Say I deposit $100 in a bank, and the bank says I can draw my money at any time I want (forget about interest). The bank obviously doesn’t have the money in it’s vaults, or probably has a little amount of reserve alone believing all depositors won’t call back their money at the same time.
I suppose money supply increases only when two things happen simultaneously: when the money that I have deposited is either partially or completely loaned out to a borrower, AND I am able to use my deposits (obviously via newly created money) at the same time.
Am I right? How does the bank make sure I use my money when it has technically loaned out the money? Does it use money instruments?
Banks operating under a system of fractional reserve banking don’t actually create new money. Instead, what they create is credit out of thin air. This has the same economic effect of monetary inflation even though there is no increase in the amount of money circulating in an economy.
If you haven’t already, you can read more about this in Jesus Huerta de Soto’s “Money, Bank Credit and Economic Cycles” which you can download for free at Mises.org here: http://mises.org/resources/2745
In my opinion, this is an inspiring book because of its thorough, systematic approach to the subject at hand. In it, the author addresses the subject from several perspectives: banking history, legal theory, accounting and economic theory.
"Banks operating under a system of fractional reserve banking don’t actually create new money. Instead, what they create is credit out of thin air. This has the same economic effect of monetary inflation even though there is no increase in the amount of money circulating in an economy. "
is the credit that you mention counted in dollars in the current banking system?? is this what actually occurs now??
credit expansion is monetary expansion.. credit is money. all the transactions not done with cash are credit transactions.
I am able to use my deposits (obviously via newly created money) at the same time.
The money is created through loans and checking accounts.
How does the bank make sure I use my money when it has technically loaned out the money? Does it use money instruments?
To understand FRB it is neccessary to understand that the vast majority of transactions completed are done by check or electronic transfer not with physical cash. Physical cash is only needed for small petty transactions. Everything else a check is written or a transfer is made.
Some banks take in more physical cash than they send out. In this case the physical cash is sent to the fed for deposit. Once this cash is put into the Fed system it is no longer tied to any particular bank. In the same way that once you deposit physical cash into your bank, it is no longer tied specificly to you. The Fed ships the physical money to the banks that need it, just like your bank takes the physical cash that you deposited and gives it to other customers who demand it.
This is very rough description of what happens. Obviously if all customers demanded physical cash the jig is up, but most write checks or use debit cards. And through checks you technically have access to all the money you deposited.
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Liabilities
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Assets
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DDA Cust 1
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DDA Cust 2
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DDA Cust 3
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Loan Cust 2
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Cash on Hand
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On Deposit with Fed
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Begin
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$0.00
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$0.00
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$0.00
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$0.00
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$0.00
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$0.00
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$1,000.00
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$100.00
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$900.00
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End
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$1,000.00
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$0.00
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$0.00
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$0.00
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$100.00
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$900.00
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Cust 1 Deposits $1000 physical cash into a checking account. Increases Cust 1 checking and cash on hand. Then Bank only keeps a small portion of physical cash in its vault to handle daily transactions. The rest is sent to the Fed for deposit.
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Liabilities
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Assets
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DDA Cust 1
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DDA Cust 2
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DDA Cust 3
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Loan Cust 2
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Cash on Hand
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On Deposit with Fed
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Begin
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$1,000.00
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$0.00
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$0.00
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$0.00
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$100.00
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$900.00
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$900.00
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$900.00
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$0.00
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End
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$1,000.00
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$900.00
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$0.00
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$900.00
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$100.00
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$900.00
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The bank lends Cust 2 $900. Increased Cust 2 checking account and loan account. No physical cash is neccessary.
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Liabilities
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Assets
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DDA Cust 1
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DDA Cust 2
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DDA Cust 3
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Loan Cust 2
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Cash on Hand
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On Deposit with Fed
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Begin
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$1,000.00
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$900.00
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$0.00
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$900.00
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$100.00
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$900.00
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($900.00)
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($900.00)
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$1,800.00
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$0.00
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End
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$100.00
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$0.00
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$1,800.00
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$900.00
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$100.00
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$900.00
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Cust 1 and Cust 2 buy $900 of goods from Cust 3. They write checks. Cust 3 deposits those checks in the bank. Again no physical cash is neccessary.
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I don’t know what the most popular take on this is, but I remember that Mises didn’t equate credit and money.
“credit expansion is monetary expansion.. credit is money.”
“i don’t knot the most popular take on this…”
“mises didn’t equate credit with money…”
why dont you know the mosty popular take on it??? what ia a most popular take???
is there some reason that the mises distinguished between credit and money??? the durability , divisibility crap???
what similarities do credit and money have???
Say I deposit $100 in a bank, and the bank says I can draw my money at any time…
i guess you mean 100 dollars in paper cash???
if you asked for you 100 dolars back in paper cash and several others did too somehow the bank would have to come up wiht a lot of paper cash.
i guess if there reserve issues stayed the same if you put the paper cash back into the bank along with lots of other people they bnak could potentially keep even more money out in loans creating even more paper cash/credit in total circulation. but the operation is not clear to me.