Comment by nimbleplum40
3 years ago
> 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-...
Right, but I’m not tracking your previous statement that banks don’t lend out existing deposits. They do! Sometimes up to 100% of existing deposits! I suspect we’re saying the same thing though. For example, a bank might take a $100 deposit, keep $10, and loan out the additional $90. That creates $90 because they original depositor still has the $100 in their account.
They don't lend out deposits, if a bank had zero deposits it could still loan you that $100 just by adjusting your balance and adding the loan to their books. It's a subtle difference, and honestly, the BoE explainer I linked to is by far better at explaining this than I am.
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