Print Page - Video: Banking System and Money Creation: How Does Banking System Work?

That's a surprisingly good explanation of how money and banking work.

My only complaint is that the narrator says without explanation near the end that reducing debt reduces the money supply and claims that a reduced money supply hurts the economy. I believe that is wrong, or at best it is not accurate. It is really the reduced lending that hurts the economy.

If the reserve ratio is 0 then indeed banks can create unlimited times of lending (but lending a money 1000 times does not creat 1000 times money, it just created 1000 times recorded numbers in banks' database, this is the common misconception, this video also does not get it right)

Another problem in this process which most of this kind of video does not explain well: No matter what kind of process, you must have the ownership of money BEFORE you lend it to someone

For example, the moment Barclays put a customer loan of £1000 on the asset side of his balance sheet, he start to owe the customer £1000 on his liability side. But this is only the first step. Then, in order to pay Lloyds £1000 when the customer do a purchase with his loan, Barclay's corresponding reserve account at Bank of England must be reduced by £1000. That means, if Barclay does not have enough money at his reserve account at Bank of England at the first place, he is not able to pay that £1000 to Lloyds

Otherwise, every large company will try to apply for a banking license and start to lend money to each other and create trillions and trillions of money in a couple of hours

So the most important part of money creation is what happened in the commercial bank's reserve account at central bank, the commercial bank loan is just the top level of the whole scheme, they do not create money, they just create lots of transactions

Bitcoin Forum

Economy => Economics => Topic started by: LiteCoinGuy on September 05, 2015, 02:51:19 PM