The Actual Procedure of Creating Money

[JamesIrvingGreene]

@reidbump

Fractional Reserve Banking

I understand how fractional reserve banking works but how is the actual money created? I know that for every $100 of deposits a bank can lend $900 on a 10% reserve ratio system, but that $900 must be able to be converted into actual paper or electronic dollars, so does the lending institution have a right to require the Fed to print that $900 if the borrower or someone else wishes to redeem it? If so, how does that process work? Can somebody point me to something that can explain the actual procedure that requires the Fed to print/create electronically that $900?

It seems to me that if a bank had a $100 deposit and was restricted by a 10% reserve requirement then that bank can only make a $90 loan while keeping $10 on reserve.

There seem to be two positions I see Austrians taking regarding a reserve requirement (lets say 10%):

1. With a $100 deposit the bank can make a maximum $900 loan.

OR

2. With a $100 deposit a bank can make a maximum $90 loan.

Number 2 seems to be to be the logical and correct answer, but I see enough people asserting number 1 (such as that a bank can loan 10 dollars for every 1 dollar on deposit) to make me question myself.

[jimmy]

@James Greene

It seems to me that if a bank had a $100 deposit and was restricted by a 10% reserve requirement then that bank can only make a $90 loan while keeping $10 on reserve.

There seem to be two positions I see Austrians taking regarding a reserve requirement (lets say 10%):

1. With a $100 deposit the bank can make a maximum $900 loan.

OR

2. With a $100 deposit a bank can make a maximum $90 loan.

Number 2 seems to be to be the logical and correct answer, but I see enough people asserting number 1 (such as that a bank can loan 10 dollars for every 1 dollar on deposit) to make me question myself.

They’re one in the same (except the $900 crowd neglect to describe certain steps)… you simply have to follow it through a little further. After the bank has loaned $90 the borrower spends this and the person/company they give it to puts it in their bank… which then proceeds to loan our a further $81… and so on an so forth. Ultimately the total sum of loans that can be made on the back of $100, with a 10% reserve requirement, will come out to be close to $900 (it will “tend” towards this as banks loan themselves up to their reserve requirements).

A pretty good description can be found on Wikipedia.

[JamesIrvingGreene]

@jimmy

@James Greene

It seems to me that if a bank had a $100 deposit and was restricted by a 10% reserve requirement then that bank can only make a $90 loan while keeping $10 on reserve.

There seem to be two positions I see Austrians taking regarding a reserve requirement (lets say 10%):

1. With a $100 deposit the bank can make a maximum $900 loan.

OR

2. With a $100 deposit a bank can make a maximum $90 loan.

Number 2 seems to be to be the logical and correct answer, but I see enough people asserting number 1 (such as that a bank can loan 10 dollars for every 1 dollar on deposit) to make me question myself.

They’re one in the same (except the $900 crowd neglect to describe certain steps)… you simply have to follow it through a little further. After the bank has loaned $90 the borrower spends this and the person/company they give it to puts it in their bank… which then proceeds to loan our a further $81… and so on an so forth. Ultimately the total sum of loans that can be made on the back of $100, with a 10% reserve requirement, will come out to be close to $900 (it will “tend” towards this as banks loan themselves up to their reserve requirements).

A pretty good description can be found on Wikipedia.

Ahhah! Nice, thank you. That makes sense. It IS very misleading hearing people constantly say that a bank can loan 10 dollars for every 1 dollar that they have, because that is clearly not what happens. It happens in the indirect way that you describe. A couple of synapses just clicked together in my brain. Ahhh that feels good.

[nirgrahamUK]

now you too can say ‘Money Multiplier’ and bemuse your friends and family! congrats!

[scineram]

@J. Russell Wagner

Since each unit of fiat has its purchasing power lowered through the injection of more fiat currency, a loss of wealth results.

That does not necessarily mean loss of wealth. It might be that just its distribution changed. The problem with these argument is that any production becomes stealing then.

@jimmy

Ah, cool - so everyone should be allowed a printing press then?

If you outlaw printing presses only outlaws will have them!

@Thedesolateone

pieces of paper that must, under threat of violence, be accepted in lieu of debts

I am not saying this is not a problem. It should be abolished.

@Thedesolateone

imagine the government printed £100bn and gave it to banks. Say there was purchasing power of £10,000bn in the UK economy before. Now there is £10,100bn of money, but still £10,000bn worth of goods. The banks, however, have gone from whatever they had before, to £100bn more. They will now be able to buy more goods, due to the legal tender status of the notes.

This is not due to legal tender. If supply increases prices fall ceteris paribus.

@Thedesolateone

The prices of goods will have gone up, and they will cost more for everyone, but only the banks have got more.

Again, this is an indictment of any production. There are innumerable problems with fiat money. Out of thin air is not one of them. (They cost paper and ink. lol)

[Thedesolateone]

Scineram, I can’t be bothered to selectively quote you so just know this is aimed at you:

(1) Printing money would have little effect without legal tender laws, so long as no contract was broken. Government money would trade at a gigantic discount due to its unbacked nature. On the other hand, banks who backed their money with something other than administrative fiat would find their currency in use. But you haven’t tackled the issue - it’s still theft!

(2) I have no idea what you mean by your last point. Of course money needs paper and ink to produce! The point is that the money is treated as if it were worth a lot more than just the paper and ink, for no reason. Its strength rests only on fiat and confidence (which itself rests on fiat). What I said was not an indictment of production because production is pareto-efficient. Printing money is not; it costs most people and benefits a small group of entrenched elites.