Do Banks Create Money out of Thin Air?

Alright, there has been an ongoing debate in another thread about banks ability to create money out of "thin air". So I'd like to hear some opinions of those that haven't read that thread yet and what their thoughts are on this subject.

I have never heard people claim that banks do not create money out of thin air until this forum.

Their position is that a loan check/account gets deposited in to another bank, the lending bank must transfer equivalent amount of reserves to the receiving bank. And they repeatedly use Step 6 in MMM...

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

My position is the creation of money in the form of deposits is a separate event from the transfer of reserves between banks. The need to transfer/acquire reserves is the way the Fed controls how much money a bank can create. My opponents say that because a bank can't create an infinite amount of money that therefore they are not creating money out of thin air.

However, my position is simple. You walk in to a bank to get a loan. A bank simply types numbers in to a computer and magically you now have money to go purchase the goods and services you need. That creation of money simply happens out of a thin air... the bank does not give you reserves, it does not give you another person's money, it simply creates it. Just because a bank needs to have reserves in order to transfer money to another bank or exchange deposits for cash, does not mean a bank is not creating money out of thin air.

It's simply no different than a bank creating more bank notes than they have gold, yet they are regulated to how much bank notes they can create based on how much gold they have or can attain based on their capital position.

 

How do you define "to create something out of thin air"?

What definition of money are you using?

 

Definition of money:

If money is viewed simply as a tool used to facilitate transactions... Today, in the United States, money used in transactions is mainly of three kinds - currency (paper money and coins in the pockets and purses of the public); demand deposits (non-interest bearing checking accounts in banks); and other checkable deposits, such as negotiable order of withdrawal (NOW) accounts, at all depository institutions, including commercial and savings banks, savings and loan associations, and credit unions.

Creating something out of thin air means to make in to existence something that didn't exist before.

 

OK, with those definitions, which I don't agree are necessarily appropriate or accurate depending on the context of discussion, I agree banks create money out of thin air. Through the process of lending money, loan payables and receivables and deposit account values come into existence that didn't exist before.

Of course, everything we deal was made out of thin air, so that's no big deal.

The sandwich I had for lunch was created out of thin air, per your definition. As was the chair I'm sitting on and the computer I'm interfacing with.

In fact, everything man has done was created out of thin air per your definition.

So what is your point?

 

The point is you guys spent 100s of pages of posts telling me banks did not create money out of thin air.

And the term sandwich came from thin air but your physical sandwich did not. Physical paper doesn't come from thin air, but writing the number 10 on it and saying it is "worth" 10 dollars, does come from thin air.

So when you go to a bank and they type numbers in to your account and say these are worth "x" amount of dollars, that is creating it from thin air since it can not exist with out human's saying it does.

 

Because in the common meaning of the word they do not.

According to your definition, my sandwich most certainly did.

"Creating something out of thin air means to make in to existence something that didn't exist before."

My sandwich did not exist before I made it shortly before lunch.

Thus by your definition, it was created out of thin air.

It all come from thin air. The paper did not exist before it was created. It was made into existance and didn't exist before.

Thus under your definition it was created out of thin air.

As with everything else man has created which under your definition is created out of thin air.

Once again, what is your point?

 

But they do

The term sandwich was created out of thin air. The physical properties of a sandwich were not created out of thin air. Just like the paper to create a dollar was not created out of thin air, but writing a "1" and saying this is a "dollar" is created out of thin air.

The physical paper was not created out of thin air. Paper is just paper. But if you wrote on it saying... this is worth 100 Iriemon bucks, than you are creating something out of thin air.

You are taking it to the extreme.

 

Under your definition I agree.

No, my sandwich did not exist before I created it before lunch.

Under your definition it was created out of thin air.

The paper did not existe before it was created. Therefore under your definition it was created out of thin air.

I am simply applying your own definition. You are the one who insists on using vague undefined terms because it is the only way you can defend your position.

 

You putting the pieces together and calling it a sandwich was created out of thin air since a sandwich does not "exist" naturally. But the pieces to the sandwich were not created out of thin air since when broken down it exists naturally. You can't break down a dollar bill in to a natural existence... since a "dollar" doesn't exist.

Someone making bread is not the same thing as you writing on a piece of paper claiming that paper is worth 100 Iriemon bucks.

 

No, I am simply applying your definition.

Straw man. I never claimed it was. However, in both cases they were created out of thin air per your definition.

Again, what is your point?

 

I don't think that's right. Material objects can't really be created (or destroyed), they can just be assembled or shaped out of other material objects. Your sandwich wasn't created out of thin air -- it was assembled from a number of ingredients that were grown and processed and hacked into bits and those bits placed together in the form of a sandwich. Same with your chair, your computer, and every other physical object (gold coins) that man has made.

The only things that can be "made out of thin air" are metaphysical. Well, and possibly some very tiny subatomic particles, but that's a whole 'nother thing.

The point is, I think, that money that is simply invented the way banks do it doesn't represent anything tangible. It has no practical or inherent value, beyond its ability to motivate people.

 

Use this defition for "thin air" and tell me if your analysis is any different:

"Creating something out of thin air means to make in to existence something that didn't exist before."

 

Exactly, very well said!!

 

Daybreaker was not using your definitions.

 

Yep. That's exactly why banks don't create money out of "thin air".

 

What do they create it out of? Lol. Do they go dig it up in your back yard?

 

Sure it is. You are just taking the definition to the extreme. The individual sandwich and calling it a sandwich came from thin air... the pieces to make the sandwich did not.

 

That's the definition I'm using.

Let's assume for the moment that the sandwich you ate was a peanutbutter and jelly sandwich. The various ingredients all existed before you turned them into a sandwich. The peanuts, the fruit, the wheat, etc. The peanuts were reshaped into peanutbutter, the fruit was reshaped into jelly, the wheat was reshaped into bread. The peanutbutter is not created, it's really just the peanuts in a different form. Everything in your sandwich existed before you made a sandwich. The sandwich may not have existed as a sandwich, but the sandwich was not created out of thin air.

The money that banks create doesn't have any pre-existing ingredients. It's just a number that someone types into a computer. It didn't exist as gold, or work, or any kind of energy. It's more like a story or a poem about money than it is actual money. It's pretend. Make-believe. Imaginary. You could maybe say it has some artistic value -- it does move people.

 

Banks create money out of deposits.

Lol. Yep. Lol. Lol.

 

Akphidelt's defintion said nothing about whether the the thing created came from pre-existing ingredients. You are adding conditions to the defintion that doesn't exist.

The definition simply was: "Creating something out of thin air means to make in to existence something that didn't exist before."

It's a simple question. Did the sandwich exist before I made it? No. Have I created something that did not exist before? Yes.

I would beg to differ. The new deposit is created by a transfer of cash/reserves to the payee and the act of his depositing that cash or reserves into a bank. The creation of the new deposit depended upon the existance of the ingredient of cash or reserves that are provide to the bank in the form of a deposit or loan. The creation of the new deposition also requires the creation of a loan which also creates loan payables and loan receivables.

None ofwhich are pretend, make believe or imaginary.

 

No, they create a deposit account to represent the money they created. They don't create money out of a deposit. That makes no logical sense whatsoever.

 

Thank you!! A fellow man with intelligence!! I will admit you articulate it better than I do, but it was fun watching these guys try to deny that banks do not create money out of thin air.

 

So what. Your definition said nothing about pieces.

"Creating something out of thin air means to make in to existence something that didn't exist before."

The sandwich didn't exist before it was made into existence.

Created out of thin air per your definition.

 

The point is that akphidelt2007's definition of "thin air" is flawed to begin with. When one is creating something from something else that already existed, there is a limit on how much of it can be created. In the example of the sandwich, one is eventually going to run out of peanuts or peanut butter to make the sandwich. But if you could make the sandwich out of thin air, you wouldn't need any other ingredients pre-existing. There could be zero peanuts on the planet, and you could still just create the sandwich out of nothing.

If banks could create money out of thin air, there would be no limit to how much money they could create. They could simply create it on command. We know this is not true. Banks can only create money through multiplying deposits. The deposits have to be created in order for the money to be created. There is a limit on how many deposits can be created based on how much money the Fed creates.

Banks cannot create money out of thin air.

 

No, I agreed it is created out of thin air, per you definitions.