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

Best way to grasp this is to look at the definitions of money. There’s M0: physical cash; M1: M0 plus bank deposits; M2: M0 plus M1 plus savings, certificates of deposit, money market accounts; M4: previous plus and so on, Essentially, any instrument readily exchangeable at face value. So it’s a series of debts, from most secure/least risky on down, fading out into IOUs and junk bonds somewhere down the chain. You buy a coffee with your card: bank transfers some of its debt to you to debt to coffee-shop. It’s created whenever any two or more parties record a transferable debt, and extinguished when the debt is written off.

Banks are the main record-keepers. This was not always so, and there are still other record-keepers. Banks also lend – they create debt, But many others do too – and those other debts can creep up the chain until they too are ‘money’.