Originally Posted by
Mike T
From Wiki:
When a bank issues a loan of $1000 to a customer, they debit the customer's loan account with $1000 and at the same time they credit the customer's deposit account with $1000, ready for using. The bank now has a new asset of $1000 and a new liability of $1000. The bank's accounts are still in balance because the assets and liabilities are increased by the same amount. The bank's balance sheet is simply expanded with the amount of $1000. The bank does not take the $1000 out of its reserves. The $1000 are new circulating money that did not exist prior to the transaction.[23]
A study of banking software demonstrates that the bank does nothing else than adding an amount to the two accounts when they issue a loan.[21] The observation that there appears to be no limit to the amount of credit money that banks can bring into circulation in this way has given rise to the often-heard expression that "Banks are creating money out of thin air".[20]
