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
Everybody here is misunderstanding the question. They think he’s asking “how do they profit” and that answer is “interest”. But the question is really, “How do banks create NEW DOLLARS”.
The answer is that **banks are allowed to loan more money than they have on deposit**. If they have $1 billion in assets, they can legally loan $1.2 billion in money. That “creates” $200 million in new dollars. (I’ve made up the exact numbers, but the principle remains).
There are rules and regulations which strictly control how much reserve the banks must maintain when they loan. This allows them to have more or less money enter the money supply. When they raise the reserve amount, that means fewer dollars can enter the economy. When they lower the reserve amount, more dollars can enter the economy.
There is also the *discount rate* that is the amount of interest the Fed charges for short term loans (days in length). Lowering that rates encourages more money to enter the system, raising that rate slows down money entering.
It is explained here:
[https://www.investopedia.com/ask/answers/07/central-banks.asp](https://www.investopedia.com/ask/answers/07/central-banks.asp)
**tl;dr** with strict limits, banks are allowed to loan more money than they have, that creates dollars.
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