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> When I borrow $10k at the bank, money is created This is a perfect example of the kind of misunderstanding the OP was talking about. Money is created by depo
by cchooper 18y ago
> When I borrow $10k at the bank, money is created
This is a perfect example of the kind of misunderstanding the OP was talking about. Money is created by depositing money at a bank, not by the bank lending it. Banks only lend base money, and it's illegal for them to print that.
Of course, people usually don't take the cash loan directly, but have the money deposited at the bank instead, which results in money (in the form of current account balances) being created. But it's the act of depositing, not the act of borrowing, that creates the money. If they took the cash, no money would be created.
- deleted 18y ago[deleted]
- wlievens 18y agoBanks don't create money. When you deposit money, they give you the promise that you can have it back, but you are no longer owner of the money. Similarly, when you borrow money, they let you have some of their money (when you withdraw) on promise that you pay it back, with interest. Banks don't create money. Government institutions do.
- cchooper 18y agoA current account is a bit like a short-term bond. It is a valuable commodity that is created by banks and can be traded in the market. The difference is that bank trading systems allow current account balances to be used directly as payment, without having to be converted into cash first. Therefore the current accounts themselves are being used as payment, and count as money in their own right. This is why current account balances are counted in all the official measures of money quantities, including the most strict measures such as M0.
- natrius 18y agoAccount balances are not a part of M0. M0 is all of the bills and coins in existence. Your bank does not have all of the bills to back all of its customers account balances. Account balances are part of M1.
- deleted 18y ago[deleted]
- likpok 18y agoThere is a subtle but important difference between money and currency. Only government creates currency, which is-a money. However, both banks and government can create money in other ways, such as through the fractional reserve system or through buying/selling securities (government only).
- j2d2 18y agoThis is a bit of a mistake because fractional lending is creating money. If I deposit $100 in a bank and that bank lends you $100, $200 is in use even though only $100 exists.
- cchooper 18y agoIf you deposit $100 at a bank then you will receive a $100 bank account. That account is the additional money. It remains money whether or not the bank lends out your original $100. So the money is created in the act of depositing, not the act of lending.
- j2d2 18y agoIf the bank doesn't lend, no additional money is created. They could just hold on to it.
- cchooper 18y agoWhether they hold onto it or not is irrelevant. If a company issues a bond, but doesn't spend the money it has been loaned, the bond still exists. If the bank issues you with a current account, but doesn't spend the money you loaned it, the current account still exists. The current account is the new money. It exists. You could spend it by transferring it and yet the bank still has the original $100.
- j2d2 18y agoI stand by what I've said thus far and am finished.
- astine 18y agoIf my company deposits a sun at a bank, my accountants will treat the deposit as an asset. If I then take out a loan from the same bank, that 'new' money is then treated as an asset. Companies and banks can trade on these 'assets,' in the form of stocks and bonds. In this way, the same money can be treated as an asset several times and the money supply, in the form of credit, can be effectively expanded. Reputable banks wouldn't allow this, but it's completely legal.
- pelle 18y agoYou are both right. When it comes to the Money Supply economists talk about M0 which is actual currency issued by the federal reserve (or your countries equivalent). Then there are M1 to M3 which are count increasingly less hard money and those do consists of money created when banks lend money in the fractional reserve system. Banks can only lend money when people deposit so in this way you are both right. For more see the wikipedia Money Supply page: http://en.wikipedia.org/wiki/Money_supply http://en.wikipedia.org/wiki/Money_supply