>The bank profits from fees we pay to the bank and from interest on loans from the bank, but they have to have the money before loaning it out in the first place. They can't just loan you money out of nothing.
Oh, I agree they have rules they need to follow. The way modern lending works is the bank makes you a loan and then goes looking for funds to cover its reserves by borrowing against your loan document. I'm sure they like to lend out depositors' money because it's cheaper, but they certainly don't need it.
They borrow from other banks if they can, but if not they borrow straight from the Fed at the "discount window". And when the Fed lends money it is literally created by changing a number in a computer somewhere. So ultimately that $1000 has been injected into the economy though the creation of money (which will get destroyed slowly as the loan is paid off).
The point, way back in the beginning, was that the money supply is really only constrained by the amount credit-worthy borrowers are willing to borrow at a profit to the banks. That's why the Fed discount rate has such a big effect on the money supply - by raising it they make unprofitable some portion of loans that would have been profitable at the lower rate.
I'm not sure if the central bank is technically part of the fractional reserve system. But is there fractional reserve system currency issuer without a central bank? I'm not aware of one.
Yes, it does sound like we're violently agreeing. Thanks for the informed discussion; I am so used to arguing with goldbugs and nutjobs, even on HN, that I was unprepared for an informed discussion.
Oh, I agree they have rules they need to follow. The way modern lending works is the bank makes you a loan and then goes looking for funds to cover its reserves by borrowing against your loan document. I'm sure they like to lend out depositors' money because it's cheaper, but they certainly don't need it.
They borrow from other banks if they can, but if not they borrow straight from the Fed at the "discount window". And when the Fed lends money it is literally created by changing a number in a computer somewhere. So ultimately that $1000 has been injected into the economy though the creation of money (which will get destroyed slowly as the loan is paid off).
The point, way back in the beginning, was that the money supply is really only constrained by the amount credit-worthy borrowers are willing to borrow at a profit to the banks. That's why the Fed discount rate has such a big effect on the money supply - by raising it they make unprofitable some portion of loans that would have been profitable at the lower rate.
I'm not sure if the central bank is technically part of the fractional reserve system. But is there fractional reserve system currency issuer without a central bank? I'm not aware of one.
Let me apologize for my tone as well.