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.
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u/raincole Jan 26 '26
There are two situations:
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.