I read somewhere that money is created through lending in America, and did some googling and chating with GPT. I still have a hard time understanding how money is created by banks through lending. Somehow when a new loan is made, an equal an opposite liability is made and the Reserve creates that additional money?
Does this mean that when I get a new line of credit, that new money is created? Can someone clarify how new money is created here?
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Very ELI5.
When a loan is made, a bank does it by using its resources(including customer deposits at a certain percentage depending on the laws in their jurisdiction).
If that’s not enough, let’s say the interest rates are very low and everybody rushes for credits, then a bank also borrows from the central banks/commercial banks.
Central Banks have enough liquidity to lend to these banks. If that’s not enough, they simply print.
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