Why is it ok for Banks to literally create money out of thin air?

[apepi]

In a very real sense, fiat money is actually more of a "real" money than gold.

You need fiat money to pay your taxes, and so fiat money is a real commodity: a get out of jail card...

If you were paid in gold, you'd still have to pay your taxes USD/Euro/AUD/JPY, after all.

I don't think you understand the difference from backing money with gold and using gold as money.

[LilSaihah]

I do wonder what would happen if America's gold just sorta disappeared.

Would anyone care? The value of the dollar moves up and down with 0 relation to gold nowadays. It seems more and more that the gold standard is something you may say is around, but in practice really isn't. The gold certainly has value, but the dollar itself has its own in these modern times of world economics.

I thought that it has. At least, Germany's gold's disappeared! Ho ho ho.

Was it Germany or a different country, I can't remember

[Deleted]

In a very real sense, fiat money is actually more of a "real" money than gold.

You need fiat money to pay your taxes, and so fiat money is a real commodity: a get out of jail card...

If you were paid in gold, you'd still have to pay your taxes USD/Euro/AUD/JPY, after all.

Gold is always worth something, because:
1. it's rare
2. it has good properties, which is why it's used in a lot of industries - it's not just for jewelry - electronics, medicine, aerospace, ...

[vetinari]

Most banks only need to have 10% as reserve, so they basically lend out 90% of all money they get.

You pay £100 into a bank, it keeps £10 as reserve and loans out £90 they now in effect have £190 as the initial deposit of £100 is now an IOU, lets say someone pays that £90 in another bank, that bank keep £9 and loan out £81, and so the process continues.

Nope, thats not actually how it works.

What happens is that they lend out $100 and at the end of the day borrow $10 from either a bank or the government.

[Bluey111]

Actually yes they do. thats exactly what they do. research it

Do you have some of your so called research to back up your statements?

[Fencers]

You didn't answer his question correctly.

I believe I explained it poorly, yes.

[vetinari]

Gold is always worth something, because:
1. it's rare
2. it has good properties, which is why it's used in a lot of industries - it's not just for jewelry - electronics, medicine, aerospace, ...

If gold was only used for its industrial properties, the equilibrium price would be like $2 per ounce.

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I don't think you understand the difference from backing money with gold and using gold as money.

You may rest assured that I do.

[vetinari]

hey kid you do know currency has a value
they cant just spam currency or Devaluation will happen

the government is in charge of creating currency not individual banks

Government creates money by running deficits. This is known as fiat money.

Banks create money by lending. This is known as credit money.

[Tierbook]

I thought that it has. At least, Germany's gold's disappeared! Ho ho ho.

Was it Germany or a different country, I can't remember

It was Germany in so far as they wanted their money back, they got it back so it never dissapeared, the real issue would be it dissapearing while leaving France, Europe always seems to get the big billion dollar crimes.

[Ragedaug]

Sigh.

Ok. Let's start at the beginning. You have people. People create Things. Things can be anything - goods, services, raw materials, processed goods, labor (literally "people time"). The whole exchange of goods and services is called an Economy. As technology improves, the productivity of an economy improves - it produces more things. In order to facilitate easy exchange in an economy, we create a token we call Money, which is representative of an agreed upon Value. That value is determined by the "Market" - which is a fancy way of saying "ebay". In reality, all markets are a curve, since we each value different goods differently.

Anyway - economies grow. Money itself contains a value equal to the Things it can buy (remember, the Market). So, if an economy grows, but the amount of money in circulation remains the same, then the money itself becomes worth more. This is a problem - it's called Deflation, and it's what causes major depressions. In a deflationary scenario, holding onto goods is "bad" because they lose value each day, while holding onto money is good, because money always increases in value.

In the past, rare materials such as gold (in the form of coins) were used as the money themselves. The governments issuing those coins had to continuously degrade their currencies (lowering the amount of gold, or substituting cheaper metals). This difference in face versus production values is called Seigniorage. This was necessary to maintain a constant coin value.

In modern capitalist economies where changes in purchasing power occur rapidly, it became too difficult to maintain the low "normal" levels of inflation necessary to make goods trade favorably with money. A solution to this is to use fiat currency (that is, currency whose entire value is derived by government authority) and a partial reserve system, using the interest rate as the "valve" for controlling the money supply.

Unfortunately, this system is complicated to understand mentally. Many people have the impression that fiat currencies are "worth nothing". In reality, a fiat currency is simply trading against the economy that produces it - that is, the value of a dollar is derived from the value of the goods / services being circulated within the economy that uses that particular currency. The truth is, regardless of fiat or "hard" currency, the value of a coin is always dependent on the "economy" (the goods and services we are producing as a collective) and the "market" (our willingness to purchase / value assigned to good and services).

It's not so simple as "thin air". Banks generate the money they loan from the Federal Reserve, which in turn determines the money supply (yes, literally printing money) relative to the economy.

Beautiful explanation. I'm curious what percentage of your intended audience, ie. those who don't already understand it, will have the capability to process what you said. Unfortunately, I think most won't which is why we have the huge misunderstandings in the first place.

[subrosian]

Gold is always worth something, because:
1. it's rare
2. it has good properties, which is why it's used in a lot of industries - it's not just for jewelry - electronics, medicine, aerospace, ...

Gold only has value in a stable economy in which it can be traded. In the event of economic collapse - the event most "hard money" enthusiasts are buying gold for - you won't have the ability to trade it for goods and services. Starving people are not going to give their last loaf of bread for a gold bar. People will also not give you clothes, weapons, shelter, etc... for gold, because again, without the confidence that they can trade your gold for more of the things they are selling you, they simply won't make the trade.

All currencies are built on confidence. This is why the people who try to sell you gold coins advertise so heavily on radio stations, etc... with radio hosts who distrust the government and advocate that our paper money is being devalued. This lowers your confidence in paper money and raises your confidence in the gold-money. The truth is, neither currency is "real" - however the paper money is backed by a government that legally enforces its use for repaying debts - whereas no one is required to accept gold.

In the event that the government backing the currency goes away - it won't matter what you have in terms of "currency" assets.

[Danifilth]

Banks will stop printing money soon as people start being responsible not losing money like from burning floods tearing and so on.

[Drayarr]

for the same reason banks can take money out of an account with a balance of 0.

[vetinari]

they don't create money
they use your money and loan it to other people

if everyone took their money out of a bank at the same time it would collapse

No, they don't use your money and loan it other people.

They create the money they loan out, they don't need* to have any money before they make the loan.





*regulatory requirements notwithstanding. Fundamentally, the point of regulations is to either make an entity do something they don't need to do, or to stop it from doing something they can do.

[LilSaihah]

Banks will stop printing money soon as people start being responsible not losing money like from burning floods tearing and so on.

If they're really printing all their money because the plebs keep destroying it, why don't they move to a better material than paper?

[vetinari]

If they're really printing all their money because the plebs keep destroying it, why don't they move to a better material than paper?

Because the bankers like using money in their fireplaces

[Ragedaug]

I do wonder what would happen if America's gold just sorta disappeared.

Would anyone care? The value of the dollar moves up and down with 0 relation to gold nowadays. It seems more and more that the gold standard is something you may say is around, but in practice really isn't. The gold certainly has value, but the dollar itself has its own in these modern times of world economics.

Remember, at its core, a monetary system is just an agreement that X is worth Y. Nothing more. We needed a gold standard partly because gold was the world standard. But it largely isn't any longer.

Theoretically, nothing would happen, also curious if your question presumes that the gold hasn't already disappeared?

Lots of folks would mistakenly care though.

The US went off the Gold Standard in 1971, some countries like Germany dropped the Gold Standard in 1914. Most countries left the Gold Standard in the 1900's, of the few that remained, the last country using the Gold Standard dropped it in 2013.

Either way, it doesn't actually matter. Precious metals and stone did the same thing as paper money or digital currency do, which is give folks an easier way to barter to trade goods and services.

[lockedout]

I do wonder what would happen if America's gold just sorta disappeared.

We still have gold?

[subrosian]

The United States effectively ended the gold standard in 1933 when Roosevelt set a moratorium on the conversion of paper dollars to gold, ordered all gold in denominations over $100 turned in for paper money, and barred the export of gold from the country. He then set the price of reserve gold at $35/ounce (up from $20.67 an ounce) increasing the paper value of the reserves, and began printing money. Most economists agree this helped to end the Great Depression, by lowering interest rates and allowing businesses to borrow again.

Foreign governments were still able to exchange their paper currency for gold until 1971, when Nixon abolished this practice due to foreign governments depleting the United States gold reserves (the gold held in reserves was priced below the market value it held relative to paper currency).

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We still have gold?

The Federal Reserve Bank in Manhattan has 225.1 million troy ounces of gold in a vault.
Fort Knox holds a large, unknown quantity of gold in storage.

[Kiteh]

This kind of explains it, it is worth the 15 minutes to watch the whole thing.

https://www.youtube.com/watch?v=t5ayg3hbhoM