When the bank loans out 900 dollars to me and places it in a checkable deposit, then on my balance sheet it would be +900 under assets.And now this created money. But if I now wish to withdraw the...

When the bank loans out 900 dollars to me and places it in a checkable deposit, then on my balance sheet it would be +900 under assets.

And now this created money. But if I now wish to withdraw the money from the checkable deposit, then it would be -900 under assets. The sum of +900 and -900 is 0. so how was 900 dollars of money created if it then was withdrawn and that resulted in 0?

Asked on by hjbhj

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

Once you take the money out of the bank, it comes out to zero on their accounts, but you have $900 in cash in your hands.  So money has been created.

The reason that money has been created is that the $900 you borrowed was not just taken from someone else's account and given to you.  The $900 that you have in your hands now was just money that the bank "made."  It was able to create that money because someone else had deposited money in the bank.

So, the fact that the bank's books come out to zero on this loan does not mean money has not been created.  Money has been created because the money in your hands did not exist before the loan was made.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

Every transaction has dual effect in accounts, one on debit side and other on credit side. This is why modern accounting system are called "double accounting systems'. The confusion described in the question is because only one to the two aspects of the accounting effect is being considered.

When the loan is taken and put in the checking account, it increases the bank balance. This is on the asset side of the balance sheet. However at the same time there has to be be a matching entry on the liability side of the balance sheet. This will be in the form of a loan taken from the bank. The $900 increase in assets because of increase in checking account balance will exactly match the $900 increase in liability shown as increase in loan taken from bank. Thus there is no net increase or decrease in balance sheet. When all accounts have been made correctly total of assets and liability sides of the balance sheet are always equal, which cancel each other, giving net value of 0.

In the second transaction, when the money is withdrawn from the bank, the bank balance gets reduced, but the money would still be there in some form. It can be in the form of cash or things purchased, or increase in expenses incurred. So, what is done with the money withdrawn from the bank will be represents as the other aspect of the transaction. Net effect of both these accounting entries will still be 0.

In general, putting money in bank and withdrawing it, has no impact on net assets, It only changes the form in which the assets are held.

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