How a commercial bank creates money when it makes a loan.

Question

I don’t get it. I don’t get it. I don’t get it. I don’t get it.

When a bank makes a $1,000 loan, that creates $1,000 in the recipient’s account, but I don’t get how the loan, the absence of money, is an asset on the lending bank’s books. If it’s because the money will be paid back, then isn’t it’s value based on a corresponding debit of the recipients account thus nullifying the created money?

Edit: I am not asking how banks make a profit. I get that. I am asking how NEW DOLLARS are created. There are more dollars in existence now than there were say 100 years ago. I want to understand how they came to be. The answer I’ve found so far is that NEW DOLLARS are created when a commercial bank makes a loan.

Second Edit: For those saying commercial loans don’t create new dollars, apparently they do, but I don’t get it. For reference:

https://positivemoney.org/how-money-works/proof-that-banks-create-money/

In: 23

Answer 1

Ever heard the phrase, “my word is as good as gold?” Well it applies to commercial money. Deposits are just money banks owe to the public—for any host of reasons, whether that be because someone actually deposited money with the bank or the bank extended a loan. This debt that banks owe to the public is considered so safe and risk-free that it becomes fiduciary media money, people trust it so much that they transact with it, bank deposits, just as much as they transact with the thing it represents, cash. A bank can choose to owe anyone as much as they want and so long as their word is still considered as good as cash, they can thereby extend the money supply.

Think about it this way: back when merchants traded with gold, they could deposit that gold with banks and those banks would give them back receipts promising to pay the merchant back his gold whenever demanded. Merchants quickly adopted these receipts as a new medium of currency—why lug around the gold when you can just carry a receipt that represents it? Well, soon banks realized that they could virtually create new money by issuing new receipts that represented no original deposit—after all, it’s unlikely all merchants go and redeem their gold all at once, so the bank can over extend its receipts.

tldr; anyone can increase the money supply so long as their debt is so safe and widely-accepted that it becomes a form of money.