How Banks Create Money...Out of Thin Air

Anytime somebody criticizes the Federal Reserve System and tries to point out that the entire system is a private banking cartel masquerading as a "quasi-Governmental" agency, people defend the Fed and it's policies. They conflate any and every criticism of the Fed as "conspiracy theory."

Almost one year ago, I wrote a piece for the Spearhead called The American Dream: 21st Century Serfdom.

In that post, I wrote the following:

Understand that our modern economy is based not on MONEY…but on DEBT. An obligation to promise to paying the bankers – WHO DID NOTHING MORE THAN TYPE A NUMBER INTO A COMPUTER IN THEIR BANK LEDGER SHEET PROGRAM AND – VOILA! – you too can sign up for 21st century serfdom to achieve the “American Dream!”

But don’t look at the Bankers in your local neighborhood bank as your Feudal overlord…he’s just a mid-level overseer of the Lord’s vast estates.

See, his bank, in turn, has to borrow a fraction of their funds from the central banking system so that they can turn around and obligate YOU in your pursuit of the “American Dream.”

Does this sound outlandish or confusing to you?

Apparently, it did.

Here's some quotes from that article:

Richard Brodie:

A bank can’t create $1000 from a $100 deposit. It creates $90, which can then be deposited in another bank and create $81, and so on. There’s a decent Wikipedia article about fractional-reserve banking that seems to agree with me.

Lynch:

This doesn’t make sense to me, could you please elaborate further?

The initial $100 deposit, which could then be used to lend out $90.. that makes sense. The bank makes interest off of what it loans out on the $90, eventually recouping the initial $90 and then some. That’s how I’ve always understood banking to work.

However, when you say the $100 deposit becomes the “reserve” for a $1000 loan.. how does that work? In the first case, the bank takes the $90 from the account. In this second case, where does the missing $900 come from? At some point the borrower gets $1000 (for their car, business, whatever) and spends it. Then they are on the hook for paying it back. The bank still has to give out $1000. How do they do that from someone else’s $100 deposit?

Anti Idiocy:

I too question the accuracy of this analysis. I’m not saying it’s wrong, fractional reserve banking isn’t an area of great expertise for me. But it sounds fishy. My understanding is that if the bank receives a deposit of $100, it can loan out $90 of that. It doesn’t have to keep in reserve more than 10% of total deposits.

Gunn:

Technically this analysis is all wrong.
The $100 deposit is actually a bank liability on its balance sheet, not an asset. Any loans made to customers are assets on its balance sheet, as these represent monies the bank is owed.

ABS:

I’m sure HL means well, but this article really ought to be taken down – its not going to make The Spearhead look good, and really has nothing to do with MRA, guyinism, or whatever one wants to call it. Yes, money is created through the banking system, as some of the commenters have noted, but not in the way described by HL.

That's without even referencing a banker goon who used the handle Dexter Morgan to attack me in that thread.

One year later, I still see the same arguments over at In Mala Fide:

Fractional reserve banking is not exception: if people don’t deposit the money in their bank account, the bank is unable to loan more than what it has already.
The fraction of none is always none.
If they do, what the bank do is to take a loan from the people putting the money in their account and loaning to others.

E.G.
A deposit 100$ in bank –> Bank loan 80$ to B –> B buy 80$ of nails from C
C deposit the 80$ in bank –> Bank loan 64$ to D –> D buy 64$ of wood from E
E deposit 64$ in bank –> Bank loan 51,2$ to F –>…..

The bank, at the end, have received a loan from A, C, E and is able to loan to B, D, F
The resources used by the bank to loan are the initial 100$, the 80$ of nail, the 64 $ of wood, etc.
There is no creation of resources from thin air, only displacement of them in time (and hoping all the takers pay back the loans).

Let's make this really clear and unambiguous.

The Dallas Federal Reserves own website basically admits the truth about how Banks create money "out of thin air."

How Banks Create Money

Banks actually create money when they lend it. Here’s how it works: Most of a bank’s loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank once again holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.

I can't say it any plainer than the Dallas branch of the Federal Reserve does right there.