Not true. Private debt (i.e. banks loans) are created out of thin air, indeed this is the primary mechanism for inflating the money supply. They may be backed by collateral, but that is not a limiting factor.
They are backed by collateral, which limits the growth in the money supply to the value of goods and services in the economy. And, when the loan is paid back, the money is destroyed. Hence, no inflation.
Now, when the government issues debt, there is no collateral, and hence no constraint on the debt. When the debt notes are paid, they are paid by simply issuing more debt. Hence, inflation.
Plenty of loans, likely the vast majority, are not backed by collateral. Loans are created based on supposed ability to pay (from future income streams), not from swapping the value of an asset for cash.
Banks issuing debt is exactly how the supply of money grows. Central banks influence this process by setting the rate at which banks can borrow from them and various regulations and market operations, QE etc.
If someone has told you that inflation is caused only by government excess spending it is because they are pushing the agenda that government is 'bad'.
> Banks issuing debt is exactly how the supply of money grows.
You're overlooking the fact that private debt gets paid back, which reduces the supply of money.
> If someone has told you that inflation is caused only by government excess spending it is because they are pushing the agenda that government is 'bad'.
Or read books like Friedman's "Monetary History of the United States".
Feel free to take a shot at explaining why the US has had zero net inflation from 1800 to 1914 and endemic inflation after 1914? What happened in 1914?
Indeed private debt does (usually) get paid back - but even more is being created, and so the money supply expands!
The US came off the gold standard in 1914 - so money did not have to be backed by gold (or silver or whatever) - it became fiat. Thereafter private banks were free to create as much money as they liked! (within 'reason') and so inflation (of the money supply) was born.
If the amount of money (modulo velocity) grows in line with the real size of the economy, then prices will remain stable. If the money supply outpaces the real economy, then prices will rise (what we commonly call inflation). If the money supply doesn't keep up, then prices will fall (deflation - this is considered bad because people stop spending). On the gold standard, the only way to grow the economy without causing deflation was to dig up ever more gold. Not really feasible in the modern age, hence fiat currency.
No, only the Fed was able to create debt without limit after 1914.
Other banks are and were limited by their reserve requirement. Bank lending has always been limited by the reserve requirement. The reason is because if the bank lends out too much money, there'll be a run on the bank and it will collapse.
> On the gold standard, the only way to grow the economy without causing deflation was to dig up ever more gold.
That's not how it works. The collateral for the loans is the backing. Doesn't need to be gold.
> Not really feasible in the modern age, hence fiat currency.
That's not why the Fed was created. It was created to finance government spending.
"The fractional reserve banking process creates money that is inserted into the economy. When you deposit that $2,000, your bank might lend 90% of it to other customers, along with 90% from five other customers' accounts. This creates enough capital to finance $9,000 in loans."
"The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold."
I was talking about how fiat came to be, not the Fed
