The Bank of England’s latest edition of its Quarterly Bulletin features an article entitled ‘Money creation in the modern economy’. It’s pretty revolutionary stuff.
A week ago the IMF said that inequality is harmful and redistribution is helpful to economies. We were a little bit surprised. Now the Bank of England is going out of its way to say that conventional teaching on money in economics textbooks is wrong. Take these examples:
The reality of how money is created today differs from the description found in some economics textbooks:
• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality.
and this one:
This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.
That doesn’t say the textbooks got it a bit wrong; it says they got it absolutely the wrong way round. In case you weren’t sure they meant it they add:
As with the relationship between deposits and loans, the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks.
And there are more in addition to these.
That does though lead to a question: if standard economic textbooks get something as basic as money and banking so spectacularly wrong, what else are they wrong about? As you can imagine, my list is very long.