> No money creation at banks is not controlled by central bank monetary policy
There is in fact an upper limit set by the fractional reserve. I see US has abolished that limit right now (March 2020), but when they would set it to 100%, there would be no money multiplying at all.
>If you combine this with the fact that banks work on fractional reserves, then there'd end up being infinite money... but there isn't because it's not true.
In practical terms the only limit to the amount of new money is the amount qualified borrowers are willing to borrow. Banks that don't have enough reserves typically borrow from other banks or from the central bank. The central bank (in the US, at least) isn't bound by reserve limits at all and can create money by changing a number in a computer.
The lack of lending by banks isn't a problem in and of itself. It's a symptom of the underlying problem, which is a lack of economic activity that would require borrowing.
>They still have to borrow the money from the central bank. Fractional reserves mean that the credited account's bank must deposit a portion of the money bank at central bank.
Absolutely false. For starters, in many jurisdictions including the US, the reserve fraction is now 0% and has been for quite some time.
> Does that mean that currently US banks don't need to hold any fractional reserve?
They still need to maintain some reserves to permit cash withdrawals and certain transfers, and are still incentivised to lend out at a higher rate than the base interest rate the central bank controls (and reserves still count towards the bank capital requirements which are the actual limiting factor on a particular bank's ability to lend). So the central bank still can act to encourage or discourage money being created by lending exactly as before, the banks just don't have an arbitrary reserve target to hit.
It's not a policy which hasn't been adopted much earlier in other parts of the world, or a cause of the current inflation. The UK had no reserve requirement at all during the mostly low inflation period since 2009, and small symmetric reserve targets chosen by the bank where they incurred a penalty for having too many as well as too few reserves between 1980 and 2009 (a period where inflation came down from pre-1980 record highs to an unprecedented long, stable period of low inflation)
This is precisely how banking works, at least in countries that have fractional reserve requirements.
>If that were true, the amount of money in circulation would be infinite, because loans also end up as deposits.
Nope. It would only be infinite if the reserve requirement were 0%. Look at the chart I linked to. This goes on all day, every day at banks around the world. New money is created through credit, subject to the limitations imposed by each country's reserve requirements.
> The central bank can still create money on a fractional reserve basis.
The central bank does not even need to hold fractional reserves: As the entity creating base money, it can literally create that out of thin air.
Of course, history has taught that unlimited money creation is usually a bad idea, so usually base money is now backed by public or private debt, but this idea is distinct from fractional reserve banking.
> I'm assuming this means that Banks basically need to operate with 100% reserve ratio
No, not the case at all. You can do fractional reserve banking with a foreign currency as legal tender. Heck, you can even do it with gold as legal tender, which I always find ironic given how gold backing and the perceived evils of fractional reserve banking seem to go hand-in-hand, ideologically.
>It's not like Chase Bank (or whatever non-central bank) can just print more dollars.
Yes, it can, that's what fractional reserve means. Banks create (most of) the money they lend. This is regulated by the central banks but carried out via ordinary retail banking. When you swipe your credit card, buy a car, etc. money is being created out of thin air. The universe remains balanced because it corresponds to your obligation to repay; as you do, the money ceases to exist.
> Its not fractional. It’s 0%, see FDIC website on monetary policy.
This is nonsense. Reserve requirements were deprecated in favour of finer-grained capital and liquidity requirements [1].
They serve the same purpose, but with a broader consideration than reserve requirements’ “is it a reserve” binary test. Banks’ ability to create money is still constrained by their capital requirements. We are on a fractional reserve system.
> In reality deposits only cover around 10% of the loan. This is called fractional reserve banking and it means that a bank loan is actually a money creation event!
That's not how fractional reserve banking works. If I deposit $100 in a bank, they're not allowed to lend out $1000. In fact given a 10% cash reserve ratio, the limit is actually $90. The other $10 has to stay at the bank "in reserve", at least in theory. (In practice there's additional complexity because banks can borrow money to fulfill their reserve requirements.)
When people talk about money creation from fractional reserve banking, what they mean is that someone has $90 from the loan and someone else has $100. Which sums to $190: more than the initial deposit.
>> Even loans don't create money: the issuing bank have the amount subtracted from its reserves
Not even the old system (fractional reserve) referred to in the fed link above works that way. The new system deletes what was left of fractional reserve policy.
> Under fractional banking, almost all money is created via debt. Government issues debt which is bought up buy banks which allows the government to issue new money including cash. It is purely created from thin air.
Except fractional reserve banking isn't an accurate model of how money works today. Money is created by bank loans, not deposits - a bank with zero deposits could still lend money.
>their contents is magic'd out of nowhere through fractional reserve banking
Could you ELI5 what is the connection between fractional reserve banking and creating money?
Does the following mean that all banks can create infinity money out of zero deposits?
"As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."
Also, a direct to consumer crypto dollar sounds exactly like giving individuals accounts at the Fed, the same type of account banks currently have. Except more crypto-ey.
Why, if the Fed has refused to let people bank with it directly, would they change their mind?
Someone actually thought recently of opening a bank that would literally stash all deposits at the Fed, and the Fed didn't like that, presumably because they feel it would undermine the regular banks.
> If all the money is loaned out to the limits of fractional reserve, more money for interest can only come into existence by printing more.
"Fractional Reserve" banking is not a thing, as banks do not lend out reserves (except overnight to other banks). It does not and has never accurately described how banks lend, nor does it accurately define limits to bank lending. The limit to bank lending is capital. Bank capital consists of trusted assets (e.g. IOUs that central banks are willing to discount or which other banks accept as collateral for overnight loans) that are believed to be risk free. Generally this means government debt. Government debt is the sole constraint on bank lending as well as loan growth. Reserves have nothing to do with this in a modern system, and were only incidentally important in earlier systems.
> more money for interest can only come into existence by printing more.
Please define what you mean by "money". When most people think of money, they think of demand accounts, and these are not created by the government but by the private sector. Clarity in definitions can explain almost all of these misconceptions. A good rule of thumb is that someone who doesn't know what they are talking about mentions only "money". If you know what you are talking about, you specify the asset and matching liability, and so you distinguish between bank reserves, vault cash, deposit accounts, bank bonds, and different bank assets, knowing which meet capital adequacy requirements and which do not.
A good description of how the monetary system works is provided by the Bank of England report "Money Creation in a Modern Economy".
That article does a good job at dispelling myths of "fractional reserve banking", "money printing", and the like, and it accurately describes how modern banks work and what central banks actually do. It is required reading for anyone who goes off about "money printing" or whoever thinks that banks lend out reserves.
>Because unlike in a Ponzi scheme, the US government can simply choose to create more money,
It sure can, but this doesn't go far enough.
The US Govt' can only choose to "print money". It cannot choose otherwise. This is because fractional reserve banking allows financial institutions to lend out the same $1 multiple times.
The result of collecting $1 and lending 6 people that $1 with an expected total payment of $2 per debtor results in $1 causing $13 in the economy.
There is in fact an upper limit set by the fractional reserve. I see US has abolished that limit right now (March 2020), but when they would set it to 100%, there would be no money multiplying at all.
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