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Comment by peterclary | Hacker News Reader

No. If I lend you money, I have a correspondingly smaller amount of money. Nothing is created from nothing.

On the other hand, banks are allowed to lend more money than they actually have. Remember that a lot of money exists purely as numbers in a bank ledger. When the bank gives you a loan, they make a note in one place that you owe them X and then they simply increase the number associated with your bank account.

When people withdraw money from the bank, they are given notes from the branch’s own stock of notes. If the notes get low or run out then they are restocked from the central bank.

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> If I lend you money, I have a correspondingly smaller amount of money. Nothing is created from nothing.

In the simple case, yes. But let's say I run a bar, and decided to open a tab for customers so they don't have to pay right away. I'm effectively loaning them money (extending them credit), so I've effectively created "money from nothing" in the same sense, though on a much smaller scale, of course.

The difference is that your credit money cannot be mixed with regular money. They are mixed in the case of fractional reserve.

Banks do not lend more money than they actually have at all.

Banking is a simple business - you raise money by taking deposits, issuing bonds, borrowing from other banks, etc. then you keep a reserve (say 10%) and lend out the rest. That's why it's called "fractional reserve banking" because they must reserve a fraction of the money they have raised.

The idea that banks "create money out of nothing" is an analogy not reality - two people swapping IOUs for a million dollars haven't created 2 million dollars.

>The idea that banks "create money out of nothing" is an analogy not reality - two people swapping IOUs for a million dollars haven't created 2 million dollars.

The two million dollars gets created at a different stage, either through a government bailout, quantitative easing, or other (generally) inflationary methods but it absolutely does get created "out of nothing" at some point in the cycle. (There is also the FDIC which, while technically insured by the banks, in practical terms is backed by an implicit government guarantee that the funds will be there even if all the FDIC banks fail.)

Sure, central banks can create money. I was addressing the idea that private banks “lend out more money than they have” thus “creating money out of nothing”.

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