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?
Person A deposits $100 in the bank.
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.