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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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.
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