The real question is: who gets to create an account with the central bank? The answer isn’t everybody, so everybody cannot create money.
If Alice owes $100 to Bobs bank, they can use that to credit a central bank account, so $100 can be created (assuming they are within reserve limits). If Alice only owes Bob, the result is zero sum because neither party can directly interact with the central bank. The result in zero sum.
The central-bank case is only zero sum when the loan is relayed and the $100 is removed from the reserve account. If the loan is never repayed, the economy just added $100 permanently.
But Charles will say he can’t take a debt as payment unless it is done through a party his bank trusts, which will be other banks with fed accounts. Sure it’s possible to setup a parallel banking system, but who would use it?
But Charles will say he can’t take a debt as
payment unless it is done through a party his bank trusts
Charles just takes an "Bob owes you $50" as payment. Just like Bob took an "Alice owes you $100" from Alice.
When you hire a web designer to build a new website for you, they will get to work and boom you owe them $X. The webdesigner will not say "I don't accept your IOU. They will say, "Ok, I'll get to work. You will owe me $X".
And what happens if when designer is done, Bob gives him half of his "Alice owe's you $50"? He would protest, because he wants money, not another IOU. Unless the designers bank accepts IOUs from the bank of Alice, real money is required.
It's the same result: "give me payment in a method my bank trusts. I don't trust Alice, or Bob." This trustworthy bank will need deposits, reserves, or a way to purchase reserves from the Fed when noone else will.
You bring up the question of how the debt is settled. That is out of the scope of my question. The debt could be settled in any number of ways. For example, Alice could give Bob the $100 she owes him. Or not be settled at all. Or Alice could give Bob something else. However Alice and Bob come to the agreement, that Alice does not owe Bob anything anymore, that settles the debt.
My question is if Alice and Bob created money, when they agreed that Alice owes Bob money. If so this money would be destroyed the moment the debt is settled.
The statements "money is debt" and "debt is money" come to mind. So if you create debt, do you create money?
How the debt is settled is essential to the question of whether Alice and Bob can create money. You are theoretically correct when you argue that they can create money via debt, but practically this is not correct.
The difference is that in reality, Alice and Bob will need to complete this transaction through some commercial bank vicariously recognized by the Central bank. These banks are recognized because they are (perceived to be?) solvent and follow the rules; and this recognition confers them the right to generate deposits based on loans. Alice and Bob can do the transaction without these banks, but no other party will recognize the money/deposits that this transaction creates.
Sure, debt creates money. But the only debt that creates USD is debt that is recognized by US authorities. If it's not recognized, your transaction simply created BobBucks(TM). No-one seems to want BobBucks (besides Alice for some reason).
And is zero-sum, thus not creating money. If a bank wants to pay everyone's invoices early they can, but unless that bank is using a fed account to pay the account, the result will be zero sum and no money will be created.
The critical point is whether the final lender in the chain is lending $$ that previously existed, or whether they are lending $$ that popped up in a Fed Account 20 minutes ago. The first case is zero-sum, the second case is only zero sum _when(if?) the loan is repayed_.
> critical point is whether the final lender in the chain is lending $$ that previously existed, or whether they are lending $$ that popped up in a Fed Account 20 minutes ago
The Fed isn't fundamental. Money precedes central banking by millennia.
Banks, even today, can create money willy nilly intraday. (They'll get boned EOD.) But whether the money is created at the Fed is an accounting matter, not monetary.
Because they can't meet their reserve requirement. If JPMorgan creates a trillion dollars of deposits at 11AM, that's fine. If, at the end of the day, they have insufficient reserves, they'll go into receivership. This system is far superior to the old method, which more resembled FTX.
Exactly! Their money-creating behavior is practically restricted by fundamental Reserve Requirements set by the Fed. Thus the Fed _is_ fundamental for money creation. If you want to create new money you either need reserves (set by the Fed), or a Fed account to buy reserves temporarily.
The alternative is loaning out deposits, which is zero-sum, and thus is not 'money creation.' [Edit: I am not suggesting this actually happens - I am suggesting it is the only alternative to lending within Fed limits, which is also the only way to lend without creating money]
You are well into a philosophical discussion here but I want to point out reserve requirements are not the practical limit on lending (even when they are non-zero).
The practical limits are actually the a&l requirements of their regulatory frameworks and the expectations of their equity holders. Right now equity holders get antsy if the deposit to loan ratio gets much above .8. Their regulators will almost certainly take them over if their total a:l ratio stays above 1.
But! There are accredited US banks right now with deposit to loan ratios approaching 2 and there is no federal reserve requirement. Those banks are likely in dire financial straights but for the moment they have created money with no federal reserve requirements.
Thanks for the response! I'm definitely no expert but I think I understand the basics.
Other commenters made a similar point about reserve requirements, I definitely overstated their importance. Interesting to hear about the A&L limits and kind of terrifying to know the limits are self-imposed.
The a&l regulatory requirements are certainly not self imposed. And the limits aren’t just in the form of rough ratios. They outline the classes of debt the balance sheets can have, how they are accounted for, operational procedures around the balance sheet and extensive reporting requirements.
But after 2008 equity holders became more risk adverse so demand tighter deposit to loan ratios. This caused the banks to disengage with lending, one of the things that caused the fed to remove the reserve requirement.
> money-creating behavior is practically restricted by fundamental Reserve Requirements set by the Fed
Fundamentally, for money, the Fed and central banks, generally, are irrelevant. Even practically, for modern U.S. dollars, the reserve requirement is close to irrelevant. It's an archaic tool; most countries simply set it to zero.
> loaning out deposits
Did you read the link you're commenting on? Deposits aren't loaned out. Loans create deposits. This is the difference between middle-school monetarism and real banking.
If Alice owes $100 to Bobs bank, they can use that to credit a central bank account, so $100 can be created (assuming they are within reserve limits). If Alice only owes Bob, the result is zero sum because neither party can directly interact with the central bank. The result in zero sum. The central-bank case is only zero sum when the loan is relayed and the $100 is removed from the reserve account. If the loan is never repayed, the economy just added $100 permanently.