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
> 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?
Well, yes, until they withdraw the loan amount and spend it. At that point their account balance is zero so that liability is removed. A loan where the borrower hasn’t actually taken the money basically balances out to if they had not taken the loan at all.
However the idea of creating more money is that the bank now has two instances of $1000, the money in the deposit account that gave it the money to loan and the money in the account of whoever it was loaned to. Now there is $2000 “out there” in concept where before there was only $1000.
Latest Answers