
A linguistic glitch tricks us into thinking bank deposits are deposited in banks - jpkoning
https://alteredstatesof.money/what-are-bank-deposits/
======
kinkrtyavimoodh
This feels like a bizarre article that seems to be 'fixing' a confusion no one
actually has. Also, if the premise of your article is that the 'dictionary is
wrong because I feel otherwise and that's why everyone is confused', then you
should consider the parsimonious explanation that no one is actually confused,
that the dictionary is right, and that it is you has invented a confusion.

~~~
jljljl
People do have this confusion all the time though: they think the bank lends
out the money they put in, when really what’s happening is money creation as
described in the article.

~~~
kinkrtyavimoodh
But the two are independent ideas. You don't need lending or money creation
for a bank to work, though even there the analogy is sound. The bank does lend
money out and if a lot of people try to withdraw it at the same time, you get
bank runs and collapses.

That being said, in principle, it is possible to have a bank that literally
takes the cash you give it and puts it in a giant vault, and when you come to
ask for withdraw it, retrieves it and hands it back over. It is literally the
idea that the author seems to be railing against. You come with your money
(water) and deposit (pour) it into the bank's vault (glass).

What exactly is the confusion?

~~~
TheOtherHobbes
The confusion is that this isn't how banks work. But most people believe that
this is how banks work.

More than that, most people have no idea how lending really works. They
believe the bank is literally lending their savings out. So if no one saves,
there's no lending.

Even some economists believe a more complex version of this.

[https://larspsyll.wordpress.com/2014/09/21/the-loanable-
fund...](https://larspsyll.wordpress.com/2014/09/21/the-loanable-funds-
fallacy/)

~~~
cm2187
Well at a micro level, it is still what happens, the bank doesn't make money
appear by magic.

The multiplier effect just happens because the original amount of cash has
been deposited, then lent, then deposited again. So you have the same amount
of cash in the system but two deposits, one backed by a loan, the other by
cash, and the deposits are treated as "like cash" whereas they are mere IOUs
backed by a financial asset.

~~~
jljljl
A reserve (or government cash deposit) is not technically required for a bank
to issue a loan.

Its _risky_, since it could lead to a situation where someone tries to cash
out and you have nothing to give them, which would destroy your business and
reputation as a banker.

But if you could make perfect loan decisions and no one comes to redeem their
deposit, you wouldn’t need to have any reserves at all. Most regulators
require a minimum amount of reserves to prevent instability or bank runs (and
to control money supply)

That’s the difference, you’re not lending out the original amount of cash,
you’re using it as a reserve in case someone asks for their money.

------
rkagerer
I didn't find this article very enlightening.

It uses too many words to explain a straightforward concept: You hand your
cash over to a bank, in exchange they give you an IOU. They give out IOU's far
in excess of the amount of cash assets they actually hold.

The concept of "short-term promises in exchange for long-term promises" was a
bit more illuminating.

It might also be misleading to say the bank _takes ownership_ of your
deposits. More accurate to say they take custody, given the strong fiduciary
obligations the transaction imposes on them (at least in developed economies).

The intrusive sign-up-to-subscribe form a mere few paragraphs in doesn't win
the author any love from me, and while I don't generally mind mspaint-flavored
art I found the annotated illustrations somewhat amateur. The whole article
feels like it was written by a youth who just discovered the concept of
fractional reserve banking and wants to educate the world.

~~~
cm2187
Just to be clear, the bank holds more assets than its liabilities, otherwise
it would have gone bankrupt. It just happens that a lot of these assets are
themselves IOU from private customers, usually backed by a property asset.

~~~
jonahbenton
typo:

s/bankrupt/insolvent/

As you're probably aware, bankrupt is not a relevant concept for banks.
Creditors- depositors- do not get a haircut, their deposits are insured.

~~~
cm2187
No, banks can go bankrupt like any other company. I think you are refering to
Chapter 11 (in the US), which is true, isn't practical for a bank, because the
bank has no other business than being trustworthy to its creditors, so it
couldn't really operate under Chapter 11.

The deposit insurance only applies to deposits below a certain threshold and
doesn't concern the bank, it just means the state will make the customer good
for its loss in a bankruptcy.

Now in practice central banks will do everything they can to avoid getting
there, first by forcing banks to hold a lot of capital and liquidity. But it
can still happen, and one of the tools available is bail-in, which effectively
replicates the effect of a chapter 11 over a week end, outside of courts.

I think in most jurisdictions, wholesale creditors are the most likely to get
a haircut in a bail-in, and the insured part of the deposits is explicitely
non-bailinable. But any deposit above the insured threshold can in theory be
affected by a bail-in and have a haircut applied.

But a lot of fail safe mechanisms will have failed before that happens.

~~~
jonahbenton
Thanks, yup- to be more precise, a state of insolvency- liabilities > assets
at close of business- may result in one or more outcomes, one of which is
essentially bankruptcy + bail in, but another might be, eg being
absorbed/acquired?

~~~
cm2187
Correct. Though just to be precise, a bailin would happen well ahead of a
bankruptcy, the regulator wouldn’t wait for the situation to be that bad to
call the bank non viable (except in a jump to default scenario).

Absorbed/acquired: that’s a bailout. Always an option but I think everyone
agrees no one wants to see that happen again unless it is a willing private
buyer.

------
jessaustin
_This also means you 've failed to make a distinction between the two forms of
money in our society: state money ('water'), and bank money ('promise for
water')._

Technically the "state money" is also just a promise. In years long past, it
was a promise of a particular quantity of precious metal. More recently, it's
not a promise of that, but they strongly imply that one who possesses state
money can use it to pay taxes to the state.

~~~
ouid
You can also use state money to settle debts established by the courts. Money
is not an illusion.

~~~
abfan1127
FRNs are not an illusion, just their intrinsic value. Originally, dollars were
exchangeable for gold or silver. Now, we get the _privilege_ of paying taxes
and court fees with FRNs. Outside of those arbitrary fees, they have no value.
Its current currency value is that everybody (in the US) takes them and most
international markets are based on them. once the international markets switch
to some other currency, the FRN will lose a rapid part of its value, and the
real brunt of the inflationary principles the Fed has adopted will be felt. It
will be quite painful.

~~~
AnthonyMouse
There seems to be this meme that hyperinflation is always painful. Long-term
hyperinflation is painful because nobody wants your currency and that causes
all kinds of problems.

Short-term hyperinflation is short-term disruptive, but it also has the result
of effectively wiping out your debts (which would be helpful on net to most in
the US, including the government), and then people just adjust to the new
prices, which are higher but become stable, and wages rise to compensate.

The main loss to the US from not being the reserve currency would be that they
couldn't keep printing _even more_ money without incurring the normal amount
of inflation that usually implies for everybody else. But that's assuming the
rest of the world is even interested in handing that power to somebody else.
And who would that be? Everybody wants it to be themselves, which is what
nobody else wants. Meanwhile all the powerful international holders of US debt
have a huge interest in it continuing to be the US, since they're the ones the
wiping out of dollar-denominated debts would hurt the most.

And none of that seems especially likely in the immediate future, because the
Fed is doing all it can right now to prevent _deflation_ , by keeping interest
rates on the floor and printing a ton of money. It would be so easy for them
to prevent inflation right now that all they would have to do is stop actively
doing half the things they're doing to prevent its opposite. So it only
happens if they want it to.

------
jonahbenton
Lots of valid critique for this piece. Will add that "state money" and "bank
money" is a poor way to talk about credit.

In terms of references, tons and tons and tons of prior art defining money and
so forth. A book I recently enjoyed a great deal is:

The Nature Of Money, Geoffrey Ingham

[https://www.amazon.com/Nature-Money-Geoffrey-
Ingham/dp/07456...](https://www.amazon.com/Nature-Money-Geoffrey-
Ingham/dp/074560997X)

And this more recent Bank of England paper is exceptional:

[https://www.bankofengland.co.uk/quarterly-
bulletin/2014/q1/m...](https://www.bankofengland.co.uk/quarterly-
bulletin/2014/q1/money-creation-in-the-modern-economy)

------
dmurray
The point of this article is: a bank deposit is an asset for you, the
depositor, and therefore a liability for the bank. A mortgage is a liability
for you, and therefore an asset to the bank.

Sometimes we get confused and we think that the bank deposits must be assets
for the bank, and mortgages must be liabilities. This isn't because of some
linguistic quirk. It's because its _good_ for the bank to have a lot of
deposits, because it means it's doing a lot of business. In the same way a
company with a billion-dollar line of credit is likely doing better than a
firm who can't borrow a cent.

~~~
User23
Also, when the bank originates a loan it also creates a corresponding deposit.
Therefore a bank having more deposits indirectly indicates it’s originating
more loans.

~~~
dmurray
It's the other way round. The first part isn't true - the bank doesn't
buttonhole some saver into giving them a few hundred grand when you take out a
mortgage. (It might get the deed to your house, physically or metaphorically -
but there are also unsecured loans).

The second part is true: when you make a deposit the bank has some more cash
and will surely invest it/loan it out/deposit it at another institution. Those
three phrases all mean roughly the same thing: the bank will take the pile of
copper and linen you gave it and use it to purchase another asset.

~~~
User23
I wrote nothing about savers. Both the loan (bank asset/customer liability)
and the deposit (bank liability/customer asset) are created from nothing at
the same time when the bank originates a loan.

The loanable funds model, which it appears you are alluding to, is observably
an operationally incorrect fantasy.

------
recursivedoubts
_> "If this is you, you've made an error, and have fallen into the trap of
thinking that banks 'lend out the water that I've put inside them'. This also
means you've failed to make a distinction between the two forms of money in
our society: state money ('water'), and bank money ('promise for water'). And
both of these misunderstandings are facilitated by the linguistic glitch we
are trying to deprogram."_

I don't think this clarifies much. Talking about categories like "state money"
and "bank money" doesn't make the problem clear.

I have come to the conclusion that the problem with fractionally reserved
money isn't the fractional reservation mechanism at all. Rather, the problem
is that banks effectively promise the same money to multiple people _at the
same time_. There is one "piece" of money, but multiple people have claims on
it.

If deposits were timed (like CDs) and the banks could only loan out the money
for the time it was tied up, there would be no problem. In fact, there would
be no need for a reserve ratio, just loss provisions. A "piece" of money could
be loaned out an infinite number of times, in fact. Every bank would just need
to show a loanable amount curve over time as well as a loaned amount over
time, and you could easily see if a bank was in trouble or not well in
advance.

Demand deposits could not be loaned, of course. Basically, force banks to
borrow long and lend short.

This is what I'd like to see tried.

~~~
benlivengood
> I have come to the conclusion that the problem with fractionally reserved
> money isn't the fractional reservation mechanism at all. Rather, the problem
> is that banks effectively promise the same money to multiple people at the
> same time. There is one "piece" of money, but multiple people have claims on
> it.

Banks get overnight loans to cover the case where creditors want more money
than they currently have access to.

There is no single piece of money anywhere anymore.

When you deposit a $100 federal reserve note in the bank you are only giving
that bank a means to pay taxes or pay back loans from Federal Reserve Banks.
If you take a $100 note to a federal reserve bank they will look at you funny.

The reason this works is that U.S. currency is so stable that any potential
commodity you might desire as currency can be paid for with USD money from
virtually any bank in the world. Banks are just an accounting system at this
point who barely hold any physical thing of value, and only on a just-in-time
delivery model. The rest of the economy satisfies the market for transactions
between money and goods.

Why doesn't it all fall apart? The federal reserve raises interest rates when
there is too much money in circulation, urging banks to pay off their
liabilities, thus destroying money.

------
jasonhansel
The "bank" in "bank deposits" is an attributive noun (a.k.a. a "noun
adjunct"). In "oil deposit," since oil is a mass noun, we interpret the phrase
as meaning "a deposit made of oil." But "bank" is a count noun--the phrase "a
deposit made of bank" makes no sense--so the natural interpretation is "a
deposit related to a bank."

Essentially, "bank" is just a noun being used as an adjective (as in phrases
like "horse race," "corn maze," "motor vehicle," "chicken noodle soup bowl,"
etc.)

------
Patient0
This speech by the SNB chairman describes fractional reserve banking well in
my opinion:
[https://www.snb.ch/en/mmr/speeches/id/ref_20180116_tjn](https://www.snb.ch/en/mmr/speeches/id/ref_20180116_tjn)

------
ajb
It sounds like he's saying that the banks should have a type system for money,
maybe something like this:

    
    
      datatype Money 
      = Deposit of int
      | Reserves of int
    

(Or maybe a unit system) and we shouldn't think of these as comparable..

~~~
cm2187
You just invented T-accounting!

~~~
Konohamaru
What is T-accounting?

~~~
cm2187
The basic concept behind accounting, the T represents the balance sheet which
must be balanced at all time, and every change in the balance sheet is always
a tuple of two operations, either on both sides of the balance sheet, or on
two lines of the same side.

So if you start with an empty balance sheet and a customer comes with cash to
deposit, your first operation is: increase deposits | increase cash.

Then the bank lends money to a borrower: decrease cash | increase loans to
customers.

Then the borrower pays an interest: increase cash | increase equity

Then you pay some interest to the depositor: decrease cash | decrease equity

etc.

------
Ijumfs
It's not a linguistic trick. It used to be that banks had to keep a certain
percentage of they money they had on deposit on the premises. Slowly, this
amount (the "reserve rate) was lowered to 0% under Obama.

~~~
gruez
>Slowly, this amount (the "reserve rate) was lowered to 0% under Obama.

Source for this? AFAIK it was done this year, under trump not obama.

>As of March 2020, the minimum reserve requirement for all deposit
institutions was abolished, or more technically, fixed to zero percent of
eligible deposits. The Board previously mandated a zero reserve requirement
for banks with eligible deposits up to $16 million, 3% for banks up to $122.3
million, and 10% thereafter. The removal of reserve requirements followed the
Federal Reserve's shift to an "ample-reserves" system, in which the Federal
Reserve Banks pay member banks interest on reserves that they keep in excess
of the required amount

[https://en.wikipedia.org/wiki/Reserve_requirement#United_Sta...](https://en.wikipedia.org/wiki/Reserve_requirement#United_States)

~~~
thedudeabides5
You two are mixing up required reserves ratio:

[https://tradingeconomics.com/china/cash-reserve-
ratio](https://tradingeconomics.com/china/cash-reserve-ratio)

and a bunch of other yields, which connect to the the rate paid on reserves,
the rate on excess deposits, fed funds, libor etc etc.

[https://tradingeconomics.com/united-states/interest-
rate](https://tradingeconomics.com/united-states/interest-rate)

------
neilwilson
The main mistake is thinking deposits are taken out of banks.

Once you realise that a bank note is a receipt for a deposit at the central
bank it all becomes clear.

We just swap deposits between ourselves

------
pablobaz
In Ireland, you make a lodgement when you are paying into a bank.

I was in disbelief when I first realised that no-one in the UK knows what a
lodgement is.

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josefrichter
Eh, this sounds more like linguistic overengineering really. And that
accounting example is wrong.

------
pantaloony
I can’t tell whether this is debunking a myth I didn’t believe to begin with,
or if I do believe the myth but am too dumb to recognize that it’s what this
article is about. This is bizarrely opaque for so many words about a fairly
small (I think?) scope of knowledge.

~~~
distantaidenn
I’m also not quite sure what the point of this was. It’s seems a long winded
way to say that the money you deposit is not physically there regarding
absolute ownership.

That or I too am completely missing the point.

------
adamsea
Why even use the word "glitch"?

