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

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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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13 Answers

Anonymous 0 Comments

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

Anonymous 0 Comments

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.

Anonymous 0 Comments

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.

Anonymous 0 Comments

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.

Anonymous 0 Comments

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.

Anonymous 0 Comments

20 people each have 10 gold coins. In total, 200 gold coins exist.

Those people deposit their coins in the Bank of Bob. In exchange Bob gives them each a piece of paper called a “Bank statement” that says “IOU 10 gold coins – Bank of Bob.”

– Fact: Bob’s vault contains 200 gold coins.
– Fact: 20 people have pieces of paper that say “IOU 10 gold coins – Bob”

Sally Seller wants to sell her house. Harry Homebuyer wants to buy it. Harry makes a deal with Bob: Harry can borrow 100 gold coins from Bob if he promises to pay Bob 5 gold coins per year for the next 30 years. In exchange for the borrowed coins, Sally gives Harry her house.

– Fact: Bob’s vault contains 100 gold coins and a piece of paper that says “IOU 5 gold coins per year for the next 30 years – Harry, 02-06-2023.”
– Fact: Sally’s purse contains 100 gold coins.
– Fact: 20 people have pieces of paper that say “IOU 10 gold coins – Bob”

If you say “Money = gold coins,” then the bank didn’t create money. There are still 200 gold coins.

However, if you ask people how much money they have:

– Sally will say “I have 100 gold coins. They’re right here in my purse.”
– The 20 other people will each say “I have 10 gold coins. I have a bank statement that says so.”

If you say “Money = gold coins or bank statements,” then the Bank of Bob did create money.

Whether that’s okay depends on your point of view. Here are a few different ones:

– In some sense, Bob is lying to people. While any one, or two, or three, or ten of those 20 people come in and ask for their coins, they can get them, but if 11 or more do then they can’t. The only people who know they have any money at all are Bob and Sally. Because the 20 people who gave their money to Bob think they have money, but actually don’t, they’ve been tricked.

– In another sense, Bob is an honest businessman. Bob doesn’t make it a secret that he loans out people’s money. He tells people he’ll do it, and they give him their money anyway.

– Why do people give Bob their money? In part because he makes so much money from people like Harry (who end up paying 50 extra gold coins to Bob for his house), he doesn’t charge his depositors vault rental fees even though having employees and buildings and a vault costs money. In fact *Bob* pays *them*, Bob pays those 20 depositors each 0.2 gold coins per year.

– In addition to paying interest, Bob would argue that his facilities are well protected and insured against theft and fire. Bob would point out that his vault is a less risky place than your purse for keeping large numbers of gold coins.

– Bob helps people buy houses and cars, and start or expand businesses. Bob would say his existence improves the economy, loans help consumers consume more and producers produce more.

– For better or worse, Bob has the support of the government and society. If you have 100 gold coins and you’re looking to buy a house, what happens? Well, most people who have houses and want to sell them, and the real estate agents and attorneys and accountants who make the sale happen, will tell you that they’re simply not comfortable or properly set up to take your gold. You have to deposit your gold in a bank if you want to transact with them.

– In fact, many people are suspicious of those who keep their own gold coins. Normal people all give their money to Bob or someone like him. Why are you so suspicious of banks? Are you a terrorist? A drug dealer? In an economic crisis, the government may actually make it illegal to have your own gold; they [already did that once](https://en.wikipedia.org/wiki/Gold_Clause_Cases).

– People are lazy. Even though you would think people would be careful with their life savings, invariably a lot of people just don’t want to be bothered to secure it themselves. Bitcoin was created to be a kind of electronic substitute for gold coins, where through the ~~magic~~ math of cryptography you don’t have to trust anyone else to hold your Bitcoins. But a lot of people who want to have Bitcoins buy their Bitcoins on exchanges and never take them off. Even though many Bitcoin exchanges have lost their customers’ Bitcoins in the past.

Anonymous 0 Comments

1) Bank makes money by giving out loans with interests

2) They also invest the money that you store in the bank

3) Bank are required to keep a certain amount of cash or assets so to not to OVER lend and have a way to payback those loans if they are not paid.

Banks do not create money. The “Fed” does that in a variety of ways.

Anonymous 0 Comments

The ELi5 explanation I like to give that doesn’t involve things like velocity of money or deposit ratios is this:

Let’s say 50 people all have $100 and no immediate need for the money, but one person needs $1000 to buy something he really wants and will pay back later. Nobody wants to loan him the money, because its risky and they might need it. Banks fix this problem by providing a solution for both savers to have a safe haven and buyers to get a loan which keeps money moving most efficiently.

Anonymous 0 Comments

bank dont create money in the same way a governement does(by minting more currency)

instead what they do is implement a fractional reserve policy, where the banks are only required ot hold a % of the money in their accounts at any given time.

doing this free up those assets ot where the bank and issue Loans and collect interest: this is generally howew a bank becomes “profitable”,

but its entire setup relies on the fact that they safe in the knowledge that its extremely unlikely that all of their clients want their money back in full at the same time(which shouldnt happen in a stable economic policy where people can trust banks to not go under).

if for any reason something changes that forces the general public into a panic ot secure their money(ie: bank loans defaulting in masse.), fractional reserve banking collapses unless a larger entity steps in to either cover the funds or prevent people from pulling all their money at once.

Anonymous 0 Comments

Banks don’t loan out money they don’t have. The money regular folks give to the bank is used to loan out. If everyone tried to withdraw their money at the same time, or if lots of the loans they gave out weren’t getting paid back, the bank could end up in a situation where they completely fail. The government has tons of regulations on banks to make this unlikely. The government also has the ability to actually print new money and in the past used this to support banks in hard times to prevent them from failing.