Comment by rojeee | Hacker News Reader

Comment by rojeee | Hacker News Reader

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Not to be pedantic but central banks can and do become insolvent! E.g. developing nations with dollar denominated debts. Central bankers will tell you they can’t go bankrupt but of course they have to say this as the whole system is based upon confidence and trust.

Indeed, there have been certain periods of time where privately issued money / bank deposits were “safer” than central bank or government issued currency. Also keep in mind that bank deposits are not a promise to pay base money as people mistakenly believe. It’s just that commercial banks are a market maker between their money and the government/base money and it just so happens that the exchange rate is 1:1 unless the solvency of the bank, central bank or government is brought into question. Commercial banks also don’t “invest money”. Instead, they are in the business of swapping IOUs. When you get a loan, you swap your IOU (a debt from you to the bank - the bank’s asset) for the bank’s IOU (debt from the bank to you - bank’s liability). You do this because the bank IOU is readily accepted by everyone and yours isn’t. If you just have a deposit, you get it by swapping the IOU from another bank or an IOU from the government (notes and coins) for an IOU with the bank you hold a deposit with. Note that the deposit is not your money either.

> Commercial banks also don’t “invest money”. Instead, they are in the business of swapping IOUs. When you get a loan

Sure. But you don't simply get a loan. A bank (account manager) will make a decision whether they want to give you a loan (with a certain interest) or not. And I don't have any influence on that "decision". This is what I mean when I say "commercial banks invest my money on my behalf without me having any control over the process".

This is true! Sorry, I’m a bit of a nerd about this stuff. I was just making the point that, in accounting terms, the banks don’t invest money... they create and destroy it! Loan creation goes hand in hand with deposit creation and is a “grossing up” of the bank’s balance sheet. When the bank grants a loan, it also creates a deposit. So whilst I know it’s nice to think of “my money at the bank”, the reality is that your “money at the bank” is actually an IOU/deposit/debt that the bank previously created (when they granted a loan) and will, at some point, be destroyed when you or someone else pays back loan capital.

Reason being is that I somewhat take issue with economists of the Austrian school or “full reserve bankers” (eg author of OPs article) who fundamentally don’t understand what banks are and how they work. It’s incredible really, because if they took the time to write out the accounting journals for loan creation and destruction then they would, in a single moment, realise that much of what they advocate is in fact complete nonsense. Because, ultimately, banks don’t lend out base money... so they can’t possibly counterfeit it (as Mises claims). Banks also don’t have a special privilege to create “money”/IOUs - we can all do it and we do it all the time, It’s just that the bank’s money is widely accepted and ours is not.

>"commercial banks invest my money on my behalf without me having any control over the process"

This is completely wrong. Your money on your bank account doesn't exist. What you see is the number of dollars the bank owes you. Its a debt. They dont invest your money anywhere. It doesn't exist. When someone transfers "money" to you the bank subtractions debt from their account and adds it to yours. Its still the same debt they just owe it to someone else now. If they give you credit for example because you want to build a house. They create the credit out of thin air by putting the house on the balance sheet so they can give out credit worth as much as the house. You pay it back and the house is yours you dont pay and the house goes to the bank. Your own money is used first so the house is allays worth more than what the bank credited at any point in time. Nowhere does the bank need someone else's money to give you that credit.

Yes, money is debt and debt is money. That’s clear. But banks do like to attract new deposits cause it has an effect on how much credit they can create. They can’t just create infinite amount.

That's wrong. Read it again especially the last part "Nowhere does the bank need someone else's money to give you that credit."

They cant credit infinite amount because there is no infinite no-risk demand for credit. Banks dont give credit where there is a risk to lose. That's why startups need VC and not a bank credit. Banks attract certain deposit holders because they are future house builder or otherwise customers of something the bank actually makes profit with. They dont care about the money deposited but if its more its more likely to be a customer they can make profit with. So yes they are interested in you as a customer if you have money but not because you store it there and they want to use it for something. Its one of the most taught lies about how money and banks work.

what about the reserve requirement?

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