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
Banks are allowed to loan out more money than they have. It’s called a “fractional reserve”; and means that, for every $100 they have in deposits, they only need to keep some fraction of that as a reserve against deposits.
Let’s assume that’s 50%. So you deposit $100 in a bank. They have to keep $50, but they loan out the other $50 to someone, who then deposits that money in their account; so the bank has $100 in cash and $150 in deposits – which means they’re safe to loan out $25. They loan that $25 to another person, who deposits it into their account. They keep doing this until the $100 they have represents $200 in bank accounts (and $100 owed to them).
When that’s done, that bank has turned your $100 in cash into $200 in money – effectively creating $100. The smaller the fractional reserve is, the more money gets made per $100 of deposits.
And it’s *technically* not the banks doing it. Because the fractional reserve is set by the Federal Reserve in the US, that’s who is technically creating the money. But that’s just a technicality.
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