Comment on Where does the revenue gathered from taxes go and what is national debt?
workerONE@lemmy.world 5 hours agoWhen a bank issues a loan it creates a credit in the borrower’s account. When the borrower withdraws/transfers the money from their account the money comes from the bank’s reserves. The bank’s reserves consists of deposits and other liquid assets. The money in the bank’s reserves started its life by being created by the federal government. You may argue that the bank is loaning money that it does not hold in reserves, but for lack of a better description, this is a huge liability for the bank that can create insolvency issues (bank run). For this reason, I do not agree that banks create money when they issue loans, since in the end their loans must be paid from the reserves. These reserves are not created by the bank.
booly@sh.itjust.works 2 hours ago
Your own link from the Bank of England starts off with the thesis that agrees with me:
And you might as well link to the canonical URL of the PDF or the Bank of England website landing page for that article instead of Google Drive acting as a middleman.
No, you’re misunderstanding how the money supply works. The creation of physical printed money might happen by the government, but those physical dollars represent such a small portion of the overall money supply.
First of all, through fractional reserve banking, one physical dollar can get multiplied many times over to represent many dollars in circulation. Especially because most transactions happen on paper, through a ledger that transfers funds from one account to another.
Everything you’re saying still relates to the practical limits of money creation by commercial banks, in terms of creditworthiness (banks don’t want to lend money they can’t get back) and liquidity/regulation (banks don’t want to be left vulnerable without sufficient reserves to satisfy account holders demanding their deposits).
Realistically, the bank takes one of their own assets, such as the balance on the loan, and uses that as collateral to borrow liquid cash as needed for its own reserves (which are only a fraction of the total deposits in its accounts). And every dollar in a circle in a closed loop that doesn’t touch the Fed is a dollar that doesn’t actually trace back to a governmental entity. The Fed is a lender of last resort, but they’re a last resort because they generally charge higher interest than bank to bank loans.
So of the entire money supply, the vast majority of it is dollars created by banks, not dollars created by the government.
workerONE@lemmy.world 1 hour ago
You’re right that that article does talk about banks creating money and it’s true that banks can create money when they lend more than they have in reserves and assets. But my larger point was that although people can spend the money, to the bank it’s a liability when they can’t cover withdrawals during a bank run. If they were liquidated they would have a negative balance in the amount that they had loaned out or created and they would now have a liability .Also, you mentioned fractional reserve banking but that no longer exists. It ended around 2020 when the government changed regulations and no longer requires banks to hold any ratio of reserves to debt.