7 ms·

How money works? Well look into fractional reserve banking and do the math. If you’re a bank, you can just loan out 10-100 times what you have in assets and ask

by huijzer 10mo ago

How money works? Well look into fractional reserve banking and do the math. If you’re a bank, you can just loan out 10-100 times what you have in assets and ask say 5% interest. Then 5*10 to 5*100 is your annual interest to the bank. That’s why the Bible and Quran are against usury.

jbs789 10mo ago
This is not correct. For starters, loans are assets. Banks start with some capital, borrow in the form of deposits, and lend in the form of bonds, mortgages etc. The regulatory capital ratio determines how much capital they must hold to support the assets.
- staplers 10mo ago
  Loans are assets -1 = 1 And people wonder why finite natural resources skyrocket in value.
  - littlestymaar 10mo ago
    For every debt there's a debtor and a debtee. For the first debt is a liability, while it's an asset for the second.
    - staplers 9mo ago
      and liabilities are always paid back in full and never smoothed over with money printing bailouts.
      - littlestymaar 9mo ago
        I don't understand the point you're making. All kind of assets can lose value overnight, be it stocks or real estate.
        staplers 9mo ago
        Lending on no reserve secretly doubles the money supply, sometimes even more if repackaged multiple times. It creates a highly risky financial environment that taxpayers inevitably are forced to bailout (usually through layoffs and hyperinflation). Time and time again.
        immibis 9mo ago
        It's crazy how far you just tried to change the subject. At first you were claiming loans aren't assets, which is uncontroversially wrong. Now you're claiming lending creates money, which is a completely different statement, and uncontroversially true
  - somewhereoutth 10mo ago
    The best way to understand a loan is as the right to a future income stream (principal repayments and interest). The original debtor (the person/entity taking out the loan) establishes the credibility of that future income stream (based on income, expected returns on a project, etc) and sells it to the lender (usually a bank) for cash up front. Thus the loan is an asset on the bank's balance sheet, that is generating returns (assuming all goes to plan). Banks can and usually do sell on that asset to other parties. Conversely, when you deposit cash to a bank, you are actually creating a liability on the bank's balance sheet - as you might want your money back one day!
    - staplers 9mo ago
      And bankruptcies never happen and no money is created to bailout the lenders
- eru 9mo ago
  > The regulatory capital ratio determines how much capital they must hold to support the assets. That's one of the factors. But even in jurisdictions without regulations on capital ratio, banks tend to hold capital cushions. The Scottish 'free banking' era in the 18th and 19th century is instructive here. (Canada had a similar arrangement.) In Scotland during that time banks regularly had about 2/3 deposits and 1/3 capital to finance their balance sheet, despite no fixed regulatory obligations on capital ratios. Interestingly they barely held any reserves at all, perhaps 2% or less of assets. These banks were extraordinarily solid and stable. And the arrangement contributed to Scotland's rapid catching up to England during their Industrial Revolutions.
01HNNWZ0MV43FF 10mo ago
You can't loan more than you have, but fractional reserve means you can loan most of your assets while only keeping some liquid: https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
- staplers 10mo ago
  You can't loan more than you have You can when you control the ledgers. Even more easily when digital. Over 90% of all currency is digital.
Imustaskforhelp 10mo ago
I recently discovered narrow banking (https://www.narrowbanking.org/ https://www.narrowbanking.org/) which basically states the idea of narrow banking which can only make it so that the bank doesn't have the issues with fractional reserve banking if you are worried about it Stablecoins feel the most practical way I suppose for narrow banking although there is this UK bank and this Danish bank as well which are the two examples of narrow banking. Honestly I am sort of interested in gold pegged currencies right now because US Dollar (let's be honest) feels really shaky right now and even America's debt itself is fueled by it being de-facto currency and I am feeling like previously it helped but I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds. There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.
- staplers 10mo ago
  There already are some gold pegged stablecoins Which require blind faith in reserve numbers.
  - msla 10mo ago
    Hey, so does gold-backed currency! How do you know how much gold the government is holding? Ask them! How do you know the government isn't lying? Ask this question loudly enough and meet people with guns!
    - eru 9mo ago
      That's why you should bank with private counterparties, not the government. If you buy eg a gold ETF, you can ask all these questions without any guns coming out. You can also go and exchange them for physical gold whenever you feel like it. Without any guns coming out. If they break their promises, you can sue them. Without any guns coming out.
      - philipwhiuk 9mo ago
CraigJPerry 10mo ago
> fractional reserve banking and do the math all models are wrong but some are still useful. This model isn’t useful at all since the fraction was legislated to be 0 years ago.
- eru 9mo ago
  That's in the US. Canada for example never had any legal reserve requirements. However legal limits aren't the only ones that apply. Canadian banks still keep more than zero reserves around. The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold. A capital cushion is what makes your deposits stable, not reserves. If you have a big enough capital cushion, you can always go and liquidate some assets to get the reserves needed to satisfy withdrawal requests. Having some reserves on hand is just very convenient, so the customer doesn't have to wait.
  - CraigJPerry 9mo ago
    Canada is not an exception and operates via the same mechanism https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201551E https://lop.parl.ca/sites/PublicWebsite/default/en_CA/Resear... Fractional reserve is a model only for textbooks, it is not an accurate model of how the banking system works in most western economies with a central bank and sovereign currency today. >> The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold Well this is usually the biggest of several limitations which impact whether a loan would be profitable to make for a bank or not so i don't entirely disagree but this is a legislative control, there's no "economic terms" here because in general no school of economics understands this or has anything to say about this control which you correctly point out exists and is central to loan decision making. People can argue about the degree of centrality because it's not the only factor so let me put it this way: it's central in a way which any notion of "fractional reserve" is simply not.
    - eru 9mo ago
      Your link barely says anything about private sector money creation and doesn't contradict what I said. I'm confused. Your view of fractional reserve banking is rather.. unorthodox. Pray, tell me, why do banks bother with deposits, then?
dghlsakjg 10mo ago
That’s not how banking works. Banks cannot lend “10–100× their assets.” Loans are assets. Deposits are liabilities. What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×. The interest math is wrong too. Banks pay interest on deposits, absorb defaults, cover operating costs, hold capital, and meet liquidity rules. Net margins are about 1–3%, not 50–500%. Fractional reserve banking does not mean infinite money or risk free profit. It means deposits are not 100% cash backed (because they have loaned out a portion of your deposit). This is a popular myth, not “doing the math”. What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.
- mothballed 10mo ago
  It can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero) , and the other regulations surrounding that aren't so cleanly understood in a neat formula.
  - dghlsakjg 10mo ago
    Extremely simplified: When I deposit a dollar, the bank records a $1 deposit liability. If the bank makes a $1 loan, it creates a new $1 deposit for the borrower. If that dollar is spent and redeposited, deposits increase even though the amount of base money has not. It looks like multiplication, but what’s really happening is that loans and deposits are expanding together on the balance sheet. The bank is not creating wealth out of nothing. It now has matching assets (loans owed to it) and liabilities (deposits owed to customers), backed by capital that absorbs risk. With reserve ratios effectively zero, lending is constrained by capital requirements and risk management, not by reserves. Banks cannot recirculate a single dollar endlessly without sufficient capital.
    - mothballed 10mo ago
      They don't create wealth out of nothing. They capture, and potentially create, wealth by offering financial services including lending. The differences between the positive interest paid to depositors and the loan interest, after covering risk and other costs, is the wealth they've captured/created for themselves. I don't think anyone is under the illusion that credit expansion itself creates wealth in the sense of more dollars moving around means more wealth. I think the relavent point here is that this form of credit expansion does expand the numerical value of deposits ("create money") which has asymmetric advantages to the bank. Due to having a central bank, the banks are basically acting as arms of the federal government when they do this. The payoff the banks get from this is capturing the interest differential on these expanded credits as well as benefitting from the Cantillon Effect whereby they usually have prioritized access to new money entering the economy.
Aunche 10mo ago
> That’s why the Bible and Quran are against usury. That's why Christian and Muslim (to a lesser extent since they exploited loopholes) nations relied on Jewish financiers. It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.
- eru 9mo ago
  > It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens. You are making it a bit too easy on yourself: these days we can create an arbitrary number of 'tokens', ie fiat money. The amount we create is limited by the amount of inflation we want to tolerate. If someone just sits on their tokens, they don't contribute to inflation, so we can print more. (But take them out of circulation, if the hoarders decide to spend.) Just to be clear: I agree with what you are arguing for! But your argument is a bit too simple to work in modern times: legalising interest payments is still a good idea, even when we can create an arbitrary number of tokens. But the reasoning is a bit more complicated.
antonvs 10mo ago
> That’s why the Bible and Quran are against usury. The problem with that is they deny the existence of the time value of money, which is essentially a mathematical fact. It's why Islamic banks come up with various workarounds to be able to charge the equivalent of interest.
aleph_minus_one 9mo ago
> That’s why the Bible and Quran are against usury. Now let's biblical exegesis to define what is legitimate interest and usury. The "good" (or "bad"?) thing about these holy scriptures is that they can be interpreted quite freely to fit a personal or institutional agenda.
- eru 9mo ago
  That's why you have the Pope or the Supreme Court to tell you what the holy scriptures mean.
  - huijzer 9mo ago
    There are many Christians very fervent opponents of listening to such authorities and stick to the Bible itself. Nowhere in the Bible for example it is written that one can pay off sins by giving money to some authority. But someone had to pay for the Saint Peter’s Basilica so there was an incentive to adjust scripture.
    - eru 9mo ago
      Well, that's about as valid as listening to sovereign citizens' interpretation of the US constitution. (At least from the Catholic point of view as far as I can tell.) > Nowhere in the Bible for example it is written that one can pay off sins by giving money to some authority. I'm no expert but doesn't James 2:26 says "Faith without works is dead."? Surely giving some money (that you had to work hard for!) to the greatest charity in the world (the Catholic church) should count as a good work? (But I'm just playing devil's advocate here. I don't know what their official reasoning is.)
      - aleph_minus_one 9mo ago
        > Well, that's about as valid as listening to sovereign citizens' interpretation of the US constitution. (At least from the Catholic point of view as far as I can tell.) From an "axiomatic perspective" this means accepting much more encompassing axioms than the holy scripture; such a "proof" requires much more than "the Bible/Quran says" as huijzer implicitly used in his argument "That’s why the Bible and Quran are against usury.", but more like "the Bible says and we additionally accept the following axioms that imply that the Pope's interpretation of the Bible is the correct one".
TZubiri 9mo ago
This is a common misconception, thinking that fractional reserve banking is the way in which banks lend. In actuality it's a limitation to how banks lend. Without fractional reserve rules the banks could lend their money infinitely. I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.
- eru 9mo ago
  > Without fractional reserve rules the banks could lend their money infinitely. What's that supposed to mean? > I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it. That's a bit silly. Yes, when you get a loan and just let the money sit in your account, the bank can create the loan/deposit pair out of thin air (modulo legal requirements). The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early.
  - imtringued 9mo ago
    >The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early. No, you don't get it. Imagine if there was a single bank and no cash withdrawals. The bank can't run out of liquidity, ever. If you buy something from a company, the money lands in the bank account of the company, which is managed by the same bank. This means as long as there is no cross bank transfer, there is no limit to how much money can be created. Now you might argue that this is a bit unrealistic, but at least in principle you could artificially engineer a situation like that even in the current system by having large corporations agree to use the same bank for money created by a specific loan. But here is where it gets weirder. Imagine if there are two banks now. Surely now the idea presented above breaks down the moment there is a cross bank transfer, right? Except it's not that simple. There is merely a limit to how much of the created money can leave the bank in one direction. If the cross bank transfers are balanced so that for every transfer from bank one to bank two, there is a transfer from bank two to bank one, then you are back in unlimited money territory. This means there is no static limit to the amount of money that can be created. The limit is dynamic and depends on the interactions between banks. Specifically, it depends on the liquidity/solvency of a given bank. This means this limit is purely practical and more akin to friction, rather than a fundamental restriction in the math of banking/accounting. It's like how computers aren't turing machines because they have finite amounts of memory. There is no limit to how much memory a computer can have as long as you can manage to build a computer with that much memory.

by huijzer 10mo ago

jbs789 10mo ago

This is not correct. For starters, loans are assets. Banks start with some capital, borrow in the form of deposits, and lend in the form of bonds, mortgages etc. The regulatory capital ratio determines how much capital they must hold to support the assets.

staplers 10mo ago
Loans are assets -1 = 1 And people wonder why finite natural resources skyrocket in value.
- littlestymaar 10mo ago
  For every debt there's a debtor and a debtee. For the first debt is a liability, while it's an asset for the second.
  - staplers 9mo ago
    and liabilities are always paid back in full and never smoothed over with money printing bailouts.
    - littlestymaar 9mo ago
      I don't understand the point you're making. All kind of assets can lose value overnight, be it stocks or real estate.
      - staplers 9mo ago
        Lending on no reserve secretly doubles the money supply, sometimes even more if repackaged multiple times. It creates a highly risky financial environment that taxpayers inevitably are forced to bailout (usually through layoffs and hyperinflation). Time and time again.
        immibis 9mo ago
        It's crazy how far you just tried to change the subject. At first you were claiming loans aren't assets, which is uncontroversially wrong. Now you're claiming lending creates money, which is a completely different statement, and uncontroversially true
- somewhereoutth 10mo ago
  The best way to understand a loan is as the right to a future income stream (principal repayments and interest). The original debtor (the person/entity taking out the loan) establishes the credibility of that future income stream (based on income, expected returns on a project, etc) and sells it to the lender (usually a bank) for cash up front. Thus the loan is an asset on the bank's balance sheet, that is generating returns (assuming all goes to plan). Banks can and usually do sell on that asset to other parties. Conversely, when you deposit cash to a bank, you are actually creating a liability on the bank's balance sheet - as you might want your money back one day!
  - staplers 9mo ago
    And bankruptcies never happen and no money is created to bailout the lenders
eru 9mo ago
> The regulatory capital ratio determines how much capital they must hold to support the assets. That's one of the factors. But even in jurisdictions without regulations on capital ratio, banks tend to hold capital cushions. The Scottish 'free banking' era in the 18th and 19th century is instructive here. (Canada had a similar arrangement.) In Scotland during that time banks regularly had about 2/3 deposits and 1/3 capital to finance their balance sheet, despite no fixed regulatory obligations on capital ratios. Interestingly they barely held any reserves at all, perhaps 2% or less of assets. These banks were extraordinarily solid and stable. And the arrangement contributed to Scotland's rapid catching up to England during their Industrial Revolutions.

01HNNWZ0MV43FF 10mo ago

You can't loan more than you have, but fractional reserve means you can loan most of your assets while only keeping some liquid: https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

staplers 10mo ago
You can't loan more than you have You can when you control the ledgers. Even more easily when digital. Over 90% of all currency is digital.

Imustaskforhelp 10mo ago

I recently discovered narrow banking (https://www.narrowbanking.org/ https://www.narrowbanking.org/) which basically states the idea of narrow banking which can only make it so that the bank doesn't have the issues with fractional reserve banking if you are worried about it Stablecoins feel the most practical way I suppose for narrow banking although there is this UK bank and this Danish bank as well which are the two examples of narrow banking. Honestly I am sort of interested in gold pegged currencies right now because US Dollar (let's be honest) feels really shaky right now and even America's debt itself is fueled by it being de-facto currency and I am feeling like previously it helped but I feel like debating that even America itself would benefit from if less foreign nations held US treasury bonds. There already are some gold pegged stablecoins and theoretically with things like revolut or some instant way to sell crypto without too much hassle/losses and transfering it easily, its rather possible to do such.

staplers 10mo ago
There already are some gold pegged stablecoins Which require blind faith in reserve numbers.
- msla 10mo ago
  Hey, so does gold-backed currency! How do you know how much gold the government is holding? Ask them! How do you know the government isn't lying? Ask this question loudly enough and meet people with guns!
  - eru 9mo ago
    That's why you should bank with private counterparties, not the government. If you buy eg a gold ETF, you can ask all these questions without any guns coming out. You can also go and exchange them for physical gold whenever you feel like it. Without any guns coming out. If they break their promises, you can sue them. Without any guns coming out.
    - philipwhiuk 9mo ago

CraigJPerry 10mo ago

> fractional reserve banking and do the math all models are wrong but some are still useful. This model isn’t useful at all since the fraction was legislated to be 0 years ago.

eru 9mo ago
That's in the US. Canada for example never had any legal reserve requirements. However legal limits aren't the only ones that apply. Canadian banks still keep more than zero reserves around. The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold. A capital cushion is what makes your deposits stable, not reserves. If you have a big enough capital cushion, you can always go and liquidate some assets to get the reserves needed to satisfy withdrawal requests. Having some reserves on hand is just very convenient, so the customer doesn't have to wait.
- CraigJPerry 9mo ago
  Canada is not an exception and operates via the same mechanism https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201551E https://lop.parl.ca/sites/PublicWebsite/default/en_CA/Resear... Fractional reserve is a model only for textbooks, it is not an accurate model of how the banking system works in most western economies with a central bank and sovereign currency today. >> The more useful limitation in economic terms and in legal terms is on the amount of capital banks need to hold Well this is usually the biggest of several limitations which impact whether a loan would be profitable to make for a bank or not so i don't entirely disagree but this is a legislative control, there's no "economic terms" here because in general no school of economics understands this or has anything to say about this control which you correctly point out exists and is central to loan decision making. People can argue about the degree of centrality because it's not the only factor so let me put it this way: it's central in a way which any notion of "fractional reserve" is simply not.
  - eru 9mo ago
    Your link barely says anything about private sector money creation and doesn't contradict what I said. I'm confused. Your view of fractional reserve banking is rather.. unorthodox. Pray, tell me, why do banks bother with deposits, then?

dghlsakjg 10mo ago

That’s not how banking works. Banks cannot lend “10–100× their assets.” Loans are assets. Deposits are liabilities. What limits lending is capital, not reserves, and leverage is tightly regulated at roughly 10× equity, not 100×. The interest math is wrong too. Banks pay interest on deposits, absorb defaults, cover operating costs, hold capital, and meet liquidity rules. Net margins are about 1–3%, not 50–500%. Fractional reserve banking does not mean infinite money or risk free profit. It means deposits are not 100% cash backed (because they have loaned out a portion of your deposit). This is a popular myth, not “doing the math”. What you’re describing only works in an absurd edge case where people borrow money just to park it and pay interest without spending it. That’s not fractional reserve banking, that’s a broken thought experiment.

mothballed 10mo ago
It can be difficult to figure out whether the theoretical limit is 10x or 100x in my mind because there isn't a reserve ratio federally (well, there is one, but it's zero) , and the other regulations surrounding that aren't so cleanly understood in a neat formula.
- dghlsakjg 10mo ago
  Extremely simplified: When I deposit a dollar, the bank records a $1 deposit liability. If the bank makes a $1 loan, it creates a new $1 deposit for the borrower. If that dollar is spent and redeposited, deposits increase even though the amount of base money has not. It looks like multiplication, but what’s really happening is that loans and deposits are expanding together on the balance sheet. The bank is not creating wealth out of nothing. It now has matching assets (loans owed to it) and liabilities (deposits owed to customers), backed by capital that absorbs risk. With reserve ratios effectively zero, lending is constrained by capital requirements and risk management, not by reserves. Banks cannot recirculate a single dollar endlessly without sufficient capital.
  - mothballed 10mo ago
    They don't create wealth out of nothing. They capture, and potentially create, wealth by offering financial services including lending. The differences between the positive interest paid to depositors and the loan interest, after covering risk and other costs, is the wealth they've captured/created for themselves. I don't think anyone is under the illusion that credit expansion itself creates wealth in the sense of more dollars moving around means more wealth. I think the relavent point here is that this form of credit expansion does expand the numerical value of deposits ("create money") which has asymmetric advantages to the bank. Due to having a central bank, the banks are basically acting as arms of the federal government when they do this. The payoff the banks get from this is capturing the interest differential on these expanded credits as well as benefitting from the Cantillon Effect whereby they usually have prioritized access to new money entering the economy.

Aunche 10mo ago

> That’s why the Bible and Quran are against usury. That's why Christian and Muslim (to a lesser extent since they exploited loopholes) nations relied on Jewish financiers. It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens.

eru 9mo ago
> It does not make sense for the exchange of good and services among one another to be held back because someone deciding to sit on a pile of tokens. You are making it a bit too easy on yourself: these days we can create an arbitrary number of 'tokens', ie fiat money. The amount we create is limited by the amount of inflation we want to tolerate. If someone just sits on their tokens, they don't contribute to inflation, so we can print more. (But take them out of circulation, if the hoarders decide to spend.) Just to be clear: I agree with what you are arguing for! But your argument is a bit too simple to work in modern times: legalising interest payments is still a good idea, even when we can create an arbitrary number of tokens. But the reasoning is a bit more complicated.

antonvs 10mo ago

> That’s why the Bible and Quran are against usury. The problem with that is they deny the existence of the time value of money, which is essentially a mathematical fact. It's why Islamic banks come up with various workarounds to be able to charge the equivalent of interest.

aleph_minus_one 9mo ago

> That’s why the Bible and Quran are against usury. Now let's biblical exegesis to define what is legitimate interest and usury. The "good" (or "bad"?) thing about these holy scriptures is that they can be interpreted quite freely to fit a personal or institutional agenda.

eru 9mo ago
That's why you have the Pope or the Supreme Court to tell you what the holy scriptures mean.
- huijzer 9mo ago
  There are many Christians very fervent opponents of listening to such authorities and stick to the Bible itself. Nowhere in the Bible for example it is written that one can pay off sins by giving money to some authority. But someone had to pay for the Saint Peter’s Basilica so there was an incentive to adjust scripture.
  - eru 9mo ago
    Well, that's about as valid as listening to sovereign citizens' interpretation of the US constitution. (At least from the Catholic point of view as far as I can tell.) > Nowhere in the Bible for example it is written that one can pay off sins by giving money to some authority. I'm no expert but doesn't James 2:26 says "Faith without works is dead."? Surely giving some money (that you had to work hard for!) to the greatest charity in the world (the Catholic church) should count as a good work? (But I'm just playing devil's advocate here. I don't know what their official reasoning is.)
    - aleph_minus_one 9mo ago
      > Well, that's about as valid as listening to sovereign citizens' interpretation of the US constitution. (At least from the Catholic point of view as far as I can tell.) From an "axiomatic perspective" this means accepting much more encompassing axioms than the holy scripture; such a "proof" requires much more than "the Bible/Quran says" as huijzer implicitly used in his argument "That’s why the Bible and Quran are against usury.", but more like "the Bible says and we additionally accept the following axioms that imply that the Pope's interpretation of the Bible is the correct one".

TZubiri 9mo ago

This is a common misconception, thinking that fractional reserve banking is the way in which banks lend. In actuality it's a limitation to how banks lend. Without fractional reserve rules the banks could lend their money infinitely. I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it.

eru 9mo ago
> Without fractional reserve rules the banks could lend their money infinitely. What's that supposed to mean? > I like Richard Wagner's theories/research on the subject, as in he actually asked for a loan and went through the books of the bank to verify where the money came from, it came from nowhere, they just credited their account and that's it. That's a bit silly. Yes, when you get a loan and just let the money sit in your account, the bank can create the loan/deposit pair out of thin air (modulo legal requirements). The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early.
- imtringued 9mo ago
  >The constraint for the bank comes when you start spending that money. Most people take loans to spend the money, eg a company might invest in some new machinery or you might buy a house. The Mr Wagner in your story stopped his investigation too early. No, you don't get it. Imagine if there was a single bank and no cash withdrawals. The bank can't run out of liquidity, ever. If you buy something from a company, the money lands in the bank account of the company, which is managed by the same bank. This means as long as there is no cross bank transfer, there is no limit to how much money can be created. Now you might argue that this is a bit unrealistic, but at least in principle you could artificially engineer a situation like that even in the current system by having large corporations agree to use the same bank for money created by a specific loan. But here is where it gets weirder. Imagine if there are two banks now. Surely now the idea presented above breaks down the moment there is a cross bank transfer, right? Except it's not that simple. There is merely a limit to how much of the created money can leave the bank in one direction. If the cross bank transfers are balanced so that for every transfer from bank one to bank two, there is a transfer from bank two to bank one, then you are back in unlimited money territory. This means there is no static limit to the amount of money that can be created. The limit is dynamic and depends on the interactions between banks. Specifically, it depends on the liquidity/solvency of a given bank. This means this limit is purely practical and more akin to friction, rather than a fundamental restriction in the math of banking/accounting. It's like how computers aren't turing machines because they have finite amounts of memory. There is no limit to how much memory a computer can have as long as you can manage to build a computer with that much memory.