There have been a few more blog posts of late on the old issue of whether banks lend reserves, including from Nick Rowe and Brian Romanchuk.
I prefer to say that banks do not lend reserves. However, this raises another question. If they do not lend reserves, what is it that they do lend? This question is a useful one to ask, because it forces us to think a bit deeper about loans and money.
The essential features of any loan from A to B, is that A agrees to transfer value in some form to B, and B agrees to transfer value back to A, in equivalent form, at a later date. There may be other terms, most notably payment of interest, but these are incidental. A simple example is a loan of A's car. A agrees to transfer possession of the car to B and B agrees to transfer back possession of the same car at some point in the future.
It's similar with a loan of securities. A transfers securities to B, and B agrees to transfer back equivalent securities on the later date. One difference compared with the car loan, is that we are not generally specifying exactly the same securities. The securities merely need to be of the same type. It's usually not possible to separately identify securities anyway, but the point is that if B chooses to sell the borrowed securities to C, he does not need to get them back from C in order to meet his obligation to A - he can instead buy equivalent securities from D, say.
In both these cases, the transfer of value involves an actual transfer of property from A to B: either physical possession of the car, or title to the security (a chose in possession in the first case and a chose in action in the second). Loans of dollars are different. With a dollar loan, A agrees to transfer value by making a payment to the order of B (or procuring that such a payment is made) and B agrees to reciprocate at a later date. In this case, there is no actual transfer of property.
To some extent, however, we can interpret this as being a loan of money from A to be B. After all, in many cases, the result of the initial transfer will be that A's money balances will be reduced and B's will be correspondingly increased, with the position reversed at the end. This interpretation is popular with economists as many of them like to think of money as an enduring thing that is passed from hand to hand. And in some cases, such as if we lend cash, there is an actual identifiable transfer of property.
However, this is only an interpretation and it does not work well in all circumstances, particularly if we have certain contracts between A and B where we want to treat the actual contracts themselves as being money, such as if either A or B is a bank.
The fact is that a loan does not have to a loan of anything. Some loans can easily be treated as being a loan of something, such as a loan of a car. But dollar loans are not in general a loan of something, even if we feel a desperate urge to think of them as such. They are in fact just bilateral agreements to procure accounting entries.
For many purposes, it is fine to think of dollar loans as being loans of money. But we should be careful not to fool ourselves into thinking that is what they actually are, because we need to understand how things work when that interpretation no longer fits.