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
Some answers may seem confusing, so let me break down in simple steps and you, /u/DanGabriel let us know which step is confusing. (for simplicity assume same day, interest free transactions)
**Step 1.**
I am a bank. I have 100 EUR cash (owners put it in, so bank has on balance sheet 100 EUR cash on asset side and 100 EUR equity on liability side that is due to owners as their capital)
Persons /u/DanGabriel , Persons B and C have accounts in bank, but currently at 0 EUR.
**Step 2.**
I lend 90 EUR to DanGabriel and DanGabriel takes out this money as cash (assume, by law I’m required to keep 10% of assets in reserve; my assets are now 10 EUR cash and 90 EUR in loans to DanGabriel; and 100 EUR equity)
DanGabriel has 90 EUR in cash. (and 90 EUR debt)
**Step 3.**
DanGabriel goes to Person B and buys toaster from him, pays him in cash.
DanGabriel has toaster and 90 EUR debt.
**Step 4.**
DanGabriel has toaster and 90 EUR debt.
Person B then goes to bank (me) and deposits 90 EUR in his account.
Person B has sold toaster and has 90 EUR in bank account.
Bank (me) has on Asset side has 190 EUR (100 EUR cash = (10 I had before, +90 received as deposit) and 90 EUR loan to DanGabriel) and Liabilities (100 EUR equity due to owners, and 90 EUR owned to Person B that he has in account)
This should be already enough. As you can see bank has “created money” from EUR 100, it has assets of EUR 190 already. Seems that money in economy is also more – 100 EUR in cash in bank’s safe and 90 EUR in Person’s B account.
Just to continue example in shorter steps
**Step 5.**
Bank lends EUR 81 to Person C, Person C takes out as cash.
Bank now has assets EUR 190 = EUR 19 cash + EUR 171 loans to DanGabriel and C
**Step 6.**
Person C buys concert ticket from Person D.
Person D deposits his money in bank’s (mine) account.
Now bank has assets of EUR 271 (EUR 100 cash (deposited), EUR 171 loans to DanGabriel and Person C), while on liability side it has EUR 100 owner equity and EUR 171 in liabilities that are bank accounts of person B and Person D).
See, even more money in economy. And it goes on and on.
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