[milderworkacc]

> This is just completely wrong - banks only loan out money they have. If you go to a bank and get a loan the bank didn't just edit a database entry - they had that money. Banks loaning out money they don't have is extremely illegal.

I'm afraid to say that this is completely wrong. Commercial banks do in fact create money via lending! The 101 textbook explanation offered here is at best outdated and at worst misleadingly perpetuates a myth that simply must die.

The Bank of England's note on money creation in the modern economy [0] is the place to start - and more or less reflects the explanation in the article.

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

[lesuorac]

Page 19 seems to show that the newly generated money has to be backed by somebody's deposit and not just minted though. Like for any situation that doesn't involve you taking a loan from a bank to use that money at the bank the BoE paper calls out that the bank needs to get deposits from where you're sending the loan.

So, you buy a house using say Chase and the seller has Wells Fargo then Chase "mints" say 1M the money for your loan but then solicits 1M of deposits from Wells Fargo. like why does it matter if the 1m for your loan came from Chase depositors or Wells Fargo depositors? The point is that it's backed 1:1 by cash that came from a person which BoE example shows.

[throwawaymaths]

> the newly generated money has to be backed by somebody's deposit

Ok. Suppose I am a bank, and pg deposits $10. Then I lend to you, lesourac $9. This $9 is "backed" by pg's deposit. But I, the bank, only hold $1, and you, lesourac, hold $9.

In your head, you hold $9. In pg's head, he has $10 of assets. There are $19 of imagined assets running around, even though the "real" assets are only $10.

It's all good until pg pulls his $10 sooner than I expected, or if you, lesourac declare bankruptcy and default on your loan, and unable to pay back those $9. This is why bankruptcies are deflationary.

We could have a safer banking system if loans were from individual to individual, possibly mediated by a bank, and the lender fully accepted the risk of default.