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 loaded, dude.
They’re lending against assets that they have.
The entire premise of a bank is that a bunch of people pool their money together, and while the bank guarantees that that money will always be available to the rightful owner, they’re also turning around and lending it out to borrowers.
That’s why it’s always a problem when there’s a run on a bank… everyone trying to withdraw their money at the same time. That means that bank could actually not be able to give everyone their money back, and potential put the bank out of business.
In simpler terms, if Joe keeps $25,000 in his savings account, then the bank can lend Sally $15,000 of it for a car loan. But if Joe decides to close his account just after Sally opens her loan, then the bank just pays Joe money from Tom, Chris, and Darlene’s accounts. Then repays them with Sally’s loan payments.
And that’s not to mention the massive amounts of profits banks turn on interest payments and other service related charges and fees.
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