, and the loan-taker can withdraw their $4. This is possible because there’s a reserve pool of money which is not loaned out, and because people tend to just leave the money in their account. At least that’s my understanding. Happy to be corrected
- scrlk 4y agoFor a solvent bank, assets >= liabilities. Customer deposits are liabilities on a balance sheet.