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It's entirely true, it's even in the name. In a "Fractional Reserve" System banks only have to maintain a fraction of what they lend out in reserve. When you

It's entirely true, it's even in the name. In a "Fractional Reserve" System banks only have to maintain a fraction of what they lend out in reserve. When you borrow money from a bank you are literally creating new money. But don't believe me, Wikipedia is your friend.

philwelch 11y ago
You're thinking fractional reserve means, for a 1/4 fraction, I put $1000 in my savings account and the bank can lend you $4000. That's not true. In reality, I put $1000 in my bank account. But the bank only needs $250 cash in reserve backing that account, and can lend out the other $750. Of the bank's $1000 in assets, 1/4 must be hard cash and the rest can be debts payable to the bank. The bank charges interest to borrowers, and pays interest to depositors, and makes its profit off the margin.
- RobertoG 11y ago
  It seems this is not how it really works. http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... This is one of these things that made me think what else of what I believe is not true.
  - XorNot 11y ago
    The link you posted seems to fundamentally fail to contradict the OP. The link states "banks do not lend out their reserves" - which is true. They lend from their deposits, which is exactly what the OP was saying. If that's not it, then someone needs to explain it more clearly.
    - RobertoG 11y ago
      Banks don't lean from deposits even in the "official" narrative. A bank that needs to lend money that doesn’t have it's going to use the interbank system in order to get "reserves" from others banks. The idea is that the causality is inverted. Banks lend and then search for reserves. If you see it this way, you realize that there is not constrains in how much money they can lend (except how expensive is to find reserves). Try this (maybe more clear than the other): http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620

philwelch 11y ago

You're thinking fractional reserve means, for a 1/4 fraction, I put $1000 in my savings account and the bank can lend you $4000. That's not true. In reality, I put $1000 in my bank account. But the bank only needs $250 cash in reserve backing that account, and can lend out the other $750. Of the bank's $1000 in assets, 1/4 must be hard cash and the rest can be debts payable to the bank. The bank charges interest to borrowers, and pays interest to depositors, and makes its profit off the margin.

RobertoG 11y ago
It seems this is not how it really works. http://www.economonitor.com/lrwray/2013/08/15/banks-dont-lend-reserves-who-knew-mmt-thats-who/ http://www.economonitor.com/lrwray/2013/08/15/banks-dont-len... This is one of these things that made me think what else of what I believe is not true.
- XorNot 11y ago
  The link you posted seems to fundamentally fail to contradict the OP. The link states "banks do not lend out their reserves" - which is true. They lend from their deposits, which is exactly what the OP was saying. If that's not it, then someone needs to explain it more clearly.
  - RobertoG 11y ago
    Banks don't lean from deposits even in the "official" narrative. A bank that needs to lend money that doesn’t have it's going to use the interbank system in order to get "reserves" from others banks. The idea is that the causality is inverted. Banks lend and then search for reserves. If you see it this way, you realize that there is not constrains in how much money they can lend (except how expensive is to find reserves). Try this (maybe more clear than the other): http://bilbo.economicoutlook.net/blog/?p=14620 http://bilbo.economicoutlook.net/blog/?p=14620