Not much more to it than that. Why is it the world’s end when a government prints money but fine when a banking system does it?
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* You deposit $1000.
* The bank holds on to a *fraction* of it, hence the name. Say they hold on to $100.
* The bank loans out the remaining $900 to someone.
* That person repays the loan and ends up paying back both the $900, and $100 in interest.
The bank *made a profit* but did not *print money*. The bank’s profit came from someone giving them money.
* You deposit $1000.
* The bank holds on to a *fraction* of it, hence the name. Say they hold on to $100.
* The bank loans out the remaining $900 to someone.
* That person repays the loan and ends up paying back both the $900, and $100 in interest.
The bank *made a profit* but did not *print money*. The bank’s profit came from someone giving them money.
Because fractional reserve banking [doesn’t cause inflation](https://whatismoney.info/fractional-reserve-banking-inflation/) – at least not in the long term.
The type of inflation you are thinking about is demand-pull inflation – where inflation happens because there is more demand for goods than can be supplied, causing prices to increase. When brand-new money is introduced into an economy, the net increase in the amount of currency causes a spike in demand (I have extra money, so I want to spend it on extra things) which can cause demand-pull inflation. This would lead one to believe that fractional reserve banking would cause inflation, as FRB does “create” new money out of thin air.
_However_, every dollar that is created by FRB is a dollar that has to be _repaid to the bank_ at some point in the future. The spike in demand today will be met with a _reduction_ in demand every day afterward as I forego spending to repay my loan. With every repayment, the money that the bank “created” with FRB is “destroyed.”
So the inflation that may happen immediately due to demand-pull is offset by the reduction in demand going forward. At a macro-level, this all balances out as millions of loans are taken out and repaid every day – for every spike in a new loan, there are drops due to loan repayments.
* You deposit $1000.
* The bank holds on to a *fraction* of it, hence the name. Say they hold on to $100.
* The bank loans out the remaining $900 to someone.
* That person repays the loan and ends up paying back both the $900, and $100 in interest.
The bank *made a profit* but did not *print money*. The bank’s profit came from someone giving them money.
Because fractional reserve banking [doesn’t cause inflation](https://whatismoney.info/fractional-reserve-banking-inflation/) – at least not in the long term.
The type of inflation you are thinking about is demand-pull inflation – where inflation happens because there is more demand for goods than can be supplied, causing prices to increase. When brand-new money is introduced into an economy, the net increase in the amount of currency causes a spike in demand (I have extra money, so I want to spend it on extra things) which can cause demand-pull inflation. This would lead one to believe that fractional reserve banking would cause inflation, as FRB does “create” new money out of thin air.
_However_, every dollar that is created by FRB is a dollar that has to be _repaid to the bank_ at some point in the future. The spike in demand today will be met with a _reduction_ in demand every day afterward as I forego spending to repay my loan. With every repayment, the money that the bank “created” with FRB is “destroyed.”
So the inflation that may happen immediately due to demand-pull is offset by the reduction in demand going forward. At a macro-level, this all balances out as millions of loans are taken out and repaid every day – for every spike in a new loan, there are drops due to loan repayments.
Because fractional reserve banking [doesn’t cause inflation](https://whatismoney.info/fractional-reserve-banking-inflation/) – at least not in the long term.
The type of inflation you are thinking about is demand-pull inflation – where inflation happens because there is more demand for goods than can be supplied, causing prices to increase. When brand-new money is introduced into an economy, the net increase in the amount of currency causes a spike in demand (I have extra money, so I want to spend it on extra things) which can cause demand-pull inflation. This would lead one to believe that fractional reserve banking would cause inflation, as FRB does “create” new money out of thin air.
_However_, every dollar that is created by FRB is a dollar that has to be _repaid to the bank_ at some point in the future. The spike in demand today will be met with a _reduction_ in demand every day afterward as I forego spending to repay my loan. With every repayment, the money that the bank “created” with FRB is “destroyed.”
So the inflation that may happen immediately due to demand-pull is offset by the reduction in demand going forward. At a macro-level, this all balances out as millions of loans are taken out and repaid every day – for every spike in a new loan, there are drops due to loan repayments.
The private banking system creating money certainly can be a problem. However it’s also a basic part of how modern economies work.
When you hear about central banks increasing interest rates, the main aim of this is actually to make lending more expensive, thus reducing the amount lent out and the amount of money created. This is commonly misunderstood (including by me until fairly recently).
In general: creating money is fine – in fact, expanding the money supply as the economy expands is generally considered to be really important. In a modern economy this is – with the big exception of quantitative easing – mostly done by private bank lending.
This lending is regulated by governments and influenced by the central bank rate, but within these limits banks have flexibility in how much they lend out. This is viewed as a good thing as banks are meant to respond to the market, which will demand more money as the economy expands.
Whether banks expanding the money supply is good or bad depends on the situation – just like expansion by the government. There are definitely cases where banks lend too much – for example if a big bubble is increasing demand for lending – and in these cases central banks may take action. On the whole, though, economists tend to view banks as less responsible for problems than governments (or at least, when they cause problems it’s ultimately the central bank’s fault for not raising interest rates).
The private banking system creating money certainly can be a problem. However it’s also a basic part of how modern economies work.
When you hear about central banks increasing interest rates, the main aim of this is actually to make lending more expensive, thus reducing the amount lent out and the amount of money created. This is commonly misunderstood (including by me until fairly recently).
In general: creating money is fine – in fact, expanding the money supply as the economy expands is generally considered to be really important. In a modern economy this is – with the big exception of quantitative easing – mostly done by private bank lending.
This lending is regulated by governments and influenced by the central bank rate, but within these limits banks have flexibility in how much they lend out. This is viewed as a good thing as banks are meant to respond to the market, which will demand more money as the economy expands.
Whether banks expanding the money supply is good or bad depends on the situation – just like expansion by the government. There are definitely cases where banks lend too much – for example if a big bubble is increasing demand for lending – and in these cases central banks may take action. On the whole, though, economists tend to view banks as less responsible for problems than governments (or at least, when they cause problems it’s ultimately the central bank’s fault for not raising interest rates).
The private banking system creating money certainly can be a problem. However it’s also a basic part of how modern economies work.
When you hear about central banks increasing interest rates, the main aim of this is actually to make lending more expensive, thus reducing the amount lent out and the amount of money created. This is commonly misunderstood (including by me until fairly recently).
In general: creating money is fine – in fact, expanding the money supply as the economy expands is generally considered to be really important. In a modern economy this is – with the big exception of quantitative easing – mostly done by private bank lending.
This lending is regulated by governments and influenced by the central bank rate, but within these limits banks have flexibility in how much they lend out. This is viewed as a good thing as banks are meant to respond to the market, which will demand more money as the economy expands.
Whether banks expanding the money supply is good or bad depends on the situation – just like expansion by the government. There are definitely cases where banks lend too much – for example if a big bubble is increasing demand for lending – and in these cases central banks may take action. On the whole, though, economists tend to view banks as less responsible for problems than governments (or at least, when they cause problems it’s ultimately the central bank’s fault for not raising interest rates).
Firstly, I am not aware that the world has ended as your initial comment suggests. Big if true, lol.
All banks create money, from the Federal Reserve down to the branch bank in your community. Anyone who says commercial banks don’t create (i.e. print) money is simply wrong.
However, not all money has the same impact on inflation. We have several different measures of money in economics for this reason, you can do a google search for M0, M1, and M2 if you wish to learn more. The money the Fed creates directly is called the Monetary Base, though another nickname is “High Powered Money”.
Put simply, banks can print money into your account but cannot print into their own account at the Fed. But the money in the Fed account directly regulates how much they can print into your account. This is because we have pretty strict rules on just how fractional banks can be, they need to keep a certain percentage of the assets as cash in their Fed account. Central bank money printing is like the little domino in that meme, and that is by design.
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