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
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.