I've heard this many times but never understood it. How is there $190 of things that work like money? It seems like $10 of the original $100 is locked up, and only $90 is available in for purchasing goods; the owner cant use his money like money (only the assurance of "having" it, not the property of buying anything with it) -- only the person who ultimately gets lended that money can.
Person B receives a loan of $70 from the bank. Just to make the example easier, their only depositor is person A.
The bank now "has" $30, of which $100 is in person A's account.
Person A buys groceries, writing a check (yep!) to the store for $80. Their account has $100 in it, so they're fine. They've spent $80.
Person B also buys groceries, with cash. They give the store $40. The store now has $120, $40 in cash and $80 owed by the bank. They can spend their $120 in turn. There's no $70 spending limit imposed by the amount of the loan to person B. Person A had no trouble spending their money like money.
Some comparisons you might find of interest:
- The store ends up with more money ($120) than existed at the beginning of the scenario ($100). This is possible because the bank created an extra $70, and 120 < 100 + 70.
- The money the bank owes the store is more than the amount of the loan it gave to person B. This is largely a pointless comparison, but does illustrate that more money is available to spend ($170) than was loaned out ($70). From an accounting perspective, the bank started out owing $100 (to person A) when A deposited that amount, and ended up owing the same $100, of which $20 to A and $80 to the store.
Thats a good description. I may just be getting hung up on (meaningless?) semantics, but its still not quite the same as money but more like credit -- even though $170 is in play, nobody can actually go and get $170 dollars (well, other people's deposits at the bank notwithstanding). I guess fiat is also credit in a sense; but I wonder if the scenario somewhat conflates credit and money. That is I wonder if the bank "expanding credit" really means anything, or if that's simply the nature of credit itself. Thanks for the comments.
> even though $170 is in play, nobody can actually go and get $170 dollars
This is running the bank. As long as everyone uses a bank account, it's not a problem. If the depositors all try to withdraw their money in cash, the bank will be immediately destroyed, because it doesn't have the cash.
As explained in It's a Wonderful Life:
> You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.
A lot of work gets done without cashing out the money banks create.
What are the properties of "money", as conceived of by you, that "credit" does not share?
Because we aren't trading actual goods, but notes that are "guaranteed" to be worth something. That's fiat money. You aren't trading actual gold coins, or even coins or notes guaranteed to represent a specific amount of gold or silver, but notes guaranteed to worth something as long as well still believe in them. It's a system of trust, and if enough people distrusted that the notes were worth anything, it would collapse (as has happened in other countries in the past).
So, even if an entity had $1 in reserve, but gave you notes representing $1,000,000, that money is valid as long as both the person you are trying to pay with it trusts that the issuing entity will honor the note, and it is worth the trade being offered (services, goods, etc). It might not be a good idea to trust that entity, but if the system persists long enough, and the entity makes enough money on fees and interest to actually cover the extravagant lending before people try to claim the notes, then in the end it was (or may be, depending on the parties involved) a net success. The issuing entity made money on the loan, the person taking out the loan was able to use it to provide needed liquidity (hopefully leveraged to make their situation better), and the person paid with the notes was able to redeem them at the issuing entity, or use them with other people successfully.
What we have currently is that the government issues, but does not want to be responsible for vetting individual loans, so only loans to large entities that then re-lend (and these lenders may take deposits as a bank or have other sources of cash to lend out). They also require these lending entities keep a portion of the amount they lend in reserve (the $1 from above), but at a certain percentage rate such that they expect in most instances the re-lending institution can weather most cases of increased demand to make good on the money for their loans (otherwise a lender could over-leverage themselves with far too much lent to deal with even normal economic events).
