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How does bank destroy money?

Updated: 10/10/2023
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13y ago

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They eat it! Omnomnomnomnom

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Q: How does bank destroy money?
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How banks destroy money?

Money DestructionBanks create and destroy money through "fractional reserve banking." Depositors leave money with the bank in return for interest payments. Since most depositors don't actually withdraw most of their deposits at any given time, the bank can lend most of the depositors' money out, keeping only a small fraction of all deposits on hand as a reserve available for withdrawals by depositors. The total amount of money in existence thus increases with each new loan.When a depositor withdraws money from a bank, the bank is obligated to pay any amount up to the entire amount on deposit, even though the bank holds only a fraction of the deposit in reserve. The bank must use fractions of other depositors' money to make up the difference. This means that the ratio of reserves to total deposits shrinks every time a withdrawal is made. The law prescribes a minimum reserve ratio; if the bank's actual ratio approaches this amount, the bank must either call in loans, which damages its business relationships, or borrow money from another bank or from the central bank to maintain its reserves at the required level. This effectively destroys money, since the overall amount of deposits in the banking system is decreased. In practice, the withdrawn money will likely quickly be spent and re-deposited at another bank, evening out the process over time. Money is also destroyed by a loan default. The bank accounts the loan as an asset, something that will eventually satisfy deposits, which are liabilities of the bank. When no repayment is forthcoming, the asset is destroyed, the bank takes a loss, and the bank must make other arrangements to satisfy deposits, as above.


How do banks destroy money?

Money DestructionBanks create and destroy money through "fractional reserve banking." Depositors leave money with the bank in return for interest payments. Since most depositors don't actually withdraw most of their deposits at any given time, the bank can lend most of the depositors' money out, keeping only a small fraction of all deposits on hand as a reserve available for withdrawals by depositors. The total amount of money in existence thus increases with each new loan.When a depositor withdraws money from a bank, the bank is obligated to pay any amount up to the entire amount on deposit, even though the bank holds only a fraction of the deposit in reserve. The bank must use fractions of other depositors' money to make up the difference. This means that the ratio of reserves to total deposits shrinks every time a withdrawal is made. The law prescribes a minimum reserve ratio; if the bank's actual ratio approaches this amount, the bank must either call in loans, which damages its business relationships, or borrow money from another bank or from the central bank to maintain its reserves at the required level. This effectively destroys money, since the overall amount of deposits in the banking system is decreased. In practice, the withdrawn money will likely quickly be spent and re-deposited at another bank, evening out the process over time. Money is also destroyed by a loan default. The bank accounts the loan as an asset, something that will eventually satisfy deposits, which are liabilities of the bank. When no repayment is forthcoming, the asset is destroyed, the bank takes a loss, and the bank must make other arrangements to satisfy deposits, as above.


What is the Money placed in a bank?

Money placed in a bank account