Lending money creates deposits
Broad Money is the money in the possession of homes and companies, whether private or public, that is, all the money except that in the possession of financial institutions. More than 95% of that money is made up of bank deposits that, in the modern economy, are mostly created by commercial banks for themselves.
Commercial banks create money when they lend money. When your bank lends you money so that you can buy a house or a car, it is creating money, it does not act as an intermediary between you and a saver, it creates it, period.
The sequence is as follows:
a. The commercial bank lends you money to buy the house.
b. In his assets you appear as a debtor, you owe him that amount and in his liabilities, a bank deposit appears as a counterpart. Money created.
c. The money he has lent you is transferred to the seller’s bank as a bank deposit in his liability; he owes it to the one who has sold the house to you.
d. The seller’s bank has to cover that liability with reserves from the central bank.
In short: a deposit has not been transferred from one person to another, what has happened is that a deposit and a debt has been created in the market. Broad Money has been created without the Central Bank having intervened or altered its reserves Based Money.
The reserves of the Central Bank are not touched; it is only a matter for commercial banks. In addition, contrary to what we are told, central reserves only move from the Central Bank to commercial banks and among the latter, never to final consumers, households or companies.
The Fractional Reserve Myth and the Money Multiplier: There is really no limit.
