Not exactly. The central banks acting as a lender of last resort encourage the commercial banks to create money in this way, but be assured that the actual creation occurs whether the bank needs to borrow money or not. The definition of money supply looks to the balances in checking accounts, and creating and disbursing a loan increases the balance in a checking account (while simultaneously increasing the negative balance in a loan account, but loan balances don’t shrink the money supply), and as that money is spent it increases balances in someone else’s checking account.
Not how it works. a bank can’t just magically issue loans in a vacuum without caring about liquidity, because the second a borrower spends that money, the bank has to cough up real central bank reserves to settle with another institution or go broke.
So the question becomes, does the money get created when it is put in a deposit account balance, or when it gets spent outside the bank for the first time?
The textbook answer is that the money is created as soon as the deposit balance is created, not when the account holder spends it down enough to where the bank needs to borrow to maintain liquidity. It’s how the Fed counts M1, for example.
The bank’s need to actually run a viable business, and central bank regulations, prevents it from going nuts with this, but that’s beside the point of what I’m saying: a bank doesn’t need the central bank’s permission or approval to create money by extending loans. In the aggregate, central bank policy affects the way all the different banks do this, but the end result is that the banks can create a shitload more money than there are reserves (and the reserves don’t need to be physical currency, either, since they can just be balances in accounts with other financial institutions).
Well only central banks can create it out of thin air. Normal banks lend other people’s money (fractional reserve banking)
Not exactly. The central banks acting as a lender of last resort encourage the commercial banks to create money in this way, but be assured that the actual creation occurs whether the bank needs to borrow money or not. The definition of money supply looks to the balances in checking accounts, and creating and disbursing a loan increases the balance in a checking account (while simultaneously increasing the negative balance in a loan account, but loan balances don’t shrink the money supply), and as that money is spent it increases balances in someone else’s checking account.
Not how it works. a bank can’t just magically issue loans in a vacuum without caring about liquidity, because the second a borrower spends that money, the bank has to cough up real central bank reserves to settle with another institution or go broke.
So the question becomes, does the money get created when it is put in a deposit account balance, or when it gets spent outside the bank for the first time?
The textbook answer is that the money is created as soon as the deposit balance is created, not when the account holder spends it down enough to where the bank needs to borrow to maintain liquidity. It’s how the Fed counts M1, for example.
The bank’s need to actually run a viable business, and central bank regulations, prevents it from going nuts with this, but that’s beside the point of what I’m saying: a bank doesn’t need the central bank’s permission or approval to create money by extending loans. In the aggregate, central bank policy affects the way all the different banks do this, but the end result is that the banks can create a shitload more money than there are reserves (and the reserves don’t need to be physical currency, either, since they can just be balances in accounts with other financial institutions).