How do private banks “create” money and is that okay?


Edit: So basically we have two explanations. One goes by actual money loaned out again and again by different people and banks, thus “creating” money. The other one: Banks actually loan out money they dont have and never had by creating the same volume as asset.

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They don’t. Where are you getting the info that banks create money? Banks store money and invest it.

They create money by making loans. The bank simultaneously gets an asset (it will be paid money in the future) and a liability (the borrower has some money that they can withdraw from the bank). The two add up to zero. Eventually the loan will be paid back, cancelling out the asset and the liability. In the meantime, the borrower gets to do something useful with the money and the bank gets some interest. It’s OK as long as the loans are paid back and the banks don’t lend so much that they create asset bubbles and inflation.

Banks “create” money by giving out loans. This creates money because banks are not required to have all the money the give out, this works because the money is coming back to this(or another bank) at somepoint because you dont take loans out just to have them laying around but to buy things with it and the seller puts the money back into the bank. This is the basis of our modern banking system so if you think our modern banking system is good then yes it is okay, if you think the banking system is bad then its not okay.

Banks can create money, note that it’s a different thing than creating *wealth*, and that when a bank creates money, nobody is getting any richer, it just reflects a new loan balance.

One key thing to remember is that when you deposit money in a bank, it’s not like they’re just holding it in a vault for you, what you’re doing is lending the bank money. Part of the deal, though, is not just that they’ll pay you back on demand, but that they’ll pay anyone on your behalf.

So if you deposit $100 and walk out with a checkbook, you can make out 100 checks to “Cash” for $1 each, and in a sense, you now have the equivalent of a hundred dollar bills. You’re not richer, the bank’s not richer.

The bank, in turn, can lend your deposit to someone else, say a restaurant. They buy, idk, olive oil, and then the olive oil factory deposits the money into another bank, and walks out again, with a checkbook. The olive oil maker has $100 in cash (well, checks), and so do you. So the bank has “created” $100 in cash. But it’s not made anyone richer because of it, because the bank owes you $100 and the restaurant owes the bank $100, and then some other bank owes the olive oil maker $100.

This works fine unless everyone wants their money back at the same time, which is a run on the bank.

They do it by loaning it out.

It’s more accurate to say they “share” money instead of creating it.

If you have a car and don’t drive it all the time. Normally you leave it parked in the garage. Your roommate borrows the car when you’re not using it.

To the wider economy, this “creates” a second car by doubling utilization.

Banking does this. There’s no difference between a “borrowed” dollar and a “real” dollar. In fact, your “real” dollar might be a “borrowed” dollar because you might be paid with corporate debt.

When both people want to use the same dollar at the same time, this causes problems (bank run).

We as a society have decided to accept this. Banking and debt provide useful functions to society so we regulate and allow it.

Most “recessions” are in fact products of bad debt. Debt in general is a multiplier. When times are good, they’re REALLY good, and when they’re bad, they’re BAD. This is the fundamental cause of good economic times and recessions.

It’s not capitalism in general, but debt specifically.