Say I gave him an IOU for a dollar. When he goes to the supermarket, they will accept the IOU. So will the gas station, his landlord or anybody else he does business with. Their banks will also accept my IOUs. They have all accepted my IOUs before. They all have, or know people who have, converted my IOUs to hard cash before.

The IOU is an account balance. Have I created money?

> Say I gave him an IOU for a dollar...Have I created money?

Technically speaking, yes! (Neat, huh?)

If the IOU is accepted as currency, that is. You have rights to the original dollar and the borrower has rights to the IOU. Practically speaking, however, you haven't created money because nobody treats your IOU as money.

(Side note: this isn't a stupid question and doesn't deserve to be downvoted.)

Yes, that was my point. To spell it out: the whole difference is who will accept the IOU. When everyone will, that's money.

Only if his obligation to you is transferable - that is, if you can freely pass it onto another person, and then the debt is owed to that other person. For example, he could write you an IOU for one dollar, and then you could give that dollar IOU to another friend (possibly in exchange for goods and services). In that case yes, you have created money.

I think it is more along the lines of: Say you have no money. Your friend has no money too, and needs some. You lend him a dollar (because you are a bank and have special powers).

Voila, new money!

The superpower of banks is to take the dollar from you and lend 90 cents to your friend while promising that when you need your dollar they will have enough money around to make you whole. (When the time comes, they may or may not be able to keep their promise.)

Please, stop promoting this false conception of how banks operate. It makes really difficult to have serious discussions about the modern economy.

From the Bank of England, banks are not intermediaries of loanable funds:

https://www.bankofengland.co.uk/working-paper/2015/banks-are...

I'm sorry you didn't like that simplification. Anyway, it's better than "you have no money but you can make it appear from nowhere and lend it because you are a bank and have special powers".

The more details are given, the less interesting the special powers of commercial banks seem to be: not only is the amount of money that they can create limited to some multiple of the "real money" base, but they don't even lend that much out because it's not profitable.

But the "real money base" will expand on demand if the banks need it. It's not a limiting factor! The loan happens first. The base money is created (if needed) after the fact. It's not as if base money is pushed out there and then the base money is used to create loans. Loans pull base money into being.

It’s not a limiting factor anyway because US banks have 1.4 trillion dollars in excess reserves deposited at the Fed (down from 2.7 trillions five years ago!).

The monetary base (physical currency plus banks deposits at the Fed) is currently $3.3tn.

M1 (circulating cash plus on demand deposits) is $3.9tn (the money multiplier is slightly above 1, but it was below 1 for most of this decade!).

M2 (including also savings accounts) is $14.9tn. M2/MB is 4.5, it has ranged between 3 and 5 over the last 10 years. It was between 8 and 12 in the four decades before 2008.

The superpower of banks is taking a dollar from you and lending 10 dollars to someone else. With interests.

That special power is literally the distinction between bank and central bank, and what this whole thread is about.

Central banks do have that special power, they can literally create money out of nothing. A normal bank can lend out a $, but they need to have taken a $ deposit, and it stays on the banks balance sheet.

Normal banks special powers are turning risky illiquid debt and making it appear risk free and liquid to depositors.

No, because you don’t have the right to use $1 at any time.

In a bank, Person A gives the bank a dollar, the bank loans out (let’s say the full dollar for simplicity) and, some steps later, the dollar is out back into the bank (let’s say person B does this for simplicity).

Both A and B have title to a dollar, so yes, there’s more than one.

The bank created it by creating a liability for themselves. This is ok because long term the loaning of the dollar should create more than a dollar in value, so the liability will be covered.

So you don’t think the bank is creating money when it lends out the balance from savings accounts? (That is, the deposits that you do not have “the right to use at any time”.)

> you don’t think the bank is creating money when it lends out the balance from savings accounts?

Banks don't lend out balances. "Banks lend out balances" is just an analogy. (It was truer under the gold standard.)

Banks create money through lending and destroy money via write-offs. Periodically (in the U.S., at the end of the day) banks count up what they owe and what they're owed and make sure the ratio is legal. If not, they borrow (from each other or from the Fed) to make up the difference.

(For monetary purposes, savings accounts are checking accounts. Banks don't segregate savings from their balance sheets. Balances in savings account can be withdrawn just as easily as those in checking accounts.)

> And for monetary purposes, savings accounts are checking accounts

There are different definitions of money and saving accounts are included in M2 (“money and close substitutes”) but not in M1.

What about time deposits? For short maturities they are included in M3. And what about longer term depositss? Are banks creating money when they lend those out?

> What about long-term deposits? Are banks creating money when they lend those out?

You're hanging on to the "banks lend out deposits" mental model. Stop that. The Bank of England has an accessible write-up on this: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-....

Loans create deposits. Whether those deposits then end up in a checking account through a payroll service or a vendor's savings account through a payment for goods and then transfer is irrelevant.

"Banks create money through lending"

A bank making a loan is trading one asset, cash, for another asset, a loan. If that's "creating money", then doesn't that imply that a loan is "money" and cash is not "money"?

I’m not familiar with any savings accounts that dont permit you to take money out whenever. You might mean CDs, which will, as per the agreement, assess a fee against you if you take it out early. But you still have title to the cash whenever you want. It’s yours. And if a fee happens, the fee is still money that is now owned by the bank instead.

Down the line you suggested depositing money creates money because now you and the bank have a dollar. That’s not true, because the bank doesn’t have title to the dollar.

I think it is a general rule of savings accounts in the US (in my experience anyway) that you can make a limited number of withdrawals per month.

The bank does have the f* dollar!

(And can deposit it at the federal reserve, if somehow you don’t think actual money is good enough to qualify as money.)

If I ask you to hold my drink, you’re not allowed to drink it. Banks have rights to do certain things with your deposits, but it’s not theirs. They can’t decide to pay salaries and deduct the amount from the deposits.

Custody isn’t title.

It is part of M0. It's more "money" than deposits (M1) or savings accounts (M2). In a discussion about money supply it definitely counts as money. And they have it. Yes, they need to keep enough reserves but apart from that it's their money to use as they please (lend, invest, spend, pay dividends...).

The deposit is their liability (obviously they can't spend it). The dollar is their asset. When you deposit the money into a bank that dollar is not yours anymore, the bank is not keeping it in custody for you.

Banks don't lend any specific deposits. The deposit is a liability of the bank. The deposited cash is an asset. When the bank makes a new loan, they create both a new asset (the loan) and a liability (the deposit of the funds lent). The existing savings account isn't part of the new loan.

While this is technically true, it is a partial description and a bit misleading.

When a loan is taken, it is usually not taken just to sit in a bank account, it is to be spent. When that happens (by cash withdraw or transfer to a different bank), a bank must release/transfer base money, which it can get from cash deposits, incoming transfers or in exchange for some other assets.

Therefore, although banks create M1 money by lending, they are limited in practice by necessity to keep balance of base money. So it is more a distributed/emergent behavior, where each bank ability to create M1 money is limited by its market share and the rate of money production by other banks.

You’re assuming the loan stays at the bank as a deposit, but normally one takes a loan to give the money to someone else. As soon as the client goes to the teller to get her money, or a cheque she wrote is cashed, or whatever, the balance sheet of the bank will change again (and shrink unless whoever gets the money deposits it again at the same bank).The asset (the loan, the fact that the client owes money to the bank) will stay. The liability (the money the bank owed to that client) will disappear, together with some of the liquidity that the bank had in its balance sheet. It’s ability to lend money has disminished and eventually it will need more liquidity and/or financing (in the form of new deposits, interbank loans, bond issuing, capital raising, central bank credit lines or whatever).

Yes, there are of course limits to bank lending. Ultimately, the limiting factor is the ability of banks to make profitable loans. The capital and the reserves will follow if the profitable loans are there.

The money lent does not go away when the check or whatever is cashed at another bank. The reserves follows the check. We're just working with more balance sheets now.

As long as the loan asset remains in the books, it earns interest which will add to bank equity.

We can keep bringing up details, but the basics remain the same. Bank lending creates money.

We agree, money (under various definitions) is created within limits.

In fact banks also create money when they take cash deposits (and destroy money when they hand out cash).

If I deposit a $100 bill into a bank we’re increasing the money supply because I have $100 and so does the bank (until it spends it, trades it for a non-money asset or lends it out).