Which, as the article says, is an inaccurate model of how modern monetary economies actually work. Bank loans create new money, they don't lend out existing deposits, and repayments destroy that money. Reserve requirements - in countries that have them - don't affect whether a loan can be made or not.
> Bank loans create new money, they don't lend out existing deposits
Do you mind clarifying? I agree banks create new money, but they do that by lending out existing deposits. A bank can’t lend out money that don’t have on their books…
It helps if you think about it in accounting terms where assets minus liabilities needs to add up to zero. When a bank makes a loan for $100 it adds $100 to the balance in your account - which is a $100 liability - and the $100 loan to its assets, balancing the books. Bank deposits aren't stores of physical cash, they're numbers in a ledger indicating what the bank owes you, and when you get a loan it means the bank owes you more money and not that it owes anybody else less money.
This Bank of England paper is by far the simplest and best explanation of the whole process, well worth a look even if just for the summary on the first page :)
Which, as the article says, is an inaccurate model of how modern monetary economies actually work. Bank loans create new money, they don't lend out existing deposits, and repayments destroy that money. Reserve requirements - in countries that have them - don't affect whether a loan can be made or not.
> Bank loans create new money, they don't lend out existing deposits
Do you mind clarifying? I agree banks create new money, but they do that by lending out existing deposits. A bank can’t lend out money that don’t have on their books…
It helps if you think about it in accounting terms where assets minus liabilities needs to add up to zero. When a bank makes a loan for $100 it adds $100 to the balance in your account - which is a $100 liability - and the $100 loan to its assets, balancing the books. Bank deposits aren't stores of physical cash, they're numbers in a ledger indicating what the bank owes you, and when you get a loan it means the bank owes you more money and not that it owes anybody else less money.
This Bank of England paper is by far the simplest and best explanation of the whole process, well worth a look even if just for the summary on the first page :)
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
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