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 $1,000 in the recipient’s account, but I don’t get how the loan, the absence of money, is an asset on the lending bank’s books. If it’s because the money will be paid back, then isn’t it’s value based on a corresponding debit of the recipients account thus nullifying the created money?
Edit: I am not asking how banks make a profit. I get that. I am asking how NEW DOLLARS are created. There are more dollars in existence now than there were say 100 years ago. I want to understand how they came to be. The answer I’ve found so far is that NEW DOLLARS are created when a commercial bank makes a loan.
Second Edit: For those saying commercial loans don’t create new dollars, apparently they do, but I don’t get it. For reference:
https://positivemoney.org/how-money-works/proof-that-banks-create-money/
In: 23
I’ll try and eli5 level explanation.
Imagine i have a vault with 100$ in it.
I can lend Jack 50$ for a year. But because ingots and coins are heavy, and can be lost, and stolen, etc. I can just give Jack a piece of paper saying: i (the bank) will give 50$ in coins to Jack, or whoever he paid those 50$.
Chances are, those people will accept the paper and not get the coins within the year. Jack will pay back after a year, and all is fine.
But i can also write 10 such papers, lend 500$ and be fine. (Profit increases tenfold this way) If the people pay me back, I’m good. My only problem occurs if too many cannot pay me back and suddenly i, the bank, owe more than i have.
Last time i checked, banks in Europe needed about 11% of the capital they lend, which means for every 11$ they actually owned, they could lend out 100$. And that’s after-banking-crisis rules…
As for your edit:
Now more money exists because money is bound to some value let’s take gold ingots (which is no longer true, but for eli5..). You did up some gold, smelt ingots, put them in a bank vault, print an according number of paper dollars.
Now you have more money than a year ago, in this world.
Latest Answers