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
They don’t create new *dollars*. They create new *value*.
I as a homeowner see a bunch of dirt that could be a home. The home will have more value than the dirt and materials that go into it, because labor has value. But I can’t afford to build a home.
The bank has dollars that some other person, a person with savings, doesn’t know how to put to work. The person has entrusted that money to the bank to find work for it to do. So it gives those dollars to me to do work – to build that home. I need $200,000 to build a home that I will value at more than $200,000. I agree to pay the bank some of that excess value in the form of interest which it then shares back to the person who provided their savings.
Those extra dollars come from the federal reserve. They see that the aggregate value of the economy has gotten bigger (because my dirt is now a home) and backfill new dollars to match that new value, so that the new value can be exchanged. If I sell my now $300,000 home, we need an extra $100,000 sloshing around somewhere above the original $200,000 (dollars that the federal reserve created ages ago).
How does that extra $100,000 make it into the economy? The feds lend it to the banks. That’s what the federal reserve rate is, upon which almost all other interest rates are based. It’s the cost of acquiring new dollars, and the banks pay it because the 3.5% they pay the Fed are lower than the amount of work they can do with those dollars.
So the bank doesn’t create dollars, but they create the need for dollars by funding new value to the economy, generally in the form of labor. They’re just a matchmaker and a mechanism for doing this efficiently. But all of us do this. We pay for college because it has value to us. We ask professors to teach us, which is labor and new value being created. Knowledge or skills in this case, but it’s still a thing of value to a future employer. That value can be a house, a factory, some intellectual property – a patent, a design – or some goods. I assess the iPhone I bought as having more value to me than the components and labor that Apple needed to make the phone. I just don’t have the means to make it myself. So that’s both a transfer of dollars from me to Apple, but those profits are also a form of demand for new dollars to be created. I am willing to turn the compensation for my labor into new value through the purchase of the phone. In a sequence of value transferral, that works its way back to some bank who will pay the fed to print more dollars.
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