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 don’t get how the loan, the absence of money, is an **asset** on the lending bank’s books
I think you actually get it. When loans (and therefore new money) are created, they **are not** by themselves an “asset” to the bank.
The key point to remember is there’s *always* two parts of a transaction. I.e., for every credit, there’s a corresponding debit somewhere.
Or a slightly different way of looking at this: for every increase in **asset**, there’s a matching increase in **liability** somewhere.
When a bank creates a loan, two events immediately happen on their books (from the bank’s perspective):
1. The *loan agreement* is created, which is an **asset** to the bank since it’s a promise from the customer to pay back the loan with interest
2. On the flip side, a *deposit* is also created on the customer’s account, which is really a **liability** on the bank (the bank must make available this amount to the customer)
**The** **moment the loan is created, the increase in the bank’s asset is immediately offset by the increase in the bank’s liability**. They effectively cancel each other out, and therefore loans by themselves are not a net asset to the bank.
In event #2 above, the deposit to the customer corresponding to the loan is how money is created by the bank. The customer now has money in their account, and that money didn’t exist before the loan.
Of course, banks expect that their loans in the long run will make them money through interest payments, fees, etc. But the loan creation itself is not a net asset to the bank.
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