Talk:Fractional reserve banking

The combined effect of loan interest and fractional reserve banking

Thank you everyone for the detailed account of fractional reserve banking. There was one related area that I'd really like to have read more about: When you have created money through repeated lending of a fractional reserve, and you charge interest on all those loans, where does the money to pay the loan interest come from? Without being an expert or dusting off my math skills, it seems like the only 'solution' is for a certain portion of the population to accumulate an ever increasing amount of debt, which may be offset/delayed to some extent by economic growth (hence the built in drive for growth).

I realize the issue of where the money comes from to repay debt interest isn't intrinsic to fractional reserve banking, but it does appear to be multiplied by it. I'd be very curious to hear some views on the relationship between cumulative debt and fractional reserve banking. Joehudson (talk) 20:32, 17 June 2011 (UTC)

Interest for loans simply comes from the existing money supply, and gets paid back out by the bank to the economy. The bank is not accumulating or sucking money from the economy in normal operation. A bank is simply a set of books that exist in an economy whereby people transact amongst each other across the books. The books cannot accumulate money, and the banks do not accumulate large amounts of cash in normal circumstances. Andrewedwardjudd (talk) 05:12, 18 June 2011 (UTC)andrewedwardjudd

Thanks Andrew. I'm struggling to see how it works without an ever growing money supply.

Let's say a central bank issues a total of $100, i.e. the sum of M0 is $100. This is distributed amongst commercial banks and multiplied by the money multiplier, let's say 10, so there is $1000 of M2 in the economy. But so long as that M0 is floating around the economy and not returned to the central bank then the base rate of interest is accumulating on it right?

Let's now say that due to the reserve requirement, M2 can't go much above $1000. But where that M2 - M0 ($900) is also loaned to individuals or businesses and not directly exchanged for assets like land, raw materials or business ownership, then interest is also accruing on that money, at the rate the bank sets, right? A bank may make a loan to someone secured by certain assets that they have and their income, but where does the money to repay the interest actually come from? $100*k + ($900-o)*n + o > $1000, no? (where k is the base interest rate, o is the amount of money the commercial banks exchange directly for assets and so don't earn interest on, and n is the commercial banks aggregate lending rate. k > 1, n > 1, o < $900)

Surely with this system either the banks end up owning all the real assets or the central bank has to keep issuing new loans of M0 to cover the old loans, which are then passed onto people and businesses and so the debt increases. Isn't this what necessitates perpetual economic growth? If I misunderstand, please enlighten me. Joehudson (talk) 13:18, 18 June 2011 (UTC)

1. The 100 fiat does not get multiplied to be $1000, but rather there is $100 fiat and 1000 claims for fiat. M0 is the 'real money' and m2 are claims for the 'real money'. The claims only exist in the banks books and get traded amongst customers of the same bank. Between banks the banks have to settle in real money terms.

2. You are in the economy with the bank. Whatever money you pay to the bank in interest does not get removed from the economy, because the bank exists in the same economy.

3.If there is a stable economy the banks earn money from fees and enabling trading between sellers and buyers, where sellers get credits for real money.

4.1The 'created money' loans create a liability for the bank. which is either immediately called upon by real money moving to another bank or person so that real money is lost by the bank or the 'created money' is recorded in the banks books for later payment in real money terms causing the bank to make a loss later.

4.2 For a particular loan of 'created money', loan repayments replace the banks losses caused by them paying out real money, or they end the banks outstanding liabilities created when the bank loan was made

5. Interest for the loan comes from the economy and is paid out by the bank to the economy in wages profits purchases and investments Andrewedwardjudd (talk) 17:15, 18 June 2011 (UTC)andrewedwardjudd

Thanks again for your reply. Unfortunately your points don't make it much clearer for me. Specifically, as far as I can see, if the money in an economy is created first by the central bank as debt with interest, then that interest can't be paid without either creating more money (taking another loan to cover the old loan) or giving up real assets to cover the debt. And, it seems to me, that this simple fact is what necessitates perpetual inflation.

Regarding some of your numbered points, I understand how loan repayments cover a banks liabilities. My question is really where does the interest on those loans come from? You say 'the claims for real money only exist on the banks books and get traded amongst customers of the same bank'. My understanding of m2 (broad money) is that this is the money available for trade in the economy, and is a multiple of m0, due to fractional reserve banking. (So with a fractional reserve requirement of 10% m2 could tend towards $1000 with only $100 of m0.) It's not paper money, but it is on people's balance sheets and it is available for trading. In your point 5 you say interest for loans comes from the economy, but the financial size of the economy is bound by m2, plus valuation of real assets (afaik) and m2 only covers the initial value of all the loans, not the interest - unless of course the supply of money is further increased. So again it seems like ultimately in order for interest to be repaid the m0 money supply must increase, or assets be given up. Can anyone show me how that conclusion is wrong? (Maybe I'll just have to do some more maths after-all to clear things up in my head.) Joehudson (talk) 18:16, 18 June 2011 (UTC)

I see what you are saying now. For many decades the central bank has supplied money in whatever quantities the economy requires at an interest rate price it sets relative to inflation. So each day of operation the central bank is receiving interest rate money and it uses this to pay for its operations and the rest goes to the government to spend. The banks then earn money from the economy to pay for the interest. All of the borrowed money is still in the economy, unless the central bank choses to hold some money as an asset from interest earnt.

On the other points are you clear there are two different types of money where one is just a claim or IOU for the other?

A bank is no different to a loan shark in a pub with a pocket book, he takes deposits and pays better interest than the banks do, he can offer cash loans or credit money loans where you transact across his books. He has a pocket with cash in it and a pocket book with the rest of the created money in it. You pay him interest on the loans and he pays interest on deposits and spends the rest on his living expenses and investments.

You appear to be saying that M2 is something more than it actually is? The loan sharks created money is just not part of the official money supplyAndrewedwardjudd (talk) 20:20, 18 June 2011 (UTC)andrewedwardjudd

Let's look at an example:

• person A deposits $100 in a bank.
• With a reserve fraction of 20%, the bank can lend $80 to person B. Let's say the interest rate is 10%.
• Person B deposits the $80 in the same bank. Now the bank has again $100 in cash, but in order to support the $180 in demand deposits, they have to keep $36. So they lend $64 to person C.
• Person C keeps the cash in his home, so the chain stops here.
• Now, after a year, person B owes the bank $88, and person C owns the bank $70. But person B has only $80 in deposit, and person C has only $64 in cache. B needs $8 more, and C needs $6 more. Where will they get it?
• One option is that they convince person A to give them some money, for example, in return to doing him some service he wants. In this case, no new money is created - A will have $86, B and C will both have 0, and the bank owner have $14 - totally the original $100.
• Another option is that B and C give the bank some of their assets, if they have some.
• If B and C have no assets, they will go bankrupt and will not be able to pay the interest. The bank owner can try to threat them, throw them to jail. etc. In any case, no new money is created.

Hope that helps. --Erel Segal (talk) 11:17, 19 August 2011 (UTC)

(Why) do banks create new money only as a portion of the central bank money deposited?

I quote from the article: "Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands." From the initial deposit of $100 to bank A, $80 is lend out. What is preventing bank A to put the full $100 central BM in reserve, and lend out $400 commercial BM? (I cannot login because it says cookies are disabled, which is not true.)

Sentence too long

Quote: "Though not a mainstream economic belief, a number of central bankers, monetary economists, and text books, have said that banks create money by 'extending credit', where banks obligate themselves to borrowers, and then later manage whatever liabilities this creates for them, where if the central bank targets interest rates, it must supply base money on demand to meet the banks reserve requirements, after the banks have begun the lending process[10][11][12][13][14][15][16][17] and that rather than deposits leading to loans, causality is reversed, and loans lead to deposits".

This sentence is extremely long and hard to understand. Can someone please rewrite it? Thank you! --Erel Segal (talk) 08:26, 19 August 2011 (UTC)

Additionally, the entire paragraph titled "Criticism" is unclear, especially this passage: "Adherents of the non-mainstream Austrian School claim that fractional-reserve banking, by expanding the money supply, will lower the interest rates compared to a hypothetical full-reserve banking system, although this idea has been criticized within mainstream economics.[45][46][47] Austrian adherents argue that the presumed discrepancy will affect the role of the interest rate as the price of investment capital, guiding investment decisions. One of the proponents of aspects of the business cycle theory, Friedrich von Hayek, shared in the Nobel Memorial Prize in Economic Sciences for 1974.[48] Hayek accepted that bank credit and fractional reserve banking — even if they contributed to business cycles — were necessary as "the price we pay for a speed of development exceeding" that which would otherwise be possible, and that "financial institutions have never been prohibited from holding fractional reserves."[49]"

It is not clear, why this is a criticism? And what is the opinion of Hayek - is he for or against fractional banking? And how is all this related to the business cycle? --Erel Segal (talk) 10:18, 19 August 2011 (UTC)

Money creation table

Forgive me for asking, but shouldn't the "Deposits" column of the money creation table actually be negative? Whilst a loan by a bank is an asset, deposits (i.e. loans to a bank) are liabilities. So, excluding interest, loans + reserves = total deposits should be the basic situation. So, in the model, what is happening is that the initial $100 created by a (basically a) mint then attracts assets of $457 in security on loans from its debtors. Or am I missing something obvious? I mean, it just seems to me no different than if someone invests $100 in a shoe shine stall and then attracts $457 in custom.--Red Deathy (talk) 07:47, 26 August 2011 (UTC)

Changes to the opening paragraph

The first few sentences of this article were changed because they were factually incorrect. Fractional reserve banking does not mean that only a fraction of the customer's deposits are held at the bank. It means that only a fraction of the customer's deposits are held as reserves (cash and coin and other reserves - ie. government securities, deposits at the Central Bank etc..). Also, banks do not lend their customer's deposits to others - this activity would be illegal. A bank cannot loan your deposit to someone else. Loans create new deposits, and that is one of the ways that commerical banks create money (google the term deposit expansion, as this concept is taught in any introductory economics course, and is also discussed in the article itself). Chdouglas (talk) 16:24, 1 October 2011 (UTC)

Number One Provocation for Wall Street Protest

** Formal Request **

In the interests of accuracy please revise the example: http://en.wikipedia.org/wiki/Fractional_reserve_banking#Example_of_deposit_multiplication.

Please provide an example which uses 10% as the reserve ratio, as that more closely reflects the current 10% value in use: http://en.wikipedia.org/wiki/Reserve_requirement#Historical_changes_in_cash_reserve_ratios

One may ask, "In the interests of providing a sufficient example, while conserving page space, why does it matter?"

And the answer is for "social magnitude" and "incriminating clarity" upon the following reason.

** Unspoken Deception **

Banks earn usury interest by loaning 10 imaginary dollars for every 1 dollar that it actually has on hand!

And those earnings are not divided by 10 on the back side!

Imagine oneself exchanging $1 and receiving $10 in purchases, or imagine exchanging 1 hours of labour and receiving compensation for 10 hours of labour!

Is there any wonder how banks earn $35 billion a quarter and how the banking system can award 5000 employees greater than 1 million dollars in annual bonuses?

Does the method earnings give new meaning to the definition of theft as "Taking something from someone else that is not yours?"

What veil of illusion has shrouded the foundations of reason that the perpetrators of the scheme should fabricate a rejection of their gains multiplied 10 times upon money that it is not theirs as envy for free market capitalism?!

** Proposed Revision **

"The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 10 percent of it, or $10, and sets it aside as reserves, and then loans out the remaining 90 percent, or $90. At this point, the money supply actually totals $190, not $100, because the bank has loaned out $90 of the central bank money, kept $10 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.)."

GeMiJa (talk) 18:48, 11 October 2011 (UTC)

Putting aside that this is your mere opinion, it doesn't seem to be a genuine problem per WP:AGENDA. Wikipedia isn't the place to right great wrongs and neither social magnitude nor incriminating clarity are goals of the Wikipedia project. I don't object to the example being changed or improved, but not on the weak basis you have put forth. John Shandy` • talk 20:47, 11 October 2011 (UTC)

What do you mean "Putting aside that this is your mere opinion."?! Is there something incorrect about the example? Otherwise there is nothing ambiguous about it!! If a revision of the example is not agreeable, then at least a direct statement that the US reserve ratio is 10.3% seems reasonable - per http://en.wikipedia.org/wiki/Reserve_requirement#Historical_changes_in_cash_reserve_ratios GeMiJa (talk) 23:34, 11 October 2011 (UTC)

My comment about your opinion is in reference to all of the irrelevant, sensationalist, point-of-view junk you posted in addition to your proposed revision (e.g. unspoken deception, what veil of illusion, shrouded the foundations of reason, perpetrators of the scheme, fabricate a rejection of their gains, envy for free market capitalism). Such drivel makes it difficult to assume good faith because it appears that you are here to rant, and while passing through, to suggest a change that merely suits your rant.

Why do you insist that the example, which is a general example of fractional reserve banking (independent of any particular country or central banking system), use the current reserve requirement of the U.S. Federal Reserve? Why wouldn't it be appropriate to use the reserve requirement of Turkey, or the United Kingdom? Aside from that, why do we even need to mention the current reserve requirement of the U.S. Federal Reserve in an article that is not about fractional reserve banking in the U.S., but rather about fractional reserve banking in general? The actual reserve requirement ratios of various countries are better suited to the reserve requirement article. The example of fractional reserve banking in this article uses example values for its variables, and that is perfectly okay. It doesn't warrant any need for change, and the reasons you've given to support your request that it be changed to use 10% are particularly weak. John Shandy` • talk 03:50, 12 October 2011 (UTC)

Unrelatedly to the above rant, when I read this article I was dismayed to find that it did not list a typical requirement, nor did the article make it obvious that this information was available at [[1]], and I think someone should correct this lack of information. — Preceding unsigned comment added by Shades97 (talk • contribs) 01:22, 22 January 2012 (UTC)

I've just added a tidbit to the reserve requirements section which notes that countries adhere to varying required reserve ratios and that they've changed over time to help clarify this. Cheers, John Shandy` • talk 05:09, 22 January 2012 (UTC)

Banks do not lend deposits. They create them.

I have altered the opening paragraph once again, because someone still keeps trying to state that banks lend deposits. Banks do not lend deposits as this activity is illegal. Banks cannot loan your deposit to someone else. Banks create deposits through loans and purchases of securities etc.... The loan, or security, is an asset of the bank, and the corresponding deposit it creates is a liability. That is how they balance on the bank's balance sheet, and that is how double entry accounting works.

Further, deposits do not need to be deposited at another bank for the expansion of the money supply to occur. This is simply a model used to explain how banks create money through the process known as "deposit expansion". However, evidence by research by the Federal Reserve and in countries that do not have reserve ratios demonstrates that reserves actually follow deposits, not the other way around. In other words, banks will create deposits and get the reserves necessary to cover those deposits at a later point in time by borrowing the reserves from the Central Bank or another commerical bank. This means that reserves don't limit the amount of money in existence, because if the demand for money exists, banks will create the loans, and the reserves will increase correspondingly. In other words, the deposit expansion process described in elementary economics text has the causality backwards. Chdouglas (talk) 21:28, 15 October 2011 (UTC)

When writing articles we are supposed to report what reliable sources say, even if they are wrong, rather what we believe to be true. I notice that you did not provide any sources for your changes and therefore will revert, because your edit is original research. TFD (talk) 22:36, 15 October 2011 (UTC)

Anyone with an elementary understanding of economics and the accounting of banking knows that banks don't lend deposits. But if I must reference the statements, then I will. 68.150.179.95 (talk) 01:05, 16 October 2011 (UTC)

"1. Banks create money by creating new checking deposits for borrowers when making loans."

68.150.179.95 (talk) 01:05, 16 October 2011 (UTC)

http://ecedweb.unomaha.edu/ve/library/hbcm.pdf — Preceding unsigned comment added by 68.150.179.95 (talk) 01:09, 16 October 2011 (UTC)

"Creation of Credit: A unique function of the bank is to create credit. Banks supply money to traders and manufacturers. They also create or manufacture money. Bank deposits are regarded as money. They are as good as cash. The reason is they can be used for the purchase of goods and services and also in payment of debts. When a bank grants a loan to its customer, it does not pay cash. It simply credits the account of the borrower. He can withdraw the amount whenever he wants by a cheque. In this case, bank has created a deposit without receiving cash. That is, banks are said to have created credit. Sayers says “banks are not merely purveyors of money, but also in an important sense, manufacturers of money.”"

"Derivative Deposits: Bank deposits also arise when a loan is granted or when a bank discounts a bill or purchase government securities. Deposits which arise on account of granting loan or purchase of assets by a bank are called “derivative deposits.” Since the bank play an active role in the creation of such deposits, they are also known as “active deposits.” When the banker sanctions a loan to a customer, a deposit account is opened in the name of the customer and the sum is credited to his account."

"The creation of a derivative deposit does result in a net increase in the total supply of money in the economy, Hartly Withers says “every loan creates a deposit.” It may also be said “loans make deposits” or “loans create deposits.” It is rightly said that “deposits are the children of loans, and credit is the creation of bank clerk’s pen.”

http://www.newagepublishers.com/samplechapter/001636.pdf

Chdouglas (talk) 01:34, 16 October 2011 (UTC)

Your first source is a high school textbook which does not meet rs and the second source is a chapter from a book which has no description, so I cannot tell whether or not it is rs. In any case, this article is about fractional reserve banking and you need to supply sources about that topic. TFD (talk) 02:35, 16 October 2011 (UTC)

---

A text book isn't a sufficient source?

If you were to bother to look, the other link I provided above is from the University of Nebraska

Here then: "Loans Make Deposits"

http://www.mu.ac.in/arts/social_science/economics/eco23.pdf

And just so you know, the following is on the Wikipedia article on money creation: "When a commercial bank loan is extended, new commercial bank money is created."

The following is posted at Texas A&M university if you bother to check.

"Banks create money whenever they make loans. The process is that the bank creates a liability (deposit) to pay for an asset (loan)."

http://faculty.tamu-commerce.edu/dfunderburk/231/notes/DepositExpansion.htm

I am talking about fractional reserve banking, because that's how the system operates. Banks cannot loan your deposit to someone else. It's illegal. They cannot debit your deposit in order to credit someone else's. Each loan creates a new deposit. The loan (or purchase of a security) is accounted as an asset to the bank, and the corresponding deposit that the loan (or purchase of security) created is accounted as a liability to the bank. That is how double entry accounting works. Chdouglas (talk) 14:12, 16 October 2011 (UTC)

You need a source that specifically talks about "fractional reserve banking", otherwise adding your sources is synthesis. If you believe that no sources use the term, then nominate the article for deletion. TFD (talk) 15:36, 16 October 2011 (UTC)

"Most of the money in the United States today (measured as M1 or M2) is created by banks."

The subject of fractional reserve banking and deposit expansion are the same subject. That is how commercial banks create money. Chequable deposits are considered to be part of what economists call M1,and commercial banks create this money when they purchase securities, create loans and other activities. Every loan creates a deposit, just as every repayment of a loan destroys a deposit. That is how money is created and destroyed in a fractional reserve banking system. The government creates M0, or the monetary base. This base only comprises a small percentage of the money supply (about 4% of M1 in Canada). The other 96% is created by fractional reserve banks, who only hold a fraction of the deposits they create as reserves. This is not "original research", and you cannot have an article on monetary expansion without cross referencing it to fractional reserve banking. They are the same subject, because our commercial banks create deposits in a fractional reserve system, and that is how most money is created. This is taught in every introductory economics course. That's where I referenced the material from. The article is simply WRONG when it states that banks lend deposits. This statement is misleading. The bank cannot lend your deposit to someone else. A bank CREATES deposits when it makes a loan. And as long as it has enough reserves to maintain liquidity (many countries, like Canada, do not have required reserve ratios), then they will continue to create deposits. Chdouglas (talk) 16:13, 16 October 2011 (UTC)

If fractional reserve banking and deposit expansion are the same thing, then please provide a source that says that. Arguments like the ones you are presenting are just original research and cannot guide us in developing the article. TFD (talk) 17:09, 16 October 2011 (UTC)

"The Fractional Reserve Banking System A fractional reserve banking system exists when the amount of reserves banks must keep on hand is less than the amount of their deposits. In the U.S., banks must keep a fraction of their assets as bank reserves – cash plus deposits with the Federal Reserve, which is the nation's central bank. Banks issue loans with the funds that are not held in reserve; in doing so, they expand the nation's money supply."

http://www.investopedia.com/study-guide/cfa-exam/level-1/macroeconomics/cfa15.asp#axzz1axg78v2i

The following is from a workbook produced by the Federal Reserve and is a demonstration of deposit expansion in a fractional reserve banking system:

"The purpose of this booklet is to describe the basic process of money creation in a "fractional reserve" banking system.

http://www.rayservers.com/images/ModernMoneyMechanics.pdf

"The fractional reserve banking system allows banks to expand the money supply by making loans." Fundamentals of Economics - William J. Boyes, Michael Melvin.

http://books.google.ca/books?id=dmfJmMODxfYC&pg=PA315&lpg=PA315&dq=fractional+reserve+banking+and+deposit+expansion&source=bl&ots=_NB3iQ3Njn&sig=hXZqMrtF0stz1lYbyRv_LFF_oxw&hl=en&ei=VR6bTsPxB8fjiAKt36ziDQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CCMQ6AEwATgK#v=onepage&q=fractional%20reserve%20banking%20and%20deposit%20expansion&f=false

Now, if you refuse to change the wording of the opening paragraph given all the references that I've supplied at your request, I must assume that you are purposefully trying to be deceitful on the subject in order to sow confusion. Chdouglas (talk) 18:21, 16 October 2011 (UTC)

I believe this is a semantic misunderstanding

First of all Chdouglas, I want to convey to you that reliable sourcing is important. The Four Deuces (TFD) was not assuming bad faith on your part, but all editors are required to supply full references and citations for reliable sources in support of their edits. It is how we make sure that "junk" isn't being inserted into an article. To not use any references and merely write "off the cuff" or from "common knowledge" is to engage in original research (of the very weakest kind, too), and Wikipedia does not publish original thought, but instead seeks to characterize the existing reliable literature on any given topic. Plus, we must be considerate of the fact that some readers may wish to see where something comes from, such as the source for a fact (no matter how well-known the fact is). This is part of producing articles that are encyclopedic, and that is why TFD has been pressing you hard to cough up reliable sources. TFD is an editor of good character and he is not trying to pick on you, so please don't react in any hostile way.

Now, I believe this to be a misunderstanding resulting from unfortunate semantics that rise from the nature of the topic's sophisticated use of terminology. There is truth to what Chdouglas is saying, in that money creation occurs from banks creating deposits as liabilities simultaneously as they create loans as assets. Reserves are composed of (a) required reserves and (b) excess reserves. The amount of a bank's excess reserves implies something about the amount of loans it can safely make (and therefore the amount of deposits it can safely generate). Excess reserves and deposits are like two sides of the same coin (excess reserves being the asset side and deposits being the liabilities side). It's true that banks don't "lend" a portion of a person's deposits to someone else, but through converting its excess reserves into new loans a bank is essentially "lending what resulted from deposits" from the assets perspective, and those new loan issues generate an equivalent amount of new deposits from the liabilities perspective, to be withdrawn, spent, etc.

However, it is indeed correct to say in the article's lead that fractional reserve banking is a type of banking whereby the bank retains only a fraction of the customer's deposits as reserves. The bank lends out most of the deposited funds (mechanically, excess reserves are converted to loans, but excess reserves are but the asset perspective of deposits). The lending takes the form of new deposits that a borrower can withdraw; essentially, deposits are indeed being lent because you need more deposits in order to have the excess reserves available for conversion into new loans.

I believe the confusion arises from a misunderstanding of semantics between a mechanical interpretation (from a double entry accounting point of view) and an essential interpretation (from more of an economic point of view). The following are reliable sources which support both Chdouglas's nuance and the present verbiage in the article's lead.

Xi, Ning; Ding, Ning; Wang, Yougui (2005). "How required reserve ratio affects distribution and velocity of money". Physica A: Statistical Mechanics and its Applications 357 (3): 543-555. http://www.sciencedirect.com/science/article/pii/S0378437105003882. Retrieved 2011-10-16. 

Modern banking system is a fractional reserve banking system, which absorbs savers' deposits and loans to borrowers. Generally the public holds both currency and deposits. As purchasing, the public can pay in currency or in deposits. In this sense, currency held by the public and deposits in bank can both play the role of exchange medium. Thus the monetary aggregate is measured by the sum of currency held by the public and deposits in bank in economics. When the public saves a part of their currency in commercial banks, this part of currency turns into deposits and the monetary aggregate does not change. Once commercial banks loan to borrowers, usually in deposit form, deposits in bank increase and currency held by the public keeps constant. So loaning behavior of commercial banks increases the monetary aggregate and achieves money creation.

Money creation of commercial banks is partly determined by the required reserve ratio. In reality, commercial banks always hold some currency as reserves in order to repay savers on demand. Total reserves are made up of ones that the central bank compels commercial banks to hold, called required reserves, and extra ones that commercial banks elect to hold, called excess reserves. Instead of appointing required reserves for each of commercial banks, the central bank specifies a percentage of deposits that commercial banks must hold as reserves, which is known as the required reserve ratio. The role of the required reserve ratio in money creation is illuminated well by the multiplier model.

Let me reproduce an example from Mishkin, Frederic S. (2006). Economics of Money, Banking, and Financial Markets, 8th edition. Boston, MA: Addison-Wesley. ISBN 978-0-3212-8726-7. :

The Fed conducts an open market purchase of a $100 bond from the First National Bank. The Bank finds it has an increase in reserves of $100, but assume the bank does not want to hold excess reserves because it earns no interest on them.

First National Bank
Assets		Liabilities
Securities	-$100
Reserves	+$100

Since the bank has no increase in its checkable deposits, required reserves remain unchanged, and the bank's additional $100 of reserves means that its excess reserves have increased by $100. The bank makes a loan, setting up a checking account for the borrower and putting the proceeds of the loan into the borrower's account. In this way, the bank alters its balance sheet by increasing its liabilities with $100 of checkable deposits and at the same time increasing its assets with the $100 loan. The excess reserves were converted into loans, which in turn created deposits.

First National Bank
Assets		Liabilities
Securities	-$100	Checkable deposits	+$100
Reserves	+$100
Loans	+$100

The bank has created checkable deposits by its act of lending. Because checkable deposits are part of the money supply, the bank's act of lending has, in fact, created money.

In its current balance sheet position, the First National Bank still has excess reserves (because the deposits created are excess reserves on the assets side of the balance sheet), and may wish to make additional loans. However, these reserves will not stay at the bank for very long, because the borrower took out a loan not to leave $100 idle at the bank, but to purchase goods and services from other individuals or businesses. When the borrower makes these purchases by writing checks, they will be deposited at other banks, and the $100 (of deposits created as liabilities, and of excess reserves recognized as assets) will leave First National Bank. A bank cannot safely make loans for an amount greater than the excess reserves it has before it makes the loan. The final resulting T-account is:

First National Bank
Assets		Liabilities
Securities	-$100
Loans	+$100

Assuming the borrower purchased $100 worth of services, the provider of those services then deposits $100 at Bank A. Assuming bank A presently hold no excess reserves, its reserves now increase by $100, as do its checkable deposits.

Bank A
Assets		Liabilities
Reserves	+$100	Checkable deposits	+$100

If the required reserve ratio is 10%, this bank will now find itself with a $10 increase in required reserves, leaving it $90 of excess reserves. Because Bank A (like First National Bank) will not want to hold onto excess reserves, it will make loans for the entire amount that it can. Its loans and checkable deposits will then increase by $90, but when the borrower spends the $90 of checkable deposits, they and the reserves at Bank A will fall back down by this same amount. The net result is that Bank A's T-account will look like this:

Bank A
Assets		Liabilities
Reserves	+$10	Checkable deposits	+$100
Loans	+$90

If the money spent by the borrower to whom Bank A lent the $90 deposited in another bank, such as Bank B, the T-account for Bank B will be:

Bank B
Assets		Liabilities
Reserves	+$90	Checkable deposits	+$90

The checkable deposits in the banking system have increased by another $90, for a total increase of $190 ($100 at Bank A, plus $90 at Bank B). In fact, the distinction between Bank A and Bank B is not necessary to obtain the same result on the overall expansion of deposits. If the borrower from Bank A writes checks to someone who deposits them at Bank A, the same change in deposits would occur.

Bank B will want to modify its balance sheet further. It must keep 10% of $90 ($9) as required reserves and has 90% of $90 ($81) in excess reserves and so can make loans of this amount. Bank B will make an $81 loan to a borrower, who spends the proceeds from the loan. Bank B's T-account will be:

Bank B
Assets		Liabilities
Reserves	+$9	Checkable deposits	+$90
Loans	+$81

So, a more important question to ask is what verbiage in the lead article is most appropriate for communicating the function of fractional reserve banking to readers who may or may not understand double entry accounting, and who may or may not be familiar with the intricacies of commercial lending. Thoughts? John Shandy` • talk 19:02, 16 October 2011 (UTC)

Hello John, my frustration was with the fact that, not only is the opening paragraph incorrect, but that it was not referenced at all. When I tried to correct the opening paragraph, I was the one who needed to reference the material.

I see that you are a graduate student, and probably quite familiar with economics.

I don't think this is a question of "semantics" whatsoever. Banks cannot lend anything. They create deposits/money. That is the role of banks in the economy. They create deposits not only through loans, but through purchases of securities, ordinary business expenses, and payment of interest on deposits. The confusion lies in the fact that banks have to compete for deposits, because they are in reality competing for reserves.

On a "higher level", I would argue that the process of "deposit expansion" as ordinarily taught in economics texts is erroneous. Banks do not "lend" excess reserves. Excess reserves are merely reserves in excess of the legislated reserve/deposit ratio, or if not legislated, the reserve/deposit ratio that banks are comfortable posessing for liquidity purposes. In fact, much new research shows that the causation of the "deposit expansion" taught in ordinary economics texts has the causality backwards (see Steve Keen etc.), and in fact reserves follow deposits, not the other way around. In other words, banks create as many deposits through loans or other activities as they deem prudent, and then obtain reserves from the Central Bank or other commercial banks.

But, back to the original argument in terms of the opening paragraph, I would suggest that the word lend be replaced with create, because I believe it is essential that people understand that banks create deposits in a fractional reserve banking system.

Back to you.

Chdouglas (talk) 21:20, 16 October 2011 (UTC)

I don't think anyone is disputing that banks create deposits (and thereby money), but banks do "lend" to people borrowing money from the banking system. Whether they lend from existing funds or fabricate new funds (by adding loans to the assets side of the balance sheet and adding deposits to the liabilities side) seems to be a matter of semantics. I do acknowledge that they can create deposits as a result of other means that weren't specified in the example I gave. What difference does it make that banks have to compete for deposits, and through that method compete for reserves? Taking the example into consideration, it's clear that excess reserves arise from receiving deposits from money already created in the system, when a person deposits funds into a bank. It's also clear that excess reserves (or other types of assets on a bank's balance sheet) enable the bank to create entirely new money (by fabricating deposits). It appears to be a closed, rather than open loop. To amass more excess reserves you must acquire greater deposits, and to create new deposits you must accumulate greater excess reserves (or do any of the other things that enable you to create new loans and thereby fabricate new deposits). With regards to your comment "reserves follow deposits, not the other way around. In other words, banks create as many deposits through loans or other activities as they deem prudent, and then obtain reserves from the Central Bank or other commercial banks," that sounds about like what I originally learned about money and banking, but it seems trivial, especially if a bank deems it prudent to not create more deposits than the amount of excess reserves it holds.

I don't see how this could be anything but a matter of technicalities and semantics. You said Banks do not "lend" excess reserves. Excess reserves are merely reserves in excess of the legislated reserve/deposit ratio, or if not legislated..., but from a double entry accounting point of view given the example I provided, it is quite apparent that excess reserves are transferred from the bank's reserves asset account to a loans asset account when a bank decides to loan more funds. Whether it's called "lending excess reserves" or not seems of little consequence. It appears that Steve Keen is a post-Keynesian economist, and so of course someone such as he who criticizes an array of neoclassical economics is going to offer a point of view alternative to the mainstream. But will focusing on his minority point of view in the lead add useful clarity for a reader?

If there is "much new research" that "shows that the causation of the 'deposit expansion' taught in ordinary economics texts has the causality backwards" (and that it matters in any meaningful way), then it shouldn't be difficult to search a subscription database and dig up tons of scholarly publications from researchers investigating money creation and fractional reserve banking (at your local public library, your school/university's library (if you're a student), Google Scholar, Google Books, etc.). So far the sources you've provided merely verify what is said in the sources I have provided (that banks create money by creating deposits as a result of making loans); they appear to say nothing to the effect that banks don't lend funds through the conversion or depletion of excess reserves. Data wins all arguments. John Shandy` • talk 00:46, 17 October 2011 (UTC)

The reason that the word "lend" is confusing is that many people still believe that banks receive deposits and actually "lend" those deposits to someone else. That simply isn't true, and perpetuates a common myth. The fact is that banks create deposits with each loan, purchase of security etc.

Excess reserves do not have to derive from taking in more deposits. Banks can borrow reserves from the Central bank or other commercial banks. This action does not increase the amount of deposits at the bank borrowing the reserves unless they choose to increase the amount of loans, or purchase securities etc.... Banks can increase their reserves without increasing their deposits.

The excess reserve account is not an account that is on the bank's balance sheet as an asset. In other words, banks are not transferring an asset to another when they "lend" money. This is what most people deem "lending" something to someone else. If I have a car, which is my asset, I can lend that car to my friend. However, the bank is not "lending" an actual asset when it loans money. It is creating an asset (and a liability). There is a huge difference, and like I said before, the word "lend" only leads to confusion in the matter when there are a great many people who do not understand that banks create deposits/money with each loan.

I used Steve Keen as an example of research that shows that money is actually an endogenous variable as opposed to an exogenous one as is taught in the theory of "deposit expansion". I can't find the article now, but I will post it here when I do, but it is research from the Federal Reserve in the U.S. which also demonstrates that reserves follow loans, and not the other way around. The reason that this is important is that demonstrates how little control the Central Banks have over the money supply.

Chdouglas (talk) 01:47, 17 October 2011 (UTC)

I'm not sure I understand what you mean when you say "reserves follow loans." It seems like the mechanics aren't in dispute, because I agree with what you're saying about the events that take place throughout the process (although I have been ignoring special cases and exceptions to the rules). Rather, it seems that colloquial understandings of the process are erroneous in labeling the process as "lending," right? Yet, this seems to me like it would not be a simple misunderstanding of fractional reserve banking, but a profound misunderstanding. And if it is so compelling or material, then I should think it would readily appear in scholarly publications such as peer-reviewed journals, textbooks, or books vetted by reputable university presses to correct the misunderstandings once and for all. We ultimately have to adhere to the preponderance of what reliable sources have to say on the matter. I can't guarantee much on my end for now as I have a busy week ahead of me. John Shandy` • talk 03:04, 17 October 2011 (UTC)

I'm really sorry in advance, but Chdouglas, I got to ask, are you the same person as User:Javalizard who was making some very similar statements and arguments over at money creation and a few related articles awhile ago? I'm asking because this whole idea does seem to be shared between these two accounts and because looking into yours and their contributions it does seem like you guys alternate months in your editing. Volunteer Marek  03:14, 17 October 2011 (UTC)

Hi Marek, sorry, but I don't know who "Javalizard" is. The idea that banks create deposits is common knowledge taught in any introductory economics course, and of course is basic bank accounting, so I'm not surprised that someone else has "similar" ideas. Banks cannot lend deposits to someone else. Each loan creates a new deposit. Chdouglas (talk) 22:31, 17 October 2011 (UTC)

John, the fact that banks create deposits does appear in text books, and is common knowlege. I've supplied several sources that are from universities in the United States, as well as a workbook published by the US Federal Reserve. I could quote as many sources as you like.

The following is from the Bank of Canada:

"Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money."

http://www.bankofcanada.ca/about/backgrounders/canadas-money-supply/?page_moved=1

The fact that banks create deposits/money with each loan is not in dispute.

The idea that reserves follow deposits is not taught in ordinary economics texts, but certain groups of schools of economic thought teach that money is an endogenous variable (eg.Circuitism, Chartalism, etc..) and new research into this area actually demonstrates that the theory of deposit expansion, as taught in universities has the causality in regards to reserves and loans backwards. Loans do not follow increases in reserves, increases in reserves follow increases in loans. In other words, if there's a demand for deposits, banks will make the loans, and get the reserves after. Or alternatively, if the Central Banks produce more reserves through open market operations, banks may not correspondingly increase the amount of deposits created through loans. This has important monetary policy implications because if it's true, Central Banks have far less control over the money supply through open market operations that we are led to believe.

Regardless, the openining paragraph is confusing and misleading, especially to those who erroneously believe that banks lend your deposits to someone else when banks make a loan. A loan involves the creation of a new deposit, and that is not in dispute. That is how banks create money. Chdouglas (talk) 22:31, 17 October 2011 (UTC)

It seems we need sources that discuss that then, rather than just discussing the part about banks creating deposits to create money. We need good sources that talk about how banks create deposits in response to increases in demand for deposits. For future reference, I would advise that the next time you find yourself having to explain this to someone, choose different phrasing than "follow" 'cause that really threw me for a loop; now I understand that you're saying the need for reserves increases as the demand for deposits increases, due to a bank creating new loans to service the demand for deposits. So, I understand what you have been getting at. But, it seems to me that what people describe as "lending deposits" is just their colloquial way of saying "banks loan money in the form of new deposits" (which banks create to service the demand for deposits). I must admit this whole thing still seems somewhat blurry. Regardless, if the endogenous money view is of a heterodox or non-mainstream school of economic thought, it would have to be characterized as such in accordance with WP:NPOV and we cannot give it undue weight. John Shandy` • talk 23:01, 17 October 2011 (UTC)

Hi John, sorry if I was unclear, but written communication is not nearly as good as verbal. I want to be clear on two points.

1) The fact that banks create money is not an "endogenous" theory of money, but is in fact the vast majority point of view. I know that the term "lend" deposits is a "colloquialism", but the reason I don't like this term is that it continues to perpetuate the myth that banks take your deposit, and loan it to someone else. You would be amazed how many people believe that, and do not understand that banks create deposits/money.

2) I admit that the "endogenous" theory of money is a minority view (for now) and that this theory would need to be regarded as such in this article, but this was not my main point, and I'm not seeking to push this in the article. What I really want to do is change the opening paragraph to state that banks create deposits, instead of what what it states now - that banks lend deposits. The word "create" adds much more clarity to the subject matter than the word "lend". Chdouglas (talk) 00:13, 18 October 2011 (UTC)

Banks don't create deposits, the deposit of funds by customers into banks create deposits. However, I see the point you're trying to make. I've edited the lead, hopefully this answers your objection. LK (talk) 10:16, 18 October 2011 (UTC)

Well the literature actually argues that deposits (as liabilities) are created both (a) when a person withdraws deposits to pay for something and the receiver deposits those into a different (or the same) bank which creates excess reserves (as assets), and (b) when a bank makes loans and sets up an account and fills it by creating "new" deposits as a balance sheet liability so that a borrower can start doing things like (a) with the loaned funds. I've given an example of this above from a book by Frederic Mishkin. Lending seems to me to be what people describe the overall process as, while creating deposits appears to be a mechanical technicality of double entry accounting. That's why I don't quite see a meaningful discrepancy and why Chdouglas's change strikes me as puzzling. John Shandy` • talk 15:44, 18 October 2011 (UTC)

LK - talk about circular reasoning! You're claiming deposits create deposits?

The Central Bank (or whoever they authorize, like the Royal Canadian Mint in Canada) creates cash and coin, but this is but a fration of the money supply. Who creates the rest of the money supply? Are you claiming that depositors create the money? Wouldn't that be counterfeiting? Are you claiming that when a bank makes a loan that a new deposit is not created? How does the money supply increase? Chdouglas (talk) 17:12, 18 October 2011 (UTC)

Hi John - Of course deposits have to increase by an equivalent amount of a loan (or purchase of security). That is how double entry accounting works. But in doing so, banks increase deposits/money with each loan (or purchase of security). Many people believe that banks take our deposits, and lend it to somone else. In order for this to be true, the bank would have to debit our deposits and credit another's whenever they made a loan. That's not the mechanics of a bank loan. Banks create a new deposit with each loan, and are therefore creating money. When the loan is repaid, there is a correpsonding decrease in the size of the loan and deposit, and that is how money is destroyed. If the rate at which loans are being granted is greater than the rate at which they are repaid, the money supply expands and vice verse. Chdouglas (talk) 17:25, 18 October 2011 (UTC)

Chdouglas, I dislike the way you preface your arguments by belittling the other person, this is against a fundamental pillar of Wikipedia, our policy of Politeness. Please treat the others here with respect. I have a PhD in Economics, I've taught intro and intermediate Macro for several years, and I've worked in commercial banks and central banks. As far as I can see there's nothing seriously wrong with the article as it stands. If you want something changed, state clearly and succinctly what you want changed, and back it with a reliable source. These walls of text are meaningless. --LK (talk) 06:08, 19 October 2011 (UTC)

LK, if pointing out the circular reasoning in your argument is "belittling" to you, then perhaps you need to be a little less sensitive. I did not call you any names, and I also see you did not respond to one of my questions. You merely tried another logical fallacy (argument from authority), and then try to silence me with Wikipedia policy. Why don't you simply answer my questions? If I'm wrong, it should be easy to prove. It's actually pretty easy to prove the opposite, because the only way banks would not be creating deposits with each loan would be if they actually debited another's deposit when they made loans. This is illegal. Every loan results in an increase in assets (the loan), and liabilities (the deposit). Since bank deposits are considered part of the money supply, banks create money by creating deposits through loans.

"In the normal course of their operations, banks create money" (Blomqvist, Wonnacott, and Wonnacott, "Economics First Canadian Edition"pge. 201)

"The actual process of money creation takes place primarily in banks." (Federal Reserve, "Modern Money Mechanics")

"Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money."

http://www.bankofcanada.ca/about/backgrounders/canadas-money-supply/?page_moved=1

"The process by which banks create money is so simple that the mind is repelled." (John Kenneth Galbraith)

Chdouglas (talk) 14:15, 22 October 2011 (UTC)

I don't think LK is arguing that banks don't create money; indeed, the article already supports the idea that banks create money. It seems to me that you are hung up on the terminology used to describe the process. Banks create money via lending. Mechanically, they may not lend others' deposits, but it is their lending activity that creates money. This is again why I don't think there is a meaningful discrepancy in what you propose versus what the article states. John Shandy` • talk 16:24, 22 October 2011 (UTC)

Hi Shandy, if nobody is disputing the fact that banks create deposits through loans etc...., why do you and other insist on using the term "lend" instead of "create"?

The problem is that many, if not most, people believe that banks take in deposits, and then turn around and lend those deposits to someone else. By using the term "lend" in this article, Wikipedia is perpetuating this myth (whether purposefully or inadvertently). If nobody is debating that loans create deposits, and banks create money, then why the objection when I changed the word "lend" to "create". Lend is more ambiguous, and leads people to believe the myth that I just stated above. Banks create deposits is, in my opinion, a clearer and more accurate statement of the process.

Chdouglas (talk) 16:44, 22 October 2011 (UTC)

The statement that 'the action of depositing money into a bank creates deposits' is not a circular argument, if you believe it is, you should review the meaning of 'circular argument'. You seem determined to twist others words around to insult them. I remind you again, this breaks our policy on policy on politeness.

You seem to have a WP:OR belief that deposits have nothing to do with lending. If that's the case, riddle me this, why do banks even bother to take in deposits, if doing so doesn't enable them to lend?

All these arguments are beside the point. We are not here to argue about issues to determine what is the WP:Truth. Wikipedia is about summarizing for articles what is in reliable sources. You have so far not provided any sources for any of your statements. Until you do, don't expect any further responses. LK (talk) 02:23, 24 October 2011 (UTC)

LK, I've provided numerous sources, from Economics texts, to the Bank of Canada and the U.S. Federal Reserve etc....

"The fractional reserve banking system allows banks to expand the money supply by making loans." Fundamentals of Economics - William J. Boyes, Michael Melvin.

http://books.google.ca/books?id=dmfJmMODxfYC&pg=PA315&lpg=PA315&dq=fractional+reserve+banking+and+deposit+expansion&source=bl&ots=_NB3iQ3Njn&sig=hXZqMrtF0stz1lYbyRv_LFF_oxw&hl=en&ei=VR6bTsPxB8fjiAKt36ziDQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CCMQ6AEwATgK#v=onepage&q=fractional%20reserve%20banking%20and%20deposit%20expansion&f=false

"Banks create money whenever they make loans. The process is that the bank creates a liability (deposit) to pay for an asset (loan)."

http://faculty.tamu-commerce.edu/dfunderburk/231/notes/DepositExpansion.htm

"Loans Make Deposits"

http://www.mu.ac.in/arts/social_science/economics/eco23.pdf

In answer to your question in regards to why do banks take in deposits - Banks compete for deposits because they are in fact competing for reserves. If bank A makes a loan, and creates a corresponding deposit, and if the person or business who acquired the loan writes a cheque against that deposit, and that cheque ends up in bank B, then there is a tranfer of reserves from bank A to bank B in the amount of the cheque through the clearing process at the Central Bank. If bank A loses reserves to bank B, then it must either borrow more reserves from the Central Bank or the another commercial bank, or call in some of its loans if it is to maintain the same reserve/deposit ratio.

Chdouglas (talk) 00:59, 25 October 2011 (UTC)

Why would banks compete for reserves unless it allows them to make a higher profit. And banks profit from lending, so .... LK (talk) 10:09, 26 October 2011 (UTC)

So? Banks make a profit like every other business by having their revenues greater than their expenses. Interest on loans is part of their revenues.

The discussion is whether banks create deposits through loans, and the answer is unquestionably - yes! That is how double entry accounting works. Therefore, the first paragraph is confusing when it states that banks "lend" deposits. Banks do not lend someone's deposit to someone else when they make a loan. Banks create new deposits when the make a loan, therefore, the word "create" is a more accurate description of the process than the word "lend". Further, the statement that banks "lend deposits" perpetuates the common myth that banks take in deposits, and lend those deposits to someone else. Banks create deposits through loans to individuals and businesses, purchase of securities etc....

Chdouglas (talk) 16:32, 30 October 2011 (UTC)

Great, so we agree that there's nothing incorrect about the article's lead. You just feel that there should be some clarification or demystification to improve the message the lead attempts to convey, right? It seems that your issue may be that you are interpreting the verbiage in its most literal sense. Is there a "common myth that banks take in deposits, and lend those deposits to someone else"? What if most people interpret it the way myself or LK do? While from a double entry accounting perspective, banks do not mechanically lend deposits, "lending deposits" seems to be the preferred phrasing for describing the process to someone who wouldn't know what double entry accounting is or who wouldn't even know what a balance sheet is. The bank's received deposits become excess reserves, and its loans become created deposits; in the middle of those steps, on the assets side you have something happening (usually involving securities or reserves, etc.) that enables the bank to make the new loans. If I were explaining it to a layman, I'd probably say "lending deposits" because, while it's true that banks create deposits, they do so as a result of their lending activities.

Further, you've given plenty of sources that say banks "create deposits," and that's not in dispute. What you haven't given are sources that really and truly support your argument that "reserves follow loans" or that banks "compete for reserves." John Shandy` • talk 23:48, 30 October 2011 (UTC)

There is disagreement over the article's lead. Lending deposits merely mystifies the process for people who do not understand double entry accounting, because they do not understand that new deposits are created every time a bank makes a loan. The term "lend" merely perpetuates this myth. The proper term would be create, because that's what banks do, and by choosing not to use this term, Wikipedia is intentionally perpetuating this myth. The article should clearly state that every loan results in the creation of a new deposit, and that is how banks create money in a fractional reserve banking system. This fact is poorly understood by the majority of people, and it's not in dispute as you state above.

Loans create deposits. And the article should clearly state this fact.

As to reserves following deposits, I already said this is a "minority" view at this time, and I'm not interested in putting that statement into the article. I just want the article to clearly state that every loan involves the creation of a new deposit. By stating that banks "lend" deposits, this leads the vast majority of people to believe the myth that banks take in deposits and then turn around and loan those deposits to someone else. That is not how banking works.

Chdouglas (talk) 15:17, 5 November 2011 (UTC)

Again, if such a myth is common, then shouldn't it be readily documented by economists and bankers? What are the reliable sources that suggest such a myth exists, is commonly perpetuated, and is problematic for our purposes? Don't get me wrong. I am all in favor of improving the article's clarity. It just seems like this is a superfluous revision to make to the lead. The article already communicates that money or deposits are created as a result of banks' lending activities, albeit in various wordings. The mechanics of double entry accounting don't contradict the lead's use of lend either.

Side note: Fortunately, the article already does give duly weighted credence to the minority view that banks first obligate themselves to borrowers and later manage those liabilities, so that's taken care of in the first paragraph of the Money creation section.

I'm trying to be helpful, but I guess I may just not be fully understanding how your proposed revision will necessarily improve clarity. It'd be great if a few more editors could weigh in. John Shandy` • talk 17:32, 7 November 2011 (UTC)

Hi Shandy, sorry for the delayed response, and I know you're trying to be helpful. Maybe I can clarify my problem with the opening paragraph in more detail.

I find the following statement in the article highly misleading:

"Funds deposited into a bank are mostly lent out"

This sentence makes it sound like banks take in deposits, and then lend those deposits to someone else. As we've already agreed, this is not how banking works. Loans create deposits.

The fact is that most people have not studied economics formally, and even those that have, often have a poor understanding of money creation and bank accounting. I would like to see the above statement either taken out, or changed to show that loans create deposits. It is a more accurate description of the process than the confusing statement above. Thanks. Chdouglas (talk) 16:21, 19 November 2011 (UTC)