Bank Failures
We have written before about the remarkable ability of banks to create money when making loans, and of their equally remarkable ability to multiply these newly created-from-nothing bank deposits via fractional reserve banking. What we have written is true, and easily verified.
But banks fail! That fact is equally true, and easily verified as well. How can we reconcile these apparently contradictory facts? If banks can create, and multiply, money, how can they fail? Could your business fail if what you made was, literally, money, or what people took for money?
The qualifier is important. It is what people assume about money that makes modern banking possible. The Federal Reserve itself points out that it is the people's confidence that make paper devices serve for money. Belief (i.e., "credit") is what keeps the system going. Psychology is everything.
If modern money is an illusion, then bank failures are an important means of reinforcing that illusion. Consider the alternative. If a bank made loan after loan, and these loans were not repaid, and the bank continued to do business year after year with mounting millions of bad loans on its books, wouldn't that look odd? People would question how the bank could continue to thrive despite so many bad loans. Would they maintain their confidence in the system if the banker cheerfully admitted that he made those loans by simply crediting the borrower's account, and that to do so cost him nothing? Some might wonder why the bank would not honor checks written on insufficient funds, if the banks create those funds from nothing. Corporations which are unable to meet their financial obligations to banks might wonder why they must work to repay the bank for something it got with a flick of a loan officer ...