Comment by kevin_nisbet
1 year ago
This is a good explanation, I've had to explain this topic a few times as well, it seems like it's one of those topics that is very missunderstood.
To just expand a bit, I believe some of the confusion around printing of money comes from the way some economics reports are built. As a micro example, Assume a 10% required reserve, If Alice deposits $100 and the bank lends $90 to Bob. Alice ($100 deposits) + Bob ($90 cash) think they have $190 in total.
This is mainly useful for economists to understand, study, and report on. However, when the reports get distributed to the public, it looks like the banks printed their own money, as we now see $190 on the report when there is only $100 of cash in our example system.
Whether the system should work on a fractional reserve is it's own debate, but we need to know what it is to debate the merits and risks of the system.
And how does that work when the 'required reserve' is zero as it is now, and has been in the rest of the world since time immemorial?
Nobody deposits in a bank - it's just a retag of an existing deposit. The bank Debits a loan account with the amount owed, and Credits a deposit account with the advance. It's a simple balance sheet expansion in double-entry bookkeeping.
I'm really not sure why this myth persists given that central banks debunked the concept over a decade ago.
Loans create deposits, and those deposits are then converted into bank capital when a deposit holder buys bank capital bonds or equity.
[0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Most people deposit in a bank by transferring from another bank. There is more than one bank.
Now do the balance sheet journals for such a transfer. [0]
Then you'll see that for a bank to transfer to another bank the destination bank has to take over the deposit in the source bank (or swap that liability with another bank somewhere).
You have an infinite regress in your thinking.
[0]: https://new-wayland.com/blog/why-banks-pay-interest-on-depos...