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Comment by hgomersall | Hacker News Reader

I stopped reading at "Banks, at their simplest form, take in customers’ deposits and use those deposits (their source of capital) to make loans" which is laughably wrong. The loans make the deposits not the other way round, which is obvious when you stop to think where the deposits must have come from in the first place. Every deposit originates from a loan.

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I think it is a highly simplified or "stylised" depiction of the banking sector. It may or may not be an appropriate way to think of the banking system depending on the context in which it is used, but I would not say it is (necessarily) "laughably wrong". In aggregate, deposits are created by bank loans, but depositing cash with a bank may increase that bank's ability to make new loans, so it in effect "uses" the deposits to make the loans.

I have heard a lot of very intelligent and educated people describe the banking system in the same terms as the article. Too much to conclude that it is a laughably wrong take. If I stopped reading every time I saw that description, I wouldn't read much about the banking system at all, beyond that one Bank of England paper that people post every time this comes up.

If you stop reading when that comes up, you'd probably not read most of the nonsense that passes for commentary on the financial system and be much better informed as a consequence. It's not a simplification, it's completely wrong. There are plenty more descriptions of how it works if you care to look, it's just that the BoE paper is rather authoritative (coming from the bank that literally makes the rules within the UK).

The mechanism by which deposits "increase a banks ability to make new loans" is just a sideshow. Deposits are not the limiting factor in the banks ability to make new loans. It might be they use deposits as a cheap way to meet their Basel III liquidity obligations, but there are other routes to doing so.

> Every deposit originates from a loan

How is the cash I deposit from the dividends I earned originate from a loan? How about the community banks that purchase gold from their customers?

_All_ deposited money is created from a loan. Trace it back through the system (assuming you can) and you get to a loan creating a deposit.

This is factually untrue and I just gave you two counter-examples. While it's true that credit has long replaced deposits for money creation, the idea that all deposits strictly originate from some virtual loan operation is fallacious.

Consider that some banks are hundreds of years old and have commercial relationships that span well over a century, long pre-dating the modern financial system and the considerations we're discussing.

They weren't counter examples, they were just normal monetary transfers. Even early banks ran in the same way, with a double entry ledger. Every liability in the system is matched with a corresponding asset, that's just accounting.

I was under the impression that every cent that is created by the Federal Reserve and the US Mint, is delivered to banks via a loan.

Wouldn't that mean that the origin of all "money" under this system, either be a loan or fraud?

No seigniorage at all in the system?

Even central banks operate the same way. The result is what is called The National Debt (which is just the sum of money spent but not yet removed).

Obviously, not all transfers of money are loans, like your dividend payments, or normal transactional commerce. The statement is that when a bank creates a loan, it creates money. The money they give to the lendee is new money. This is the primary mechanism of money creation in our system.

Could you elaborate more on what you mean by that? I haven’t heard that perspective before.

The Bank of England has a full paper about the process

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

So it's only true because the trend at the moment is money is created by central banks giving loans. Is a roundabout misleading statement from the parent comment

It's true as a matter of accounting.

The bank takes your signed loan note as an asset and creates an advance against it on the liability side.

A deposit is just an advance with the ownership tag changed.

And that's how it has always been.

As Reginald McKenna, former Chancellor of the Exchequer and Chairman of the Midland Bank, said in 1928[0].

"I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process"

[0]: https://new-wayland.com/blog/post-war-banking-policy/

It's not the trend, it's how banks have always operated. There's no way within a double entry accounting system to create deposits without also creating the corresponding loan asset. If you know of a way to do so then all the politicians that obsess over the national debt would love to hear from you.

100%. Money is debt.

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