How Banks Create Money

Students guide to how bank loans work.

Category:

Education

Tags:

• Banking
• Money
• Economics
• St.
• Mary's
• University

[hoilow8]

@macroman52 For your information the 900k does not disappear from the depositor's account. The depositor's account still show a balance of 100k. Therefore a credit of 900k is create out of thin air base on the 100k deposit. Credits are debt money put into circulation by the banks

[macroman52]

You are correctly explaining how the system (of many banks) as a whole creates money, but your title encourages the nutters who think individual banks "create money". The system creates money, but the nutters think bank A gets a deposit of 100k and immediately makes a loan of 900k "out of thin air" as they like to say. Any bank that did that would be bankrupt at the bank clearing house and be forced to sell its asset (the promise of someone to pay it 900k) probably at a discount.

[ChulaKirby]

If the amount of loans is less than the month before, the year before, or years, what would happen to the amount of money? Would it stop growing? And what would happen to the prices of goods and services? Deflation right? So if I make a $100 K a year and so does everyone else, is there a limit to what we can borrow?

[ChulaKirby]

stmu00001, I like your video. As you have demonstrated, the loaning of money is actually the creation of money. But the process you have also shown is the creation of debt which makes sense because all our money is debt, correct? And prices are dependent on the amount of dollars chasing goods and services. So the more loans that are made results in the more money that is created which results in more dollars chasing goods and services. Here is my question. ......

[MrDucqui]

@CarMoves i like to lean english for banking. can you give me a few video english for banking or lesson for banking

[ElDukerino1]

@CarMoves

Okay, let's ditch analogy..

I think our contention is whether deposits are really money..I'm basically saying no. They're promises to convert an asset into money (which can only be fulfilled w/ FDIC). I realize I'm being very literal as you said before & that deposits are counted in a statistic called the "money supply".

In any case, the notion that deposits are money, rather than an invitation for others to use your money, is the delusion from which "money out of thin air" comes.

[CarMoves]

@ElDukerino1 -- the analogy can apply to any of it. A bank, and a banking system are basically the same thing -- the main difference is scale. The true "net" is only realized when the bank closes (no deposits, no loans).

But the world economy never "closes", so "net" is irrelevant.

[CarMoves]

D.D. in this video is "Demand Deposit", not "Direct Deposit"

[ElDukerino1]

@CarMoves

Hmmm, I don't get it, maybe you' re as drunk as I am right now :)

Initially, I got your analogy except for: what in reality = the music stopping? (my guess would have been a run on the bank, but I'm not sure??).

The ratio of kids to chairs is already given in our example (10% reserve), but whatever it is, I agree it is irrelevant.

I don't know what you mean by the "net" now because what I meant by the "net" was that a bank's "net" assets are unaffected by reserve requirement.

[CarMoves]

@ElDukerino1 -- The music is time.

The ratio of kids to chairs can be virtually unlimited, and is immaterial, because the "net" is only realized when the music stops.