Most people have no clue how their bank account really works. A frighteningly large number think that there is a pile of cash in the bank with their name on it if they're in what they call 'credit'. But actually, it's just an an account. The clue is in the name. And it just records who owes who money. Either the bank owes you, or you owe them. And it really is as simple as that. It's not hard, and simultaneously it is one of the hardest things for anyone to accept - that money is just an entry in a computer and nothing more. I try to explain that here.
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Even bankers don’t understand (well, the graduate trainees that I teach usually don’t despite degrees in Economics/Finance etc.). Don’t worry, though – after 4 weeks with me I make sure that they DO get it (and a few other potentially subversive ideas, too!).
So, why is it so difficult to understand? George Box said, “all models are wrong, but some are useful” and the model of the bank being a large safety deposit box is useful for most people for most purposes…. although, as you say it is wrong.
The problem is that policymakers that do (or at least should) know the truth choose to perpetuate the lie for their own ends.
We need honest policymakers and educated voters…. but that it the solution to most problems!
🙂
The institutions that fitted the description of ‘safety deposit box’ were mutual fund institutions, headed by the great TSB: and look what happened to them all. Captured by neoliberal ideology, they were destroyed – inter alia – by their own depositors, carried away by the prospect of large short-term capital gains in the capital markets by conversion to limited liability operations. Any cost, any price for a quick, selfish buck. At least that is how I recall watching it at the time, with open-mouthed astonishment at the blatant greed and civic folly.
Agreed: and they did play a valuable role
As did the old building society
As could enhanced credit unions
Surely not?
https://www.youtube.com/watch?v=7vf1RHvbIQw&ab_channel=TellyViewer
From about 8′:15” I couldn’t find a clipped version of only that sequence
Well done for finding the shoebox video Roy. The joke may be lost on someone who still likes to think of money as hard cash, who may say – if I deposit physical cash at my bank, which then records that it owes me that amount, what do they do with the physical cash? Is it still mine?
Presumably the answer is that the amount of vault money (the communal shoebox) held by the bank increases, but it does not belong to any specific customer. When they pay out physical cash to a customer, the vault money reduces.
I think the vault money is counted as bank reserves. Is that the balancing entry in the bank’s accounts for the amount recorded as owed to the customer?
If the bank thinks it may not have sufficient vault cash to process cash demands, it can ask the central bank for more, which reduces the amount in the bank’s reserve account at the central bank. So physical cash is counted as reserves.
Is that all correct Richard?
No!
The vast majority of bank transactions are elctronic
The double entry when ‘money’ is paid in is Cr customer paying in, Dr whoever paid them. That’s it.
If notes are paid in then the entry is Dr customer, Dr cash.
Cash is part of reserves
But reserves are not owed to any customer ever.
What is owed to the customer is the figure on their account, nothing else.
And yes, if cash is demanded more can be asked for from the BoE but that still does not mean they belong to anyone until the Dr is made to that person’s account – they are then simply woed less.
And that’s it.
This quest for there to be something either than an accounting entry is simply wrong – there isn’t one
With respect Richard, I think you may have mistaken me for the guy worried about his shoebox of cash.
If I did, sorry…
Thank you for the video, Richard, I wish that other available explanations were as concise.
So, the banks are not adding the loan money to their reserves, but they are still making £28 billion a year from the loans they create from nothing and mostly lending on property to the detriment of the nation.
Gnawing on this bone has been frustrating, but I’ve learned quite a bit on the journey and that’s good.
Yes, they do make seignorage
I hate to be pedantic, but seigniorage is the difference between printing money and its face worth. What the banks do is to levy interest on their loans – which cost them nothing to create – and which even at the low rate of 2% represents £28 billion a year.
This is a huge amount of money at a time when the government is struggling fiscally. If the banks were behaving in the national interest, I would be equally relaxed, but they are not. The top bank bosses live like princes and creating loans for property is certainly not in the nation’s best interests.
At 10:20, you stated:
‘If notes are paid in then the entry is Dr customer, Dr cash.’.
It should be Credit customer and Debit cash.
Yes
You can’t have two debits
A typo
Hello Richard.
Where do bank profits go? Do banks have an account with themselves, showing their own profit/loss? Do they have an account with themselves in order to pay their staff wages? Is this in any way related to reserves? What happens when money moves to a tax haven, does an account just go to zero or do reserves change or…something? I don’t have a clue about this aspect.
I understand what you’re saying in the video. It makes sense.
Thanks.
Banks are made up of many entities so the simple answer is yes – the operating bits have accounts with the banking bits
This is related to their accounting reserves – in the sense that these are increased or deflated by profit
Tax havens are just double entries in ledgers, that is all. Another one, internal to the bank
Sorry, no time to explain in more depth now
Thank you. I appreciate that you’re busy.
Off topic here but I listened to your contribution on indylive radio yesterday – A great discussion very helpful; I heard you say (I think) if Government is in surplus then the public is in debt. I wonder if you’ve expanded on this anywhere- I’d like to understand it better
Try this
https://www.taxresearch.org.uk/Blog/2018/09/07/the-most-important-piece-of-economics-that-you-should-know/
Thnks, that helped and it led me to this which filled in the details I needed: https://en.wikipedia.org/wiki/Sectoral_balances
Good one
I do enjoy teasing folk about their bank balances. Explaining that their bank statements merely reflect what the bank owes them and is NOT actually their money and it is not even pounds and pence or even bank reserves. Though confusingly you can change their bank IOU into actual cash, on demand. But of course the banks rely on us all not demanding that or else they would be in a bit of trouble.
Banks statements should come with a health warning like a packet of cigarettes. Banking with us may harm your financial health.
Beppe Grillo humorously demonstrates what bank deposits are on this video…see from 6 mins 20 secs. Though the rest of his video is quite hilarious and quite accurate in places too and that was from the 1990s.
https://www.youtube.com/watch?v=U6XeBY-d2gM&fbclid=IwAR19rvxe5TIgAZkie2h0eSLhsQ1iFFU5xTNwPVg2BiyZueIrVVno8WR1UKs
I’ve asked you this before but I still don’t really get this bit; when I deposit real cash notes into my bank account via the machine or the teller what happens to it? I know it is entered into my credit account but what happens to the actual physical money? Does it go into another account to serve the cash needs of the bank to serve those other customers wanting to withdraw cash from the machine? I believe you said before that it is “destroyed”.. maybe I misunderstood you but I have this picture of a burning pile of notes and I don’t think that’s right…. tell me what happens from the moment I shove those notes into the cash machine! Thanks!!
It becomes the bank’s
That’s it
What they do with it us up to them
They are not destroyed unless damaged – but they have nothing left to do with the transaction you undertook. That is complete.
The ‘destruction’ is of the debt that was due that the payment represents. The notes themselves are mere symbols