system
Given the following post, respond as if you're commenting on Reddit:
human
Can Banks Literally Create Money and Profit Off of it?

So, I recently learned that banks don't need to have the money on hand to lend it. This seemed reasonable to me given that they had reasonable confidence in future payments being able to cover the cost of the new loans, but then I learned that banks will literally create money in this process. Specifically I'm talking about Australia and USA here.

So, when a banks lends let's say 300k out and receives 360k back, does this mean that the bank profited not 60k (the difference) but rather 360k because the 300k never existed in the first place?

As an additional side note, what are the consequences of this 'new money' if this is true. This seems like it would be a driver of inflation to me.

Thanks for the responses.
gpt
When banks create money out of thin air for loans, they create an asset and a liability on their balance sheet.

An asset, because the debt is something the borrower has to pay back, and a liability because of course the bank has to pay out that money to the borrower as well.

So if the principal of the loan is paid out, the bank "loses" the loaned money, if the loan is paid back, it gains that money back. Point being, there is no *net* gain from the principal of the loan.

>As an additional side note, what are the consequences of this 'new money' if this is true. This seems like it would be a driver of inflation to me.

Yes, that's kind of the point. Central bank control interest rates, through that they control the price of loans, therefore the supply of loans and how many loans get made, therefore the money supply.