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Comment by redblacktree | Hacker News Reader

This isn't really true. New USD is created anytime someone gets a loan. The Fed impacts that money creation only indirectly by setting rates (not considering QE -- even with QE, the point remains: new money is created when a loan is made by a fractional-reserve institution)

Edit to further elucidate: It isn't exactly the loan that creates money, but what happens with the money after the loan. It will almost certainly land in a bank account somewhere, adding to that bank's reserves, which allows them to lend 90% of the loan's value again. (assuming a 10% capital reserve requirement)

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This is known as the money multiplier effect.

It's perhaps better put like this:

You store a dollar in the bank. The bank makes a loan to a business to buy cars. The car company stores that dollar in another bank. The bank makes a loan with that dollar to a farmer to buy sheep from another farmer. That farmer who sold the sheep puts that dollar in the bank.

That one dollar was used in three different transactions, thus creating more US Dollars than were actually printed.

And on and on it goes.

Edited to add:

That's why runs on banks are so dangerous, because the bank never has the full amount of money in it's safe. It's using that money to make loans.

This is simply false.

Your comment would be more useful if you attempted to address my misunderstandings, as you perceive them.

You and I go to the bank and get two loans backed by the same reserve. We party and spend those new dollars which in part didn't exist before. Then we work to repay the bank and make the debt and credit columns agree in the books. Btw, the money of salaries we get could be borrowed too.

Another shot at it with a thought experiment. Everybody goes to the bank and borrows 10k every month. The bank never asks them back for the first five years. Result? Inflation, possibly hyperinflation. Same as if they would be printing money (and they'll won't get anything back when the five years are past.)

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