Test this on people you know

[VetLegion]

A new bank opens.

Two guys walk in, each deposits $50.

A third guy walks in, asks for a loan of $1000, bank gives him the loan.



I recently casually mentioned this over drinks and got blank stares. I had
really thought that it was common knowledge that banks invent money out
of thin air (via FRB), but apparently it is not.

Puzzled, I repeated the above story at work (I work in a bank). I got more blank
stares. "How do you mean? Banks lend out depositors' and owners' money, they
can't lend $1000 if they have only $100. Are you feeling well?"

Do me a favor, try the above story on someone you know and let me know
what they think, do they agree it works that way and do they think it's morally OK.

[Al B. Sure!]

I don't think you quite understand deposit multiplication. I could be wrong but the creation of commercial money (invent money out of thin air, I suppose) is due to successive deposits of loaned money, not arbitrarily loaning out some sum of money as in your example.

The initial $100 deposit... let's say there's a reserve ratio of 20%... so $20 is in reserves
$80 is loaned out; the borrower spends it and it ends up as someone's deposit. This $80 deposit, 20% is set to cash reserves ($16) so..
$64 is loaned out... deposited and $12.80 is put in reserves...
$51.20 is loaned out...

and so forth til you have the money supply being considerably larger than the initial deposit.

Are you feeling well?

[Kitschum]

It's not created out of thin air in any case.

[OzzyKP]

I'm not sure AS' description was clear. But my impression is that banks "create" money just through the process of loaning out deposited money. So if I deposit 1,000 and someone gets a loan for 1,000, that $1,000 cash is, in theory, in both places (in my bank account, and in his). Even though there is only $1,000 total.

[Al B. Sure!]

I'm not sure AS' description was clear. But my impression is that banks "create" money just through the process of loaning out deposited money. So if I deposit 1,000 and someone gets a loan for 1,000, that $1,000 cash is, in theory, in both places (in my bank account, and in his). Even though there is only $1,000 total.

Subtract away the reserve requirement and that's about it.

[Cort Haus]

I don't understand all the over-complication here. The initial premise seems to be a fairly standard summary of banking principals.

Banks 'create' pretend money. How else did it all go so wrong?

[Al B. Sure!]

I don't understand all the over-complication here. The initial premise seems to be a fairly standard summary of banking principals.

Banks 'create' pretend money. How else did it all go so wrong?

His example is wrong. He says here, tell people this example and see how dumb they are! But the example is wrong. Of course, they look at him like he's crazy.