I believe that video contains a significant error. Around 13:00-16:00, it claims that a fractional reserve ratio of 9:1 with an initial capitalization of $1111.12 can lead to overall debt of almost $100,000 being issued. I believe this is incorrect and misunderstands how fractional reserve banking works.
The video's scenario is that a bank has a $1111.12 capitalization, no depositors, and issues a $10,000 loan to a customer who immediately writes a check for the $10,000 amount (which then gets deposited at another bank). The video seems to think that this bank can continue operating by fulfilling the check with $8888.88 of "debt money" that it just made up.
I'm pretty sure that the bank (call it A) has become insolvent and the check will not be able to be deposited at bank B. Bank B has no reason to accept Bank A's IOUs -- they aren't real money. If bank A doesn't have enough hard cash to satisfy the checks written by both its depositors and its loan customers, the bank has become insolvent and has to close its doors. So in reality, the 9:1 ratio means that $1111.12 of real money can only become $10,000 in "debt money", total, not $100,000.
Your link is describing the UK, which has no reserve requirement. So naturally, a ratio would not apply there.
> Money is created from nothing when banks lend.
In one sense you are right. If you add up everyone's net worth, it is greater than the amount of money issued by the central bank. But there is a natural limit on this process, because banks have to be able to fulfill checks cashed at other banks with real, central bank issued money.
The central bank in my country have issued similar reports describing the relationship between reserves and possible loans as indirect, even in the presence of the reserve requirement here. This requirement, as I understand it, a legal restriction, not an economic one, and it is rather soft. Imposing such a requirement does not fundamentally change the nature of how money is created.
> Banks have to be able to fulfill checks cashed at other banks with real, central bank issued money.
Increasingly less so. Especially since nobody buys a house with cash, and that's what most loans are for.
> Imposing such a requirement does not fundamentally change the nature of how money is created.
I never said that it did. I said that it imposed a limit on how much money can be created in this way.
> Increasingly less so. Especially since nobody buys a house with cash, and that's what most loans are for.
This is not a matter of nuance. If I sell my house for $500k, the buyer wires me $500k that shows up in my bank account. To complete this wire, the seller's bank has to move $500k of cold hard central bank cash to my bank. This isn't fuzzy or flexible. If the seller's bank can't do this, the seller's bank is insolvent and has to close its doors or take some other measure to get more central bank money.
It is true that I might then go buy a new house for $600k, using my $500k as a downpayment on a new loan. And if the seller of my new house uses the same bank as the buyer of my old house, only $100k of central bank money actually moved anywhere.
But if I don't do that, the banks are on the hook to actually move money comprising the full amount of the sale. The video I linked to upthread fundamentally misrepresents this fact.
I believe that video contains a significant error. Around 13:00-16:00, it claims that a fractional reserve ratio of 9:1 with an initial capitalization of $1111.12 can lead to overall debt of almost $100,000 being issued. I believe this is incorrect and misunderstands how fractional reserve banking works.
The video's scenario is that a bank has a $1111.12 capitalization, no depositors, and issues a $10,000 loan to a customer who immediately writes a check for the $10,000 amount (which then gets deposited at another bank). The video seems to think that this bank can continue operating by fulfilling the check with $8888.88 of "debt money" that it just made up.
I'm pretty sure that the bank (call it A) has become insolvent and the check will not be able to be deposited at bank B. Bank B has no reason to accept Bank A's IOUs -- they aren't real money. If bank A doesn't have enough hard cash to satisfy the checks written by both its depositors and its loan customers, the bank has become insolvent and has to close its doors. So in reality, the 9:1 ratio means that $1111.12 of real money can only become $10,000 in "debt money", total, not $100,000.