Universities teach the exact opposite of the truth, of how banks create loans. New loans are simply ADDED to the bank’s deposit account.

On page 2 of the linked article:

Two misconceptions about money creation

The vast majority of money held by the public takes the form
of bank deposits. But where the stock of bank deposits comes
from is often misunderstood. One common misconception is
that banks act simply as intermediaries, lending out the
deposits that savers place with them. In this view deposits
are typically ‘created’ by the saving decisions of households,
and banks then ‘lend out’ those existing deposits to borrowers,
for example to companies looking to finance investment or
individuals wanting to purchase houses.

In fact, when households choose to save more money in bank
accounts, those deposits come simply at the expense of
deposits that would have otherwise gone to companies in
payment for goods and services. Saving does not by itself
increase the deposits or ‘funds available’ for banks to lend.
Indeed, viewing banks simply as intermediaries ignores the fact
that, in reality in the modern economy, commercial banks are
the creators of deposit money. This article explains how,
rather than banks lending out deposits that are placed with
them, the act of lending creates deposits — the reverse of the
sequence typically described in textbooks.(3)

Another common misconception is that the central bank
determines the quantity of loans and deposits in the
economy by controlling the quantity of central bank money
— the so-called ‘money multiplier’ approach. In that view,
central banks implement monetary policy by choosing a
quantity of reserves. And, because there is assumed to be a
constant ratio of broad money to base money, these reserves
are then ‘multiplied up’ to a much greater change in bank loans and deposits.
For the theory to hold, the amount of
reserves must be a binding constraint on lending, and the
central bank must directly determine the amount of reserves.
While the money multiplier theory can be a useful way of
introducing money and banking in economic textbooks, it is
not an accurate description of how money is created in reality.
Rather than controlling the quantity of reserves, central banks
today typically implement monetary policy


They do not require cash deposits to make new loans. It is a mere accounting entry for the banks.




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  • Tom

    Much writing has been done in recent years on various manipulations of prices: LIBOR, precious metals, etc. But the very heart of our economic system, fractional reserve banking, is itself the biggest manipulation of all. How can anyone know what the true cost of borrowed money should be (interest) when real savers must compete in the lending market with people who have granted themselves the privilege of lending thin air? If honest, accurate price discovery is the most important element in a free market system, we have been living in la-la land for a long time.

    Yes, the price of borrowing money would be likely to rise considerably if all lenders actually had to possess what they lend. But this would have as many positive effects as negative. It would discourage careless or unnecessary borrowing, and it would finally pay savers what their hard-earned money is worth to lend out.

  • Black_Flag

    You pretend money=debt idiocy.
    No, banks lend MONEY, and debt, called deposits, does not magically become money.
    You have serious misunderstanding of the banking system and monetary theory.