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Comment by nvy | Hacker News Reader

>That's the source of money, and the source of the price level.

The vast majority of money in the modern economy is created by banks, not by the tax agencies or even the mint. When the bank lends you $1000 they just create it out of thin air and credit your account by $1000.

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They still have to borrow the money from the central bank. Fractional reserves mean that the credited account's bank must deposit a portion of the money bank at central bank.

So there is a limit to how much money can the bank create.

They must only borrow the money (or get it from somebody else who got it from somebody who borrowed it from the central bank) that they need to pay you out in paper or digital cash and the money they have to keep in reserve. They do not have to borrow the whole credit value. The credit itself is created out of thin air but with some strings attached, so banks can't just create infinite amounts of credit and they cannot just pay out arbitrary sums of created credit. (Source: Some books I read a long time ago.)

> The credit itself is created out of thin air but with some strings attached

Yes - via the central bank, right? I thought that was how quantitative easing worked.

QE is a separate process from the usual act of money creation by banks making loans, it's best to consider it as an out-of-the-ordinary manual intervention by the central bank where they create new central bank money ad hoc and use that to purchase assets on the market. The normal process of money creation is banks creating new commercial bank money when making loans to individuals and companies.

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

Mostly banks borrow from depositors and from the capital markets.

Reserve requirements of that type still do exist in some places (though in some places they've been abolished) but don't really play much of a role in determining how quickly money supply grows any more.

Control over money supply growth is mostly down to interest rates these days.

Similarly, the role reserve requirements used to play in protecting depositors has been replaced by the various "Basel" rules which determine what sources of funding banks can use to fund their loans which depend on the loan book's credit quality, tenor etc.

Banks don’t borrow from depositors.

Loans create deposits and the deposits just change ownership tag from then on.

I mean, they do, to the extent that people walk into banks and hand over wads of cash for deposit. I.e. it happens, but increasingly rarely.

How did you get the wad of cash in the first place and what is it?

A wad of cash isn’t money. It is nothing more than a receipt for a deposit held at an institution somewhere - that was created as an advance in the past in response to an equivalent loan.

When you deposit a wad of cash in a bank, the bank takes ownership of the deposit in the institution and creates a new deposit in the bank for you. It’s just another loan creating a deposit.

A deposit is literally you lending money to your bank, payable on demand.

That’s not the point. The point is where what you have came from in the first place.

A loan creates an advance. That advance is the bank owing a person in return for the person owing the bank.

The advance is then used to pay you so you have a deposit. All that does is change the ownership tag on the advance.

They don’t. Reserves are irrelevant for bank lending.

They are nothing more than a centralised optimisation of what would otherwise be a full mesh network of point to point exchanges

>They still have to borrow the money from the central bank. Fractional reserves mean that the credited account's bank must deposit a portion of the money bank at central bank.

Absolutely false. For starters, in many jurisdictions including the US, the reserve fraction is now 0% and has been for quite some time.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

The bank acts as an intermediary, but not the way economists tell you. They say that the bank is an intermediary of loanable funds between debtor and creditor. That is, money exists outside the system and the bank is just efficiently distributing it, kind of like eBay.

Except the bank is an intermediary of a completely different kind between creditor and lender. What the bank does is aggregate illiquid credits and debts to create liquid credit and debt.

You have a coupon that says you are owed X products by person A. Person B has a coupon that says he is owed Y by person C. The bank takes these coupons and transforms these illiquid promises into a liquid promise that lets you buy both X and Y products from person A and C. Think of it as a many to many relationship. The bank essentially acts as a blender that takes many things of non uniform quality and it produces a product of uniform quality.

When you go to the bank and bring a stack of coupon that says "I will work for one hour for you" and the bank puts a stamp on the coupons that says "Bank B vouches for this coupon". Except this is inconvenient. What the bank does instead is print its own coupons that everyone recognizes and it deposits your coupons in its bank vaults. The bank writes down that you owe it all the coupons representing your labor time that you deposited as debt. Except this again is inconvenient, we can do away with the individual coupons entirely. Since paying your own coupon debt requires you to withdraw the coupons using bank coupons, we can just decide that you owe the debt in bank coupons instead.

I think you're describing the difference between commercial bank money and central bank money, but I'm not sure.

This is largely correct. Commercial banks are permitted to leverage deposits (Tier 1 capital) by a large ratio.

If a bank lends $10 for every $1 of capital reserves, it will have a capital leverage ratio of 1/10 = 10%.

According to the Basel III standards, this ratio must be at least 3%, though country-wise regulations may vary.

https://www.wallstreetmojo.com/leverage-ratios-for-banks/

But money is also created in other ways. Here is a short article on how money creation, value creation and wealth creation are related:

https://nickrogers.tech/money-creation-wealth-creation-value...

Cheers!

Using what for collateral?

Yes banks create money but all they do is discount what already exists.

As every budding entrepreneur finds out when they try to get a loan at 17 years old.

Banks provide liquidity after the fact. They don’t kick the system off.

This isn't contradicting the GP's point: money is created by private banks, but they still create “United States dollar” that get a significant part of their value from the US government's ability to enforce taxes.

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