> Which is why we don't let private companies create currency willy-nilly anymore.
As I understand, private banks extend loans, which while not being printing money, the loans being deposits (which can be withdrawn) the effect of creating currency is the same.
Issuing tether was basically an unregulated bank loan system. With a regular loan the created money is destroyed when you repay it. In theory that would happen to the tether when you redeem it for dollars. The problem is really just that tether was lying about how they were operating.
Correct, for the non-financial sector, "money" is currency in circulation (created by the government) and then liabilities of the financial sector (created by the private sector). This is true regardless of whether they are checking accounts, savings accounts, certificates of deposit, money market mutual funds, etc. It's all private money and we not only allow it but we subsidize and encourage it.
Private banks can only extend loans so much as they have the money already.
Yes, it's a juggling act: Person A still has $1000 on the ledger in their deposit even if the bank lends $800 of that to Person B, so if the people with deposits want to cash out all at the same time, and the bank can't pull back what they've lended out fast enough, you have big problems!
But they aren't just adding numbers to a cell in a spreadsheet without having the money to back it - a loan that can't be used to pay someone or to be turned into cash is useless. You can't just start a bank and issue yourself a thousand dollars into your own account and expect to be able to use it for anything. This would be closer to the credit card model - short term credit without taking deposits, making money on the repayment - but again, good luck issuing yourself your own credit card to buy a bunch of stuff with to "create money."
And they also aren't doing anything that couldn't be done with crypto!
> Yes, it's a juggling act: Person A still has $1000 on the ledger in their deposit even if the bank lends $800 of that to Person B
Fractional reserve banking isn't up-to-date with the modern banking system, where in many cases, like in the UK, and in the US as of 2020, there are no reserve requirements. [1]
> But they aren't just adding numbers to a cell in a spreadsheet without having the money to back it
I disagree; this is the reality. Banks don't have to wait for deposits to extend loans. When creating a loan involves novel financial instruments to hide or offload the loan's risk, this has caused massive bubbles, as in the 2008 mortgage crisis.
This credit they extend to customers is "broad money" that, while not being created by the central bank, is effectively the same, as it is the deposit for someone else, which can be withdrawn.
Lending, and the maintenance of the depository accounts where lent money not withdrawn in cash must end up, is much more tightly regulated than it was in the era of willy-nilly private currency issuance, as well as direct currency issuance itself being reserved for the State.
Which is why we don't let private companies create currency willy-nilly anymore.