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Comment by colorint | Hacker News Reader

Banks can't print money either, and this isn't some "ackshually it's the Mint" thing: banks have the power to create debt. But this isn't special, because you and I also have the power to create debt. What makes a bank special is that debt is its business (so most of its operation concerns the management of debt), and much of its debt can be called on demand, and so we call banks' debts to us demand deposits.

Fractional reserve is just a particular kind of regulation placed on banks' creation of debt, and it usually isn't the most important one. The practical limit of banks is that they have to be able to extinguish their debts (which we call withdrawal), including being able to transfer them to other banks in exchange for cash (which we call clearing), at the whim of the creditors (you and me).

The problems with banks are the problems with debt generally, but that's much trickier than some glib remarks about monetary policy.

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You can't really create debt with money that you don't have, as the banks do.

You can't make 1000$ appear on my bank account and say " you now have a debt of 1000$ to me". You need to give me physical money. But bank can create this money they don't have.

The bank isn't creating that money. When you deposit $1000 in a bank account, you lose that $1000 and gain 1000 FunnyMonies instead. The bank can then turn around and give that $1000 to someone else. At the end of the day, there's only $1000 running around.

What makes it look different is that we treat 1000 FunnyMonies as if it were $1000. So instead of saying "there's $1000 and 1000 FunnyMonies" we say "there's $2000, oh look, the bank created money." But it hasn't, and when the difference really matters, and the bank doesn't have the ability to give you back $1000 for your 1000 FunnyMonies, that's when bad things happen.

Absolutely not. The bank can lend those 1000$ to several people.

I think it can lend it up to 10 times the money it has in its vault (not sure about the exact amount)

You are correct, it's called "fractional reserve banking". It's not a standard 'x10' though, since it's based on rules from federal banks etc.

Let's be careful about what scenario we're talking about.

> You can't make 1000$ appear on my bank account and say " you now have a debt of 1000$ to me". You need to give me physical money. But bank can create this money they don't have.

This scenario doesn't involve real money at all. It's just two IOUs in opposite directions. You and I could make such an agreement trivially.

> I think it can lend it up to 10 times the money it has in its vault (not sure about the exact amount)

So this involves real money. But it's not a special bank power. You can loan a friend some cash, which they give to you for safekeeping. Then you can loan another friend the same physical dollars, which they also give to you for safekeeping. Then another, and another...

Now you have $10k in cash deposits even though there's only $1k in physical cash.

The only reason you can't do it in practice is that nobody wants to give you their money for safekeeping. You don't lack the ability to multiply money. You lack anyone handing over money to do it on.

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