On printing money

It is often said that money-lending is, basically, printing money.

People either agree or disagree but even in the former case they often find it hard to articulate why it is so.

Here's a simple example to show how it works.


A lends $1000 to B. A still owns $1000, safely stored in a form of a loan. Yet, B owns the money as well, having hard cold cash in their wallet.

The question: Where did the extra $1000 come from? It surely must have been printed?

One may argue that there's no extra $1000 in the system. A still owns the money but they temporarily granted B the right to use them.

This analysis, however, is based on the assumption that A and B know each other, care each about the other or at least that A is aware of the risk of lending money to B and that B feels a moral obligation to return the money to A.

Consider the following example:


A stores $1000 in a bank. Bank then lends the money to B.

Now, A is pretty confident about the ownership of the money. It's not like it's some kind of hypothetical money bound in a loan that has a non-trivial chance of being defaulted. The money is sitting safely on their bank account, after all.

The caveat is that the creditor-debtor relationship still exists between B and the bank. That A is being shielded from the fact doesn't change the nature of the relationship.

So, let's go one step further.


After lending the money from the bank, B goes to C's shop and buys $1000 worth of stuff.

Now, C has the cash and no doubts about its ownership. They gained them in a honest business transaction. A, however, still sees their money on their bank account.

$1000 + $1000 = $2000

$1000 have materialised out of nowhere.

There is still a hidden creditor-debtor relationship between B and the bank but the point is that neither A or C, the actual owners of the money, cares.

They may even meet at a social event and boast about being rich. Each of them has $1000 on their bank account! They have no inkling that they are both talking about the same, magically duplicated, money.

EDIT: After discussing the topic with couple of people it seems that mentioning a bank in the example was a mistake. The very word "bank" is guaranteed to cause emotional reaction. A progressive stops following the argument and starts swearing about evil banksters. A conservative stops following the argument and dismisses the whole thing as a leftist bullshit. In reality though, the argument is not about banks. If you allow for exchange of goods on one side and exchange of IOUs on the other, every market participant, however poor and humble, gets an option to create money out of nothing. If A, a plumber, lends $100 to B, a bus driver, they've just printed $100 worth of money.

Martin Sústrik, March 21th, 2016

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