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Comment by zz865 | Hacker News Reader

> For every 1x physical dollar on hand, I will create 8x-30x crypto dollars to lend out and earn interest

That's not how fractional reserve works. Banks are money multipliers because loans are deposited again. Eg one person saves $100, someone borrows $95 - then deposits it again, so the bank can make a new loan of $90 etc etc

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When a bank loans 10,000 dollars, the amount is credited to a checking account. It does not have to come from somewhere else. What use would a loan be if you kept it in your checking?

Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around."

[0] https://youtu.be/CvRAqR2pAgw

Yes that is what I was saying. I'm trying to dispute the myth that a bank gets a deposit and lends out 10x as much that it magically creates.

Is that what you were saying? Because I'm trying to disagree with you. You seem to say that banks are not magically creating 10x money, that it only lends out money that was previously deposited. This is not the case.

They're lending 95% of their deposits or whatever the reserve requirement is. It's just that every other bank is too, and when they loan money it almost always ends up back in the banking system just in another account. The money creation is an artifact of the same dollar getting deposited and loaned multiple times.

We agree that the amount of loans roughly matches the amount of deposits. Lots of people (like beambot I believe) think there are 10x more money lent out than deposits.

Nope. GP said that storing money was expensive. I was simply alluding to the fact that (a) supply of physical dollars << assets on the balance sheet - i.e. fractional reserve, and (b) a trusted authority can 'print' money on demand so long as people have faith in its viability - i.e. central banks & federal reserve.

Bank financing is counterintuitive: deposits are actually liabilities, and loans are assets... but banks also routinely borrow money (e.g. from the Fed) well in excess of their book value. For example, JP Morgan's current debt-to-equity ratio is 1.675 [1], meaning that they are also (in a sense) "mortgaged" well beyond their net assets. It's debt all the way down...

[1] https://ycharts.com/companies/JPM

Thanks I've been working in banks for 25 years now and have an accounting degree. JPM debt equity ratio is about 12. They're supposed to be highly leveraged, that is how banking works.

Money creation happens when the money is deposited and loaned again

me -> deposit $100 in bank a -> bank a loans $95 to business -> business deposits $95 in bank b -> bank b loans $90.25

This loop repeats indefinitely until we're talking about fractions of pennies. The reserve ratio (and bank willingness to loan up to that ratio) determines the money multiplication effect. No bank is loaning more than it's actual deposits, it's just the effect of the same dollar getting deposited and loaned multiple times.

Except it doesn't have to be more than one bank, just different accounts at the same bank. So if a bank creates a loan, which ends up deposited in another account, their deposits have increased from $100 to $195. So the question becomes, where does the money that has increased the banks' reserves come from? It was created when it was loaned.

Maybe we are saying the same thing, I can't tell.

It's exactly how fractional reserve works. That it can happen more than once due to redepositing (in other banks, and so on...) doesn't help an argument against that reality.

You may have missed the memo that went out in 2008 regarding how banks like to do things in general. A kind of "statement" regarding their ethics and base principles.

The inventor of Bitcoin didn't miss it, and created a slightly better system that was at least based on something: pointlessly throwing energy away.

Did quite well at proving the concept, it's worth trillions at the moment. So it seems to work. In fact, those old banks might want to start up their own. You know, to compete.

Ah, the exciting world of finance.

As far as I know, that’s not how banks make loans. They don’t lend deposited money, the money they lend is created out of thin air.

No, he's right, that's the theory behind fractional reserve banking.

At a 10% bank reserve rate, 10x the monetary base is created.

Except fractional reserve banking is an incorrect model of how banks work, the poster you're replying to is correct, banks create money when they make loans. The Bank of England's guide to money creation makes this distinction clear on the first page, it's worth a read,

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

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