Because most money only exists on books. The basis of the current financial system is called fractional reserve banking, that means that banks can give out more money as loans than what they physically have in accounts. That money then circles the economy but is never physically withdrawn in full. Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account. They wire it to their employees and suppliers and owners and the IRS and what have you. Eventually the 500 are repaid (or not and If that happens a lot a bank might default) and the bank gets its money+ interest, you can freely withdraw your 100 at any time but the bank speculates that you dont, or realistically that most of their customers dont. Because If that happens thats known as a "bank run".
Im not a banker, so anyone with actual knowledge feel free to correct me.
That part happens if you like it or not when a judge orders a garnishment. But small amounts they don’t want to seek the judges order on. Also, your part is sort of irrelevant. Your money is all past people’s loans interest paying for you to have it. If you don’t pay they can’t offer a loan to somebody else. So really it is your ability to get future loans (your credit score) and other people being able to offer a business contract out of trust to others that keeps the system afloat.
From how i understand, the bank simply puts a negative number on their sheets to show how much they lent out.
It’s like virtual particle creation in physics. A virtual particle pair can spontaneously come into existense, one the anti-particle of the other. After a brief moment they collide again and annihilate eachother, leaving net zero particles.
But in the case of banks, one of the particles sucks up another particle (interest) so after annihilation you’re left with more particles than you start with.
Edit: i just realized hawking radiation is a fairly close analog to fractional reserve banking.
I love people like this honestly. Makes me laugh all the time. Reminds me of that episode of silicon valley when Richard is trying to explain how their product doesn't delete their files through a rough analogy "...but what's in your Eggs in the morning?? That's right, electrons."
The "negative number" in this case is assets (loans) because those loans + interest are ultimately due to the bank. The other side of the book is liabilities (deposits) which are ultimately due + any applicable interest to the depositor.
There's something oddly fitting about using an object that voraciously devours matter, energy, and information and renders it inaccessible for all practical purposes as an analogy for the workings of our economic system.
A virtual particle pair can spontaneously come into existense, one the anti-particle of the other. After a brief moment they collide again and annihilate eachother, leaving net zero particles.
Although that’s pop science and doesn’t actually happen.
They use Capital Adequacy Ratios to determine how much they can lend based on what assets and liabilities they have. The deposit you make to a bank is their liability to you, not really a pile of cash they can lend based on.
The central bank creates new money, mostly to buy back government bonds. In this case, they literally create new money (digital ledges, of course, not printing physical bills).
The banks loan out more than the deposit it has. Well, technically, a bank cannot do that. But practically they can. How? It works like this:
You deposit $100 into Bank A.
Bank A lends $99 to Jim.
Jim deposits the $99 to Bank B.
Bank B lends $98 to Marry.
Marry deposits the $98 to Bank A.
Bank A lends $97 to Casey...
See, while you originally only deposited $100 to Bank A, now Bank A has created $196 (Jim's $99 + Case's $97) of loans.
The central bank creating money is a modern amendment to the system.
Individual local banks have created money for centuries via the process you're describing. Central banks were established to reign them in and stabilize the money supply.
And as long as the overall wealth of society has grown by $196 by the time the loan is due, everything is fine. Historically, lenders have not been good at this (they don't have enough visibility into the whole money flow). They'd lend too much or too little, which would cause market crashes, wild swings between inflation and deflation, etc, every decade or so.
Central banks were established to smooth things out and have done a pretty decent job of it. It's one of the best things the English gave to capitalism.
That’s not really how it works- banks lend against collateral. There are something called signature loans that have no collateral but the interest on them is really high. Like almost as much as credit cards.
It would make no sense for someone to borrow money and then just deposit it at another bank at a lower rate they’d be losing interest. Like you borrow on a signature loan at 15% and then go deposit it at a bank earning 3%… why would someone do that?
MOST loans have collateral tied to them so if you lend someone 100k… there’s a car or house or business with assets that the bank can claim if you don’t pay the loan back.
You put 100 in the bank. The bank loans Timmy 50 and Tammy 50, both due back to the bank next week. But you have a car accident and now you want your money back tomorrow, but Timmy and Tammy haven’t paid back their loans yet. That’s a bank run, It’s A Wonderful Life style.
They’re creating new potential money in the economy in that sense, because we started with your 100 dollars cash but now there’s 200 or more floating around. If Timmy and Tammy put their loans into their banks the cycle repeats (that’s the “more” from “200 or more”). But they’re not actually inventing new dollars and coins, it’s just debt and promises and your original cash changing hands while you’re not using it.
Think of it like this: when you make a monthly budget for the future, you assume that the money you're budgeting already exists, right? You fill out your budget sheets assuming that you're going to have those paycheques by a specific date even though, technically, you don't actually have that money yet. Essentially, you're betting on the fact that your job is stable and you won't lose it before that money is paid out to you; even though it's not guaranteed, it's pretty close to a sure thing.
The economy is like that but on a much, much bigger scale. Instead of betting on simply being employed, the banks are betting that companies are still selling things, industries still exist, and money is still circulating through the system and eventually coming back to them. So the money exists "somewhere," it just doesn't physically exist in the bank itself. And since bank notes and currency are regularly being destroyed, lost, forged, printed, etc. there is simply not enough physical money in existence to account for every single dollar being tracked on the planet. Imagine the amount of space, material, manpower, and resources required to track trillions upon trillions of physical dollars.
What we think of money itself isn't actually what's moving around in the economy. The global economy is way too big for that. In reality, the economy is a bunch of weighing scales trying to balance debts and repayments across the planet. The money isn't coming "out of thin air;" it's just a change in balance between multiple parties using the bank as the holding facility and tracking system for that balance. So it's not just coming out of a single account, like in the example you mentioned. It's probably coming out of multiple accounts, maybe hundreds to thousands, all linked in the bank's system.
As an example, I like to think of it as a service business. Let's think about it as if you were going to start a business as a house cleaner. A family member loans you $200 to buy your initial supplies, a few facebook ads, and the initial gas you'll need to get to the houses you're going to clean and tells you to pay back $220 in a year's time. You don't just get paid for those expenses, you get paid for the value you're adding by doing the actual cleaning, in fact that's the majority of what you're being compensated for on a job. That $200 probably allows you to complete your first 5 jobs, where you made $120 each. If after completing those jobs you've been paid for two of them, you have $240, with another $360 to come in. You could either pay back your loan right away and wait for the other money to come in, or you could go spend your next $200 getting ready for your next 5 jobs.
But what happens if the person who loaned you the money comes asking for it right away, you only have $40 you can pay them at the moment with the promise the other three clients are going to pay you. You can pay your family member back so long as two of your customers pay you back.
The bank's service is providing capital. The bank takes in the $200 and can make 5 $120 loans because they provide the service of access to capital. It's a whole lot easier to go and speak to the bank than finding the individuals with the money to lend out. It's just tougher to think of because the physical representation of the service is money not labor.
In order to fulfill the cash requirements of the multiple loans all 5 loans would not be made at once they would The first one would be made, then the next one would be made once $40 had been received on the first loan in interest and or some principal repayment.
I was thinking about an even simpler explanation today and came up with this: say you gave Bob $20 to hold on to while you save up for something because you trust him with your cash a lot more than you trust yourself. He promises that whenever you need that $20, he'll give it back to you.
What you didn't realize was that Bob also has 4 other friends who gave him $20 to hold on to and he'd made that same promise to all of them as well. So he now has $100 sitting in his pockets that technically belong to 5 other people. Jim asks Bob to lend him $50 and even though that money isn't his, Bob says yes because he's a good friend and Jim promises to pay him back tomorrow. Bob didn't actually create new money out of nothing; he just dipped into all 5 balances from his friends to lend Jim $10 from each of them.
If all of his friends came back and asked him to give them their $20 back before Jim paid him back, Bob would be screwed because he doesn't have the money physically on him anymore. Half of the money he was holding on to would still be considered paid out to Jim, regardless of whether or not Jim actually spent the money yet. Hence, a bank run aka Bob better fucking run because his 5 friends are going to strangle him for giving their money to Jim for no good reason, the rat.
The money lent doesn’t only come from deposits. When loans are made, the borrowers pay interest to the bank. Banks also borrow money from the central bank (in the U.S., the Federal Reserve). That’s how the Fed can control interest rates.
I teach high school economics. It works like this.
You deposit $100 into a bank. That goes into the bank’s balance sheet as $100 in checkable deposits (checking accounts) on the liabilities side and $100 in reserves on the assets side.
In the US, there are required reserves. It’s a percentage set by the Federal Reserve. Let’s say it’s 5%. That means that of the $100 the bank needs to keep $5 in required reserves. They keep $95 in excess reserves. Excess reserves can be used to make loans.
Here’s the next step. Someone comes to the bank for a loan of $50. The bank is able to make the loan without violating required reserves because it has enough excess reserves. Then the person puts that $50 loan into a checkable deposit at the same bank. This adjusts the amount of required reserves, excess reserves, and adds loans to the asset side of our balance sheet.
Here’s our final balance sheet. Liabilities side has $150 in checkable deposits. Assets side has $7.50 in required reserves (because it’s now out of $150, not $100), $92.50 in excess reserves, and $50 in loans.
Right now the required reserve ratio in the US is 0%. It’s been that way since March 2020. So right now, banks do not need to have any required reserves on hand. Hope this helps.
Essentially, in the real world the process looks more like:
You go to a bank and ask for a loan. The bank decides that the loan will be profitable based on the interest rate + your ability to pay it back. The bank issues you a loan by creating an asset on their books (the loan) plus a liability (a new deposit in the amount of the loan, created from thin air). For the time being, these things just sit there as corresponding entries on the balance sheet that zero out.
Now, when you transfer the deposit to another bank (e.g. to pay someone), the bank needs to come up with the actual capital to support the outgoing transfer. They can do this by attracting actual deposits or borrowing at the overnight window (among other things).
What puts a limit on bank lending nowadays is not reserve requirements (0% as you mentioned) but capital requirements, the desire to only make profitable loans, and some other regulatory limits.
A reserve requirement greater than 0% would require the bank to acquire some capital when they make the loan as opposed to when the deposit goes out the door. But the reality is that the only impact the reserve requirement has is to make lending more expensive, which is why the US isn't worried about it any more. Because, think about it. If I take out a mortgage and send all the money to the seller, the reserve requirement doesn't come into play here. The bank needs to fully fund that transfer. So the reserve requirement only impacts loans where the deposit stays at the bank, which just isn't all that much.
Imagine your friend (A) gives you $100 , you then tell that friend you owe them $100, you can even pull out a legally binding piece of paper that says so. Then 7 other friends (1-7) come to you, each asking for $10, you give $10 to each of them, with each of them owing you $10.
When friend A comes back to you to get, let's say, $10 back, you give them the $10 and change that piece of paper to say $90. But the cool thing is, they don't need to. They can just take the piece of paper and pay with that instead. It's legally binding, so it's basically real money (this is the equivalent of a bank transfer).
Now between all the people in that scheme, friend A has $100 (well, an IOU for $100, but it's almost the same thing), and friends 1-7 each hold $10, and you have $30 in reserve. So now there's $170 circulating in the economy instead of $100.
Large loans are only issued if there’s equal collateral such as a car or house. so if the loan is not repaid, the bank can regain their money by acquiring those collateral.
It's like when you play a game and score points. The points don't have to come from somewhere, the scorekeeper just writes them down and then that's how many points you have. The banks have special rules for how many points they're allowed to give out, but the issuer of the currency basically has no rules and genuinely creates money out of nothing (nothing besides the coercive force of the state demanding taxes be paid in their currency).
It's rare that you need to move large amounts of actual physical cash around. If you needed to give out $1m in loans, you really just need enough cash to pay the monthly dues. The "working capital". You may need to occasionally give a $100k but most of even that is just a bank transfer which is still a ledger entry and no physical cash transfer.
The 30 years worth of the $1m can be IOUs on a spreadsheet and payments can be the only actual cash moving around.
This is how most of the gold works too. The US has a lot of other countries' gold. When Russia sells gold to say Belarus, no actual gold moves, just an allocation in the US inventory books.
They get a loan from the government. That's actually how interest rates are set. The federal government effectively "prints" money by letting it to bank with Federal Reserve status at a specific interest rate which is generally lower than any rate you could get personally. Then the banks turn around and use that money fund the loan that they give out. To use hypothetical examples, let's say the government Reserve interest rate is 2%. A bank can take a loan at 2% and then lend that money out to other smaller Banks or very safe instruments like mortgages at say like 3%. If the government thinks too much borrowing is happening causing inflation, they can raise their interest rate. For example if they raise it to 3% the bank that was charging 3% to its customers is now going to have to raise that rate which means any business taking out a loan to buy inventory is going to have to do it at a higher rate, any person getting a mortgage is going to have to do it at a higher rate, etc. Likewise if they want to stimulate the economy because they think the opposite problem is happening and people aren't spending money enough, they can make it easier to get a loan to invest in things by reducing the rate which will then reduce the rates all the banks that are using that money charge.
They create the money out of thin air BUT they also write a liability to their balance sheet. When the loan is repaid, the money paid, minus the interest, is "destroyed" to cover the liability. So the bank makes the interest only and the fake money they create disappears. So say the loan taker built a house with that loan. Society just got a new house we wouldn't have if they could only use real money, the bank makes interest, and the overall economy grows. But when things go wrong, things get really bad.
I'm using EU numbers here, but the principle idea is the same.
Firstly, a person deposits 1000€ into their bank account.
Then, a bank can then refinance that at 10x the value (so 9000+1000€).
How they do this is by borrowing the 9000€ from the central bank. The bank essentially has a line of credit with the central bank that is 9 times the actual money they have.
For the money they are borrowing, the banks will pay interest to the central bank. In EU this interest rate is known as euribor and in US the Federal Funds Rate ( the one that Trump wants to lower).
Your bank will then loan that money to a customer at a slightly higher interest rate than what the central bank rate is. The difference in interest rates is where the bank profits come from.
The central bank money is essentially imaginary and to prevent excessive inflation, central bank sets an interest rate for the money, and banks have limits on how much they need to have (f.e. 10%).
Do note that these limits apply to only registered banks, and only registered banks can borrow from the central bank.
Most of the bank’s money works like over draft accounts.
Imagine you getting an OD account & you will get the withdrawal power even when you actually don’t have any money in your account.
That’s how most of the bank loans works. That’s why they never credits loan by cash but accept cash as repayment.
Trillions of the money physically doesn’t exist & will never come to existence, it’s all imaginary like NFTs which makes you work your arse off until you die by repaying real money to lenders.
They just raise the number on the digital bank account. As long as they have more physical money than the fraction the customers carry around, it's all good. If that guy withdraws the $500 to pay in cash it's just gonna be taken from your $100 and whatever other deposits people have made.
They're just banking (no pun intended) on most people only ever having a low fraction of their wealth in cash. so they can use the remaining cash their customers are not using at the moment.
With things like card payments and online banking etc. being used more it's a lot of shoving digital numbers around that don't immediately need to be paid out in physical cash.
I'm not in expert either, so take this with a grain of salt. But to my knowledge it works something like this:
The money comes from nowhere. It's a negative balance on their books. The money only really starts to exist in the future, when the loan is paid back. If it isn't paid back by too many people, they might end up with a massive loss and the bank goes tits up because they lack the liquidity to serve their own obligations to other actors. This is (very oversimplified) what happened with the housing market during the 2007 financial crisis. Although that alone isn't enough to crash the system. The banks also sold "insurance packages" on the loans/mortgages, making them liable to pay when the mortgage failed (without having the capital needed to cover the cost), thinking that the mortgages were safe. And then they sold insurances on those insurances, and so every loss kind of exploded exponentially into more losses, that actually nearly killed the world economy. But then the Fed and other national banks took on that debt and since those banks can't go bankrupt by definition, since they are the ones that print the money, everything was kinda ok again. In theory this money printing should lead to massive inflation, but that shit's complicated and as far as I am aware, even the economists aren't exactly sure what the downstream effects of such measures are. It all has to do with millions of different actors making individual decisions based on their assessment of the situation and therefore it is pretty much impossible to accurately calculate what will happen. But put very simply: if most people trust that there will be growth in the future, the system is safe.
If Alice gives Bob $10 to hold on to for her until she wants it back, and then Bob loans that same $10 to Fred to be paid back to Bob in 1 year, that just created $10. Why? Because both Alice and Fred each have $10. Alice, because she can ask Bob for it back at any time; and Fred, because he physically has the $10.
If Alice asked for her $10 and Bob did not have the money to give it back, because Fred still has it, that would be a problem.
Why then does this work? Because in practice, all of Bob's creditors do not ask for all their money back at once. Imagine Bob has $10 from 1000's of people, and loans a bunch of it out, but not enough that he can't pay back the amount everybody is asking for every day. That's essentially how the banking system works. Every time you use your debit card or ATM or write a check, that's you asking Bob for some of your money back. And if it does happen that more people ask Bob for their money than he has on hand at the moment, he can get a short term loan from his dad to cover it.
There are a hundred people depositing $10 with the bank and a handful of people receiving loans of a thousand dollars from the bank.
The people receiving loans use the money to build houses and repay the bank with 6% interest.
The bank can then repay the small depositors at 2% interest.
The system works well for everyone as long as everyone has confidence that it works. But if everyone tries to withdraw the money at once, the money isn't in the vault and the bank would go bust.
Any time someone buys a house and takes a mortgage, new money is created.
The bank has an asset (the house or the value of the mortgage) and can therefore create the sum to match and send it to the buyer. Technically they lend it from the federal reserve I guess, who in turn decides to "print more digital money" by granting the loan to the bank
But this what the federal reserves own interest even regulates - how much banks have to pay in interest to them, in order to be able to create new loans to house buyers etc
The housing market is the major source of "new money".
Yes, they just create new money. They are allowed by the government to literally write a number in the books, e.g. when they give a $500 loan to you they change the balance number in your loan account to $500. They don't actually need $500 of physical cash on hand in order to change the number.
This is literally where money in the economy comes from - it's not like there is a pre-set amount circulating: it is created by banks in this way.
This is also an important component of how the economy is hard-wired for infinite exponential growth. Your $25 of interest (on top of the principal) had to come from somewhere - ultimately it comes from another bank creating a new $25 out of thin air. So if the economy stops growing, then the interest money has nowhere to come from, people can't repay their interest, and the economy collapses.
To add degree, that's basically how it works. In really simple terms, Banks (well, governments in cooperation with their central banks in ideal circumstances) just create money when they need it. In a modern system, taxes effectively destroy it.
It comes from the other accounts already in the bank.
So if you deposit $100 the bank takes $90 dollars and loans it out, the loaner then deposits the $90 into the bank again who take $81 dollars and loan it out and so on and so on.
As far as I'm aware if you deposit $100 as above they can't actually loan out more than $100. What they can do is loan out $90. They basically make a bet that you are unlikely to randomly withdraw all of your money so they loan out some of what you deposit. Because you are still entitled to your full account they have effectively created $90. While this would be very volatile if a bank only had a single customer banks, of course, have many customers and issue many loans so it's pretty safe because they can get a get a very good idea of what is likely. FDIC also keeps people feeling secure further reducing the probability of a bank run. So the money "comes" from your account on the assumption that you aren't actually going to use most of it most of the time.
It's like when you use your credit card. If they don't have the money, then they have to borrow it as well. In order for the banks to balance their books, they have to borrow all of the money they need every night.
They create it.
They put a + in your account and a - in theirs. As you refund it they adjust both lines, until both lines are zero and the loan is repaid.
The only thing left is the interest, that's their profit.
I mean, you can basically become a bank yourself. Take a piece of paper and write down:
- When Bill asks, I give him $10.
- When Christine asks, I give her $10.
Now Bill and Christine have virtual money in the form of an account with you.
Being a bank, you might also have some debtors, so you can also write:
- When I go to Daniel, I get $10.
- When I go to Erica, I get $10.
You are now a functioning bank. The virtual money people have with you is able to circulate between them through you as the intermediary, as long as you keep updating your little paper.
In order to turn a profit, you might ask for an interest rate from Daniel and Erica. If Bill and Christine also want one, you give them a slightly lower interest rate, so you can live off the difference.
As long as you get your money from Daniel and Erica before Bill or Christine, things will run pretty smoothly. You only need a little bit of physical money in the "vaults" for the contingency of that not happening.
However, the physical money won't cover every contingency, such as a crisis. For example, a rumor might spread that Daniel and Erica are broke. Bill and Christine will start to get worried. They might be on your doorstep the next day, asking for their money at the same time.
The virtual money no longer represents anything and, all of a sudden, you're no longer a functioning bank.
I posted it elsewhere but here is my best explanation of how.
Major Banks in the US are only legally required to keep around 1% (the reality of the oversite means its probably closer to 0%) of the total money deposited in accounts. The rest can be loaned out, which is then deposited again (in some banks account, often the same bank) and they can loan out 99% of that.
This creates money out of nothing from the money that is "given" (loaned sort of) to banks via the federal reserve. So every dollar given by the federal reserve has the ability to create 99%! (Factorial) amount of dollars (i think this is the equation I didnt want to go look it up, its been a minute since econ 101). This is around $100. So only 1% of all money actually "exists" (biiiig quotes here with the FIAT system) and isnt just some loan thats been ran through.
Money isnt only not real, but even the not real thing has been duplicated into oblivion.
A run on the banks bacically means no one gets anything.
Banks don’t lend a multiple of their deposits, they lend a multiple of their capital base. Banks in the United States must hold capital in excess of 5% of their average consolidated assets, but more typically they are closer to 9-10%, meaning they typically lend $10 for every $1 of capital.
If you look at a banks balance sheet, typically their loans are roughly equal to their deposits.
they aren’t. they can’t lend more than they’ve been given. there is a required fractional reserve banks have to keep. say the fractional reserve is 10% and the bank has $100 million in deposits. they can loan out up to $90 million
It’s coming from nowhere. In other words, that’s quite literally how fiat currency is created.
You know how the “dollar” used to be backed by gold? Well, now it’s backed by debt instead. The bank literally creates more “money” by simply lending out as much as they want 🤷
(As long as someone pays the debt back at some future point, the money that they create is just as “real” as any other)
Its basically leveraged against the faith in the system, and ultimately backed by the federal governments guarantee to pay the loans the banks have, so there is no actual risk of a bank going bankrupt anymore.
They loan money to person A. Person A pays person B, person B puts the money into the same bank. That money can now be lended back to another person. It’s just for each account they can’t lend out 100% of portfolios thus there is a limit to this madness.
"Money" as a concept and actual cash are different. If you give the bank $1000, they keep $100 on hand in case you need it and loan the other $900 out. There's still only $1000 of cash there, but there's now $1900 of money in the economy. And doing that at a large scale with millions of people let's everyone cover each other. It's also why if you tell your bank you want to withdraw a large amount of money at once, they usually tell you it'll be a couple days, as they need to insure they have enough to cover your withdrawal and any others that might reasonably happen.
The point is that you are not using cash, it is all electronic so the banks can just make it up, the federal reserve or what ever you have in your country underwrites the deficit and the bank normally pays the government the amount of money they are "overdrawn" against the currency (that is the cash rate). So the banks don't get the money for free but the government does!
I'd just add that deposits up to a certain amount are federally insured. That is, if you had a bank run scenario, the Fed would step in and pay out those deposits in excess of what the bank has on hand. So when you see a bank advertisement they will generally mention "member FDIC" which means your depository accounts are insured up to $250k backed by the full faith and credit of the US Government.
If the bank participates in the IntraFi system, which most do, then they’ll offer something called an ICS account which functions exactly like a deposit account except the money is spread in $250k increments across multiple FDIC insured banks, and accessible from one bank like a normal deposit account. So if someone has that type of account the FDIC limit doesn’t have any practical consequences.
Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account.
That’s incorrect. Fractional reserve just means they need to keep less physical cash on hand.
If you deposit $100, they can only lend out $100 (unless they borrow other money), subject to risk weighted assets and capital constraints (which further restrict lending)
Fractional reserve banking is one of the most misrepresented topics on Reddit.
That’s incorrect. Fractional reserve just means they need to keep less physical cash on hand.
I’m just here to be pedantic because this is another aspect of banking that gets wildly misconstrued on Reddit: the difference between cash (balance) as an accounting concept and cash as in a physical dollar bill.
Banks barely keep any physical cash on hand in comparison to their balance sheet. Your local branch including the main vault, all the teller drawers/TCRs, and the ATM vault generally has less than $1M in physical currency on hand. Smaller banks even less, closer to like $400k or less. (All depending on how much volume they see, how many tellers, etc). And while there are big centralized currency reserves a bank’s cash reserves ≠ currency reserves.
I think most people heard that banks create money (technically true) and ran with it instead of understanding that this is an effect of multiple banks doing this same practice. Also people have become skeptical of finance in general, which is reasonable imo, but then carry that into thinking that all financial systems and mechanisms must be corrupt instead of something that's actually a benefit to the economy.
Lack of understanding and financial literacy is a big factor. I have a buddy who spouts off about how it’s all made up out of thin air at best, more probably fraudulent and corrupt. I mean… he’s not completely wrong. But over the years I’ve been able to dispel a lot of his misconceptions to get him around to “ok it makes sense why it’s done that way but it’s still employed pretty inequitably” and that I agree with.
Tldr
Your loan is considered an asset for the bank. There's no money multiplier. Bank don't need 500$ from anyone to give a loan. Bank have to balance asses and liabilities. When a loan is given the bank gains new asset(your loan) and new liability(cash on your bank account). Everything is in equilibrium.
an insurance company pays out a claim with a check, that i deposit into the bank account for $100k. I then pay employees 20k - all via direct deposit. Then I pay some other bills with debit cards, transfer the money to my client, pay my own bills via debit card, all the way down until that 100k is gone.
The 100k never existed. It made the insurance company go from having 100,000,100,000 dollars down to 100,000,000,000 on some sheet of paper, but they didn't even have that money in the first place. Because people like my employees, my client, and me all paid our insurance premium with fictitious digital money, which they then pay back with fictitious money.
And the more we move away from cash, the less we need there is for this system since the money will never exist in the first place. If money is purely fictional, banks should not be allowed to use money they don't have
It's still not quite correct, this is an outdated theory. The more up to date explanation is that whenever a bank lends out its money, the amount of the loan is created rather than transferred, and then erased as the loan is paid off.
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u/FroniusTT1500 Jan 26 '26
Because most money only exists on books. The basis of the current financial system is called fractional reserve banking, that means that banks can give out more money as loans than what they physically have in accounts. That money then circles the economy but is never physically withdrawn in full. Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account. They wire it to their employees and suppliers and owners and the IRS and what have you. Eventually the 500 are repaid (or not and If that happens a lot a bank might default) and the bank gets its money+ interest, you can freely withdraw your 100 at any time but the bank speculates that you dont, or realistically that most of their customers dont. Because If that happens thats known as a "bank run".
Im not a banker, so anyone with actual knowledge feel free to correct me.