I have a question about money. I understand money is created via loans and every fiat money in existence is the result of a loan.
Many fiat critics as such are saying money can be created "out of thin air" by banks, since they can issue loans.
I see that banks are creating money via loans, however is it really the bank that is creating the new money or is it the fed.
Who is the actual entity that "creates" the currency?
I cannot imagine that the banks them-self have such power as this would give them the ability to create infinite amounts of money without any risk even with the reserve requirements:
Imagine this use case:
- Bank has a 10% reserve requirement
- I want to a 100k loan.
- Bank asks me to give them 10k so they can create the 100k loan. They take the 10k as reserve and simply create additional 90K by putting 100k into my account.
- I go broke after having paid back 50k of the loan, plus 5%
If in the above example, the bank were to create the money out of thin air, the bank would have made 2.5k in profit and could just write off the rest of the loan.
However if they had to loan the money from the fed and the fed would create it out of thin air, then the bank would have an issue if I failed to pay back the loan because it would still have to pay back the loan to the fed.
As such I would like to understand the process of actually creating the money itself. I.e. who is allowed to actually create the new money.
I would appreciate a:
- description of the process
- reference to where this is defined by the fed
Thank you for enlightening me