This incredibly valuable collection of quotes from central banks and bankers on their ability to create money out of thin air was assembled by regular reader Bill Kruse. I share it with his permission because I think many people will find it valuable. I certainly will:
According to the Bank of England;
"... Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks.".
from this PDF file
Money Creation Modern Economy
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The BofE have helpfully made a video on this subject too;
Money Creation in the Modern Economy
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This subject so excited Parliament, they had a debate about it.
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Here we're advised by the Norges Bank, the Bank of Norway, that "When you borrow from a bank, the bank credits your bank account. The deposit – the money – is created by the bank the moment it issues the loan. The bank does not transfer the money from someone else's bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing: fiat – let it become. The money created by the bank does not disappear when it leaves your account. If you use it to make a payment, it is just transferred to the recipient's account. The money is only removed from circulation when someone uses their deposits to repay a bank, as when we make a loan repayment... To sum up: banks create money out of nothing and withdraw it when loans are repaid."
https://www.norges-bank.no/en/news-events/news-publications/Speeches/2017/2017-04-25-dnva/
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What about in the EU? Here it's the ECB's [European Central Bank] turn to describe how money is created as debt by the privately-owned commercial banks, when they explain: “Commercial banks can also create so-called “inside” money, i.e. bank deposits – this happens every time they issue a new loan. The difference between outside and inside money is that the former is an asset for the economy as a whole, but it is nobody's liability. Inside money, on the other hand, is named this way because it is backed by private credit: if all the claims held by banks on private debtors were to be settled, the inside money created would be reversed to zero. So, it is one form of currency that is created – and can be reversed – within the private economy.”
https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.html
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Here's the German Bundesbank explaining where money comes from, and that banks aren't intermediaries as popularly imagined, "In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer's bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank's economists, "this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers". By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money)"
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Does this mean they're printing banknotes all night and day then? Non, according to France's BNP Paribas: "Printing banknotes accounts for only a tiny fraction of money creation. There are two different types of money creation. On the one hand, the central bank creates so-called ‘central bank' money (or ‘high-powered money', the ‘base money' or the M0 monetary aggregate), consisting in all issued bills and coins, plus commercial bank reserves with the central bank. This form of money is only exchanged between banks on the interbank market.
On the other hand, banks create scriptural money (non-cash), representing short-term customer deposits included in their liabilities. These deposits are an integral part of money since they are extremely liquid and allow for fast payments. Scriptural money accounts for a greater share of all money creation than fiduciary money.
As for the M3 monetary aggregate (also known as the ‘money supply' or ‘broad money'), 95% of it is composed of the money that you and I use, meaning the bills and coins in our wallets and the amounts of our demand deposits (checking accounts), our holdings requiring a notice of withdrawal of three month or less (savings accounts) and our term-deposits with a maturity of two years or less. More precisely, the M3 aggregate also includes debt securities with a maturity of less than two years issued by banks, which can be traded on the money market, as well as shares in money mutual funds. But these instruments account for only a small share of the money supply (about 5%). So the money supply consists in a portion of central bank money (bills and coins) and scriptural money, which is by far the larger share. In December 2018, fiduciary money amounted to 1,175 billion euros, scriptural money (short-term customer deposits) totaled 10,541 billion euros, while the total money supply in the eurozone reached 12,638 billion euros.
That is why printing money (or producing fiduciary money) is actually part of money creation, but it is only a small fraction of the whole. Moreover, this form of money creation is mostly offset by the monetary destruction caused by the Eurosystem pulling old bills out of circulation. In 2018, these actions represented 94% of the flow of new bills placed in circulation in the same year, and 83% of the total value of all bills in circulation.
Finally, despite the development of new payment methods (debit cards, contactless payment, e-wallets, etc.), fiduciary money remains deeply ingrained in our habits. Indeed, bills and coins made up 7.5% of broad money (M3) in 1997. Remaining stable since 2015, their proportion reached 9.5% in 2018
https://group.bnpparibas/en/news/money-creation-work
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Here's the Canadian Library of Parliament describing not only how money is created for the Canadian govt to spend into the economy by the Bank of Canada but also how the private banks create money from nowhere, both as 'loans':
"Both the Bank of Canada and private commercial banks create money by making asset purchases or making loans. However, money creation by the Bank of Canada through purchases of Government of Canada securities is essentially an internal government process; this means that external factors, such as financial market dysfunction, cannot cause the federal government to run out of money."
https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201551E
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The IMF are getting in on the act too with this relevant paper entitled "Money Creation in Fiat and Digital Currency Systems": "To support the understanding that banks' debt issuance means money creation, while centralized nonbank financial institutions' and decentralized bond market intermediary lending does not, the paper aims to convey two related points: First, the notion of money creation as a result of banks' loan creation is compatible with the notion of liquid funding needs in a multi-bank system, in which liquid fund (reserve) transfers across banks happen naturally. Second, interest rate-based monetary policy has a bearing on macroeconomic dynamics precisely due to that multi-bank structure."
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Here's Professor Richard Werner (known for his definition of quantitative easing, QE) gently schooling City veteran and commentator David Buik (who you'll probably recognise) on the subject of banking, the financial sector and money creation
Money Creation by Werner
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Celebrated (and sadly late) anthropologist David Graeber correctly notes that what we use for money is simply IOUs and importantly that the Bank of England, the central bank, supplies government spending: "When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects...What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite."
truth-money-iou-bank-of-england-austerity
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Britain's British Broadcasting Corporation, the BBC, have needed some encouragement into adopting this new, accurate, narrative, which at first they ignored. Complaints eventually led to:
"a response from the Head of the BBC's Executive Complaints Unit; Fraser Steel who admitted there had been “a serious breach” of BBC editorial standards.
“…we agree the original version of the article misrepresented the way modern banking works. As you have pointed out, it is not correct to imply banks act as financial intermediaries by simply lending out the deposits which savers place with them.”
“I share your concern that the BBC should accurately reflect the way modern banking works…a number of senior BBC News managers have been made aware of your complaint and our finding and I hope this will help to ensure journalists and editors are properly briefed and informed on this issue.”
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Oh, by the way... anyone still under the impression the Bank of England has any significant independence from the Government might like to consider the Bank of England Act 1998 where it states in so many words they don't. It's arguably best to consider the BofE and Government as one and the same, with the Treasury higher in the food chain.
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While we're on the subject of the Bank of England and it's actual lack of independence, let's go into its operations a little deeper with Neil Wilson: "The Bank of England is just a bank and operates in the same manner as any other bank (to the extent that it requires capital injections from HM Treasury to maintain its loss adjusting buffers). A bank that is and remains, both legally and structurally, subsidiary and subservient to HM Treasury in all ways. Its primary task is to discount liabilities imposed upon it by HM Treasury into bank liabilities. It does that by order of HM Treasury, has done since at least the 19th century, and continues to do so today. The Bank has no legal authority to refuse those orders."
https://new-wayland.com/blog/how-uk-government-payments-are-made/
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The study referred to, "An Accounting Model of the UK Exchequer – 2nd edition" can be downloaded in PDF format from the link below. The accompanying notes tell us: "In this timely study, the authors investigate the structure and function of the UK's public financial institutions, in groundbreaking depth and scope. Drawing on historical sources from the birth of the modern sterling economy, testimonies from government departments, official documentation, and parliamentary abstracts, the study forensically disassembles the components of the UK's government finances, debunking ideology and half-truths along the way.
The authors expose the myth of Bank of England “independence”, and illustrate the central, driving role of HM Treasury in the UK financial system and the primacy of Parliament in determining spending and resourcing in the UK.
The study describes in detail how the financial operations of the UK Government work, and the accounts and structure of the UK Exchequer, including its relationship with the devolved UK administrations.
Supported with references from forgotten or little-known sources and extensive appendices detailing the history of the UK financial system, this important work destroys the myths and obfuscation of governments, economists and the financial services sector that has allowed decades of needless austerity to wreak social and political devastation in the UK and beyond.
As such, this is an overdue exposé that has implications beyond the field of economic literature and challenges the basis of UK economic policy since the 1980s."
https://gimms.org.uk/2021/02/21/an-accounting-model-of-the-uk-exchequer/
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And then there's this: "This paper constitutes a first detailed institutional analysis of the UK Government's expenditure, revenue collection and debt issuance processes. We find, first, that the UK Government creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector. The spending process is initiated by the government drawing on a sovereign line of credit from the core legal and accounting structure known as the Consolidated Fund (CF). Under directions from the UK finance ministry, the Bank of England debits the CF's account at the Bank and credits other accounts at the Bank held by government entities; a practice mandated in law. This creates new public deposits which are used to settle spending by government departments into the economy via the commercial banking sector. Parliament, rather than the Treasury or central bank, is the sole authority under which expenditures from the Consolidated Fund arise. Revenue collection, including taxation, involves the reverse process, crediting the CF's account at the Bank. With regard to debt issuance, under the current conditions of excess reserve liquidity, the function of debt issuance is best understood as a way of providing safe assets and a reliable source of collateral to the non-bank private sector, insofar as these are not withdrawn by the state via quantitative easing by the Bank of England. The findings support neo-chartalist accounts of the workings of sovereign currency-issuing nations and provide additional institutional detail regarding the apex of the monetary hierarchy in the UK case. The findings also suggest recent debates in the UK around monetary financing and central bank independence need to be reconsidered given the central role of the Consolidated Fund."
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I read through all the comments on yesterdays blog, and non of the people who disagreed with you disagreed about this – that banks can create money/credit.
It was on everything else they disagreed with you. Namely that banks:
You saying banks don’t need deposits to be able to lend
What you said about the savings glut and interest rates
That interest rates have nothing to do with the market
That you actually know anything at all about banking or finance.
So you are creating a straw man. You are defending yourself and attacking your critics on the one point of agreement, whilst trying to hide from all the other places where you get everything totally wrong.
Let’s stop the stupidity, shall we?
Banks don’t need deposits to lend. As all the evidence shows, loans create deposits. There is no argument.
And there was savings glut which never funded a penny’s worth of investment. Morton Wolf would agree.
As for interest rates,if you really think they do not move in accordance with central bank wishes then you are obviously living an evidence free existence.
As for my knowledge – so fare none of you have shown I have said anything (literally, a thing) wrong.
I will not be posting further nonsense like this from anyone – because it only wastes my time and adds nothing to understanding.
“Let’s stop the stupidity, shall we?”
You could start by acknowledging the real world, in which what you are saying is clearly untrue. Once again, no-one is taking issue that banks can create credit, but you seem to be living in a fantasy that banks can do so without limit.
“Banks don’t need deposits to lend.”
In that case why do they bother having them, giving they are a cost? Regulation forces them to do so as well. By your logic banks could never go bankrupt and bank runs would never happen as they can create money at will.
“And there was savings glut which never funded a penny’s worth of investment.”
In 2020. Because of Covid lockdowns. When there were fewer opportunities to spend disposable income and new investment projects were essentially halted.
You also say somewhere that increased savings increase interest rates. Which is wrong. THe opposite is true.
“As for interest rates,if you really think they do not move in accordance with central bank wishes then you are obviously living an evidence free existence.”
Only the base rate moves directly with the BoE’s wishes. It acts as a floor on the overnight rate. Even then, all other rates are set by the market. Look at yield curves, bonds etc in any interest rate market around the world and you will see this to be the case.
“As for my knowledge – so fare none of you have shown I have said anything (literally, a thing) wrong.”
See above. Various people have pointed out the many mistakes you make. It’s obvious to anyone with even basic knowledge of markets or economics that you are wrong, but are just too arrogant to admit it.
I have never, ever, said banks can create money without limit. There is always a limit to the number of credit worthy customers. Usually they overestimate that number. That is why they could fail – although in the current era the chances are close to zero – which you do not recognise. The central bank reserve accounts basically guarantee this now by providing the funds to prevent runs.
I have never said governments can create money without li9mit. They crete infaltiomn if they do. That is why we tax.
And as for interst rates – I can’t be bothered to comment on your drivel. If you think what you do then you are, very simply, a fool.
File a full CV next time. I know you won’t. Why? Because this is your third abusive identity here.
“So you are creating a straw man”.
You could only make that claim if you had presented an argument (using ‘argument’ in the technical meaning of an ‘argument’ in logic); indeed one that is proven. You didn’t even present an argument, still less prove it. You advanced a list of opinions of a motley crew of largely anonymous, pseudonymous trolls who ludicrously proclaimed authority, while carefully hiding their identity from scrutiny; and then merely asserted you had proved your case. You are not just wrong, but demonstrated a wretched standard of discussion. I suggest you stand under your full name, and present your complete, substantive case, if you have one; and if you feel the need to rely on a reputation for anything if you can’t stand up a viable case, then show that you have one. All you have done id added half a name to a disreputable crew of trolls.
Ben said
““Banks don’t need deposits to lend.”
In that case why do they bother having them, giving they are a cost? Regulation forces them to do so as well. By your logic banks could never go bankrupt and bank runs would never happen as they can create money at will.”
Banks have deposits because they are a cheap form of borrowing, that is the only reason they take deposits. The alternatives are borrowing from a central bank or interbank lending and are usually more expensive.
Secondly banks cannot just create money to pay off other banks or pay their depositors in cash because other banks/ cash withdrawals require the use of central bank reserves only. The banks can create as much commercial credit as they like to make loans but no other bank will take that as settlement. Reserves and bank credit/deposits are completely different types of money and the two systems never ever touch each other. As far as I am concerned this is the most misunderstood point about our banking system yet everyone really need to understand it, …..especially those high up in the banking hierarchy.
As long as the banks increase credit in step everything goes well , but when one or two banks get greedy and start lending too aggressively , the whole banking system becomes unstable. And banks being banks always tend to end up doing just that, as pointed out by Minsky.
You get it
A well made point Mr Richardson. The fact that so much of the complexity keeps having to be examined, or reiterated reminds us that is important to keep repeating an important underlying principle; there is a hierarchy of money (even in a single sovereign state). There is not just a single, uniform, universal ‘money’.
For the public in general, there is only one form of money that can be guaranteed in all feasible circumstances. A form of money at the top of the hierarchy, that under no circumstances can attach interest to itself, save by being swapped for another form of credit lower in the hierarchy, like a bank deposit, or change its nominal value (NB. I did not write purchasing power); and that the debtor will never fail to honour at the nominal value; and that is legal tender. And that is why in a ‘bank run’, there is a flight to ‘cash’; and queues outside banks and building societies.
(NB. Banks hate cash, it is expensive for them. And cash has now become so despised in the culture that any large amount held by an individual is assumed to be for nefarious purposes. The irony is that every individual’s privacy – including financial privacy – is under threat from modern digital technology, and nobody cares)
I know, Richard; you do not agree……
Brilliant- thank Bill and Richard
Richard,
I was reading the BoE paper you link to about money creation and something stood out.
You have on several occasions written that QE is free money for banks.
The BoE paper, which you are putting forward as a trusted source, clearly writes (on p24) with explanation:
“Why the extra reserves are not ‘free money’ for banks”
Does this mean that your claim that QE is free money for banks is wrong?
No
I don’t agree with the BoE on that
Not only is the money free, they actually pay the banks to take it
The BoE does not wish to admit that
So the BoE is right when you agree with them but wrong when you disagree?
“Not only is the money free, they actually pay the banks to take it ”
You know that not only is this complete nonsense, it’s absolutely insane?
The BoE explain they are just acting as intermediary. So aren’t getting free money.
Banks aren’t making the huge profits you have previously claimed because of QE. You can see it in their annual accounts. Had you bothered to look.
QE involves selling an asset (Gilt) which bear interest and receiving cash which pays interest at the BoE base rate. So even if you are making money on the interest on your reserve deposits, you aren’t getting any on the bonds you used to own but have sold. So it’s not “free” as you are claiming.
You are literally lying about this.
I have explained the reality of QE time and again here.
Reserves are created from thin air and bizarrely interest is paid on them.
QE itself s just a sham.
You really need to stop talking nonsense.
The only one here talking nonsense is you.
Reserves are created and SWAPPED for interest paying bonds. Basic asset/liability accounting, which you seem incapable of.
Yet somehow you claim that banks got billions of free money. Which would clearly show up in their profit and loss statements and accounts. Yet it doesn’t ever.
The BoE explain it very clearly, but it seems you are only willing to agree with them when it suits your argument (as above, even though you get that all wrong as well) but then ignore them when it doesn’t.
It seems to me that you basically just make things up, then pretend to be an expert, all while desperately seeking the approval of most of the sychophants who follow you.
Oh dear, another wilful idiot
The whole process was:
1) The government spent – let’s say £10 billion and increased the CBRAs bu the that sum
2) It issued debt for £10 billion and reduced the CBRAs by that sum
3) In a pre-annoounced action they bought £10 billion of bonds so incerasing the CBRAs by £10 billion.
(2) and (3) were always a sham
(1) was all that rteally happened
You wilfully promote the lie that (2) and (3) mattered. They did not.
I think the term “free money” need to be used carefully here.
The rise in the CBRA balances is the result of government spending it into existence and not draining it via taxation or sales of new gilts. That money is paid to a person who will have a bank account with a Clearing bank (XYZ), XYZs CBRA balance will rise as a result.
QE is a charade where the government issues gilts with one hand and buys back with the other but the BoE/APF purchases will still be from individuals that bought the gilts at auction and the BoE will credit their Clearing Bank accounts with money.
But this is not “free money” – it is not a gift. XYZ can’t just pay it out to its shareholders. If account holders at XYZ move their money to another bank then XYZs CBRA balance will decline… and if they have done something else with the money they will be in big trouble.
What IS free money is the interest paid on those CBRA balances (at the Base Rate) which is not then mirrored by interest paid to account holders. Until QE came along this was not an issue but with so many excess reserves in the CBRAs we are talking billions of pounds in Net Interest Margin merely for running the money transmission system.
I agree that QE is a charade. I have loing said so.
Why was the increased central bank reserve account balance free money? Because it guaranteed inter bank security and provided effective working capital that largely rendered the treasury function in banks redundant except as an arbitrage centre
And then we paid the banks to take that money, as you note
Th CBRA balance was not profit – but it was the most bizarre form of bank capital ever creaed
Again, care with vocabulary is needed.
Generally, “capital” is short hand for “equity capital” in the banking world and CBRAs are not equity capital. So, “….CBRA balance was not profit – but it was the most bizarre form of bank capital ever created” will certainly be misinterpreted.
In terms of collateralising the intraday credit that the interbank settlement system requires to operate – then sure, there has been a recognition that more reserves should be held by Clearers and QE has delivered those additional reserves cheaply but the volumes required to secure the payments system are tiny compared with the overall level of reserves.
Equally, to describe Treasury as redundant is not true either; certainly with such an excess of reserves about the BoE is the borrower of first and last resort for o/n cash but ensuring banks meet liquidity regulations is a critical function (of Treasury) and the major change since 2008 is that lending cannot be funded by interbank overnight borrowing which is typically represents the bulk of interbank deposit trading.
I guess my point is that the £40bn in interest on reserves of which a small portion is “passed on” to depositors is a big enough “gift” and actually, I think any way you look at “free money” for banks you always come back to this.
So, the challenge is out there so find a system that will cut this interest cost, keep monetary policy transmission mechanisms working and not cause “unintended consequences”.
Clive
I am going to have to disagree with you.
Caital does not only = equity capital. I was referring to working capital – which is a much more impriotant economic concept, and the CBRAs massively contributed to this. I stick by my language.
And are the intraday balances small compared to total reserves? No, unless you add in the whole of the arbitrage structrue that is what Treasury functions do that is wholly zero sum and a net cost to society after costs are deducted. So, again, I disagree. Almost allt hat ttrading is parasitical on society.
We agree on the free £40 billion though.
Richard
Well, we will have to disagree… but permit me one more go.
First, if you are going to talk about banking then you should use banking language – or where you use a term in a different way you should be clear that this is what you are doing. Unless you do you will always be mis-understood…. and potentially give trolls credibility. (Calling CBRA balances “capital” is the obvious example that they have picked up on to try and discredit the broader argument)
Second, CBRA balances are there (amongst other things) to collateralise the payments system. When I do a transfer these days the recipient’s account is credited instantly…. with the corresponding CBRA transfers being aggregated, netted and transferred with a lag. That lag (although short) is a credit exposure to the (net) receiving bank and the banks are required to hold liquidity (Reserves) against this (as well as capital under Basel III rules regarding operational risk). However, the level of system wide reserves required to do this is relatively small; I believe some BoE research estimated it at £200bn or less (but don’t quote me on that). This is, I maintain “small” compared to the 1,000bn of CBRA balances…. ie £800 bn really is excess.
Third, given we have excess reserves in the system it is the case that the BoE is the “borrower of last resort”. I agree that managing current accounts and sight deposits (matched with CBRA account balances) is a trivial job for Bank Treasury departments but this misses what Treasury actually does. In a world where all borrowing/lending was overnight then you might be right but in the real world loans are longer maturity and Treasury is all about ensuring the term structure of assets and liabilities meets LCR rules. This IS a critical job and, if I may say, quite complex and detailed.. certainly not a trivial arbitrage.
So, in conclusion, it is your right to disagree – but we are dealing with a field that I have reasonably decent knowledge and I am trying to offer that expertise in a constructive manner. I hope you can take it that way.
I hear you
I will disagree on capital. I would even argue reframing language is vital. And I would add, an accountant would/should agree with my language and reasoning.
Re Treasury: I am genuinely struggling to see the issue in a closed system with a guarantee that failure is not possible, but I hear what you say. Maybe I need a tutorial and I pay for lunch.
At the risk of boring your readers I am penning a piece that might help. It will take a day or so but the opening paragraph is…..
Pieces by Richard about money creation have attracted a lot of comment and quite a bit of trolling, too. Let me be clear, Richard is right – as supported by a string of Central Banks around the world (and every government bond trader I have ever known). However, this is just the start of the story and it is what happens next that seems to have muddied the waters. I thought it might be illuminating to explore this.
Ok…..
I appreciate I am entering a Richard/Clive dialogue which is best left between them, but the issue of language is important, and worth developing because it is quite obviously causing real problems in achieving a common understanding of the issues, even here. In fact we have three financial ‘dialects’ (run with me, here), that use exactly the same word, but apply different meanings that identify and potentially conflate or confuse the facts. The three ‘dialects’ are provided by accountants, bankers and economists. The issue between accountants and bankers are discussed by Richard and Clive. But on economists, here is what the BoE says (BoE, QB, 2014 (Q1) p.16, footnote 2): “Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England ….. Part of the confusion may stem from some economists’ use of the term ‘reserves’ when referring to ‘excess reserves’ — balances held above those required by regulatory reserve requirements. In this context, ‘lending out reserves’ could be a shorthand way of describing the process of increasing lending and deposits until the bank reaches its maximum ratio”.
Houston, we have a problem. The problem is, in part I suggest the unfortunate matter of being divided by a common language. We are in glossary territory here (but a multi-dimensional one).
Wow. This is a really useful resource.
Thanks so much to Bill Kruse for sharing and you for publishing.
Over the years I have read much about money creation and have come to understand it better.
But one thing is puzzling me, actually prompted again by your comment yesterday “The Bank of England has been fuelling inflation by boosting the incomes of older, wealthier, Tory supporters”.
Why is it that many banks and building societies offer interest on deposits? Since they can simply create fiat money it would seem that they don’t need to do this to make loans. I’m sure they are not doing it as a public service. They must have a good reason for wanting these deposits.
Perhaps they are indeed acting as an intermediary to some extent, even if they are not wholly an intermediary. If so, do you know what proportion of loans are indeed intermediates as opposed to using fiat money creation? Or perhaps there is another reason that I don’t understand.
This confuses me, even though I do understand money creation by banks. If it confuses me it probably confuses others. Worse still it gives an excuse for those with a vested interest to use the intermediary argument to confuse the public.
Can you help me, and probably others, to understand this please.
Time
Convention answers your question
They try / tried to pay as little as possible
Pressure was brought to bear to make them pay more, but that was politics, not economics . In that sense they are intermediaries of politicians .
As for how much much lending is funded by deposits there is literally only one available answer. It is zero. Double entry makes that process impossible and banks live and die by double entry.
Did the old building societies have to rely on deposits and 2) repayments of earlier loans?
I recall they became banks so as to use ‘financial instruments’ such as securitisation. It backfired in the case of Northern Rock.
Building societies were intermediaries.
Thanks Richard.
I understand that about 97% of money in circulation is bank money (the rest being physical cash, and nothing that bank reserves are separate). Bank money being fiat money, i.e. promises, using double entry book keeping. All good. And, as per this discussion, banks can expand the amount of money as much as they like.
So, crucially, what I don’t understand is why banks pay depositors anything at all? Why do banks still offer free banking? Why do they not charge retail customers for depositing their money (which only swells their reserves and doesn’t enable lending)?
And yet, banks and building societies really seem to want my money. Why do they offer to pay interest with it? What do they do with it.
If anyone can help out with further explain be most grateful.
NO!
That is pre 2008 data and simply wrong
Around 40% of moeny is now govermment ceated and aroind 60% commercial bank
OK. After a little searching, I came up with this:
https://www.resilience.org/stories/2014-10-28/why-do-banks-want-our-deposits-hint-it-s-not-to-make-loans/
which provides some explanation.
Sorry if I have wanted your time.
This aspect of banking is clearly complex and needs some thought.
Perhaps, in your copious free time, 😉 , maybe you could blog to clarify this for those like me who don’t find it very clear.
When I obtained my first mortgage the mortgagee was a local authority. However at the time it was normally the case that the mortgagee for a residential property to be a building society. Has the the demise of the building society to be replaced by banks that do not make loans from a fixed “pot” of money been a contributing factor to house prices rising far faster than average earnings?
Yes, in a word
Thanks Mr Warren 🙂
They have a licence from the government. They do not have to do much for it; and pay as little as possible to depositors (frankly they are given too much leeway to rip-off the public, and even fail); but the licence carries effectively a basic responsibility to offer a banking service to the public, because that is the way the Government does most business with the public over money – an intermediary function (apart from issuing legal tender and taking taxes); through commercial banks.
This point opens up what for me is the obvious cause of confusion and even political abuse.
The sovereign currency (in our case, the pound) is owned by the government but the government has no local means to distribute the pound widely used in the economy except through private banking infrastructure. No high street in England for example has a local branch of the BofE. (I wish it did!).
Sure, the pound is launched into the economy through other routes – local authorities (grants and wages etc) , NGOs etc., but it is your high street banks effectively distributing the £ throughout the economy – and rather badly I might add. And these means (local authorities for example) are being withered.
So, if at this point we can say that a point has been made and fantastically well triangulated (please note all you faithful Neo-libsters out there), we may be in a position to reflect on what the hell has been happening since 1979.
The facts (yes, THE FACTS) laid out clearly on this blog certainly make me think about what the privatisation of the public services has really been about along side the use of cruel austerity measures.
The whole thing to me just looks like a ruse – a war even – to enable Capital to become the sole or principal beneficiary of sovereign currency production, to position themselves in prime areas where a cut can be made from the production of sovereign currency. To feed off the money supply – and how.
It’s not about choice for voters.
It’s not about improving public services.
It’s not about the scarcity of money.
It’s not even about socialism versus individualism.
It’s about Capital getting Route 1 ‘preferred status’ for government money. And that in a nutshell is that.
How can it be anything else? I mean, a line of credit from the government called the CBRA that is also boosted by an artificial interest rate whilst the government has been underfunding flood defences throughout the country and everything else?
Are you kidding?
Whose priorities are those?
It’s FUBAR.
And it’s got to stop.
21st century developments in digital technology (an absolutely critical economic life-changing innovation here), have been designed by Treasury and the BoE, assisted by the post-2007 banking Crash arrangements, and the structure for the delivery of Government monetary policy; through a calculated system that is a rarefied, exclusive, incestuous web of central bank, privileged dealers, commercial banks; carefully selected privileged financial operators; in an elite, closed loop financial network, which has neatly, discreetly and almost imperceptibly, closed off the use of cash (legal tender) for the public as the prime conduit of the Government’s injection of financial liquidity to ensure the required free liquidity for people to use in their lives, and to enhance their prospects.
Now the banks are gatekeepers to everyone’s financial wellbeing, scrutinising their fitness for entry into the economy; and it is rather like handing the keys to the porter in Macbeth (Act II, scene III); the porter is a drunk, who compares himself to the gatekeeper in Hell.
I hesitate to comment; I am not quite sure I understand the problem as set out here; but could it be that Mr Kent is trying to distinguish between a bank ‘lending out’ and lending excess reserves to another bank?
Returning to BoE, QB, 2014 (Q1) p.16: “This description of money creation contrasts with the notion
that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England”.
A point usefully expanded in the footnote (2) for this paragraph: “Part of the confusion may stem from some economists’ use of the term ‘reserves’ when referring to ‘excess reserves’ — balances held above those required by regulatory reserve requirements. In this context, ‘lending out reserves’ could be a
shorthand way of describing the process of increasing lending and deposits until the bank reaches its maximum ratio”.
Thanks
“That is pre 2008 data and simply wrong
Around 40% of moeny is now govermment ceated and aroind 60% commercial bank”
Thanks for that useful clarification. 🙂
I sorry if I appear stupid, but I am still a little confused. I could live with that. But if our MPs, and maybe bankers too, are confused in the same way, then that is a problem.
I’m entirely happy with what you have said Richard; I agree.
There is lots of discussion here about excess reserves, and how this provides an unjustified windfall to the banks. I am as appalled as anyone at the billions given as a subsidy in this way.
But, on the other hand, banks still pay interest on savings. This makes it appear (I stress “appear”) as if they are taking deposits in order to loan them out. That is, it gives succor to the discredited notion of fractional reserve banking. In turn this helps to confuse the reality of what is actually happening.
So, why is it that banks still want retail deposits? Perhaps it is simply that they pay less interest on them than they receive as interest on them from the BoE? Thinking about it, this seems likely to be the case. So perhaps I have answered my own question.
If so banks are doing two things. First, they take interest on loans of money they create into existence. Secondly, they make a profit on the difference in the interest they pay on deposits and they are given on reserves. I guess this is obvious to you.
The point is that while this maybe obvious to you, and others reading this blog, it may not be obvious to the public. And that’s important because it allows disingenuous bankers and politicians to continue to confuse the public.
I suggest that when when you and others explain the issue of money creation it is, perhaps, important to address the issue of why banks still take retail deposits. I acknowledge that requires explaining, what some people would consider the arcane matter of, CBRAs. But without that the picture is incomplete and potentially confusing.
All of which leads to the interesting question of what would (should) happen if the BoE stopped paying interest on excess reserves.
My apologies for a rather long reply. I thought it was important to try to clarify my point.
I get your point
Let me go back to soemnthing i wrote last summer. Does this clarify anything?
https://www.taxresearch.org.uk/Blog/2023/08/10/the-uk-governments-bung-to-our-commerical-banks-additional-data/
And re deposit taking – they take money bevcauise a) their banking oicence requiores it and b) it is cheap capital then they can lose if they iver etxned credit as despositors are protected by HMG, not the banks
Mr Kent,
The banks have a licence to maintain; in addition they typically borrow cheap from depositors, and if they have excess reserves they lend to other banks. At the same time, interest is paid on their reserves with the BoE. Here is one view of this arrangement:
“While the state has to deal with more expensive public finances and households struggle with a cost of living crisis, the banking sector is set to receive over £211bn in interest payments between December 2021 and July 2028. This is far more than we need to pay for monetary policy to work and is the result of an innocuous change to the design of the monetary policy toolkit in 2009 starting to pay interest on all bank reserves held at the Bank of England” (New Economic Foundation [NEF], September, 2023).
Expanding on this, the NEF go on: “Following the 2008 global financial crisis, economic activity stagnated with low demand and declining inflation rates. In response the Bank of England initiated its quantitative easing (QE) program, where money was created to buy government bonds. The aim was to boost aggregate demand, rejuvenate the economy and fend off seemingly dangerous low levels of inflation, by 2021 this had resulted in £875bn of new money being created to purchase these bonds.
This new money was in the form of central bank reserves — meaning it was directly added to the balances that the banking sector had with the Bank of England. This diminished the need for commercial banks to borrow reserves at the official Bank rate to meet their payments to their customers due to the abundance banks now found themselves with. To retain control over interest rates the Bank implemented a ‘floor system’ where all central bank reserves are compensated at the policy rate which is set by the Bank. This system, with abundant central bank reserves, ensures the interbank rate (and market credit conditions more broadly) follows ‘the floor rate’. Paying interest on these reserves is said to set a minimum floor, as banks wouldn’t lend to others (and give up reserves) below this rate and miss the opportunity of a higher profit margin …… The decision to pay interest on reserves has now created linkages between the central bank, the government and the banking sector that were historically absent. Now when the Bank changes its official interest rate this has a direct and immediate effect on government interest expenditure and the earnings potential of the banking sector. Such implications for monetary policy will now end up costing us tens of billions”.
The answer to this is, for example, ‘tiered reserves’ which the ECB has instituted. We have discussed this before on Richard’s Blog.
We have…..
And nothing has changed
Thanks for the link Richard 🙂
Whenever I consider the relationship between the HM Treasury and the Bank of England, I cannot help but hear Capt. Picard saying, “Make it so, number one.”
Splendid – and thanks to all for it putting it together.
As a thoroughly rough round the edges but unrepentant working class bod, all I can say to the many very persistent detractors and highly paid and rewarded idiots who blight our lives is ‘Stick that where the sun does not shine’.
And how someone like ‘Ben M’ can pop up this morning still seemingly not taking into consideration the mechanics of fiat money once again illustrates the religiosity of neo-liberalism – a entirely faith based system with the faithful being those who have benefited from it the most.
There is nothing more to say. Is there?
No….
Brilliant, thank you for this. Bookmarked for further reference.
Thanks Steve, can I ask you bookmark the original too over at https://www.economania.co.uk/various-authors/where-money-comes-from.htm as the whole site is fading from Google due to lack of new incoming links and (I must admit) new material as there’s been nothing new to add to it for a while. Same goes for everyone please! Thanks!
Will do.
If I may add one from the European Central bank and Mr Draghi:
During the bond-buying programme, Draghi, head of the ECB, was asked the following question ( https://www.youtube.com/watch?v=_fF3pNTtmfc ):
“Can the ECB ever run out of money”? His response was: “Technically, no… we cannot run out of money…. we have ample resources for coping with all our emergencies.” (The quotes reflect exactly what was asked and exactly what was said in response).
Draghi was stating a reality for any central bank that controls a sovereign currency (in this case, the euro). Central banks CANNOT run out of money. The ECB can print as much – or as little – as circumstances demand, or as it sees fit. Deconstructing “our emergencies”, one can ask what exactly constitutes an emergency. Who does the “our” refer to? The ECB? European society? Goldman Sachs? (Draghi is an ex-Goldman Sachs man). Who?
Thanks Mike, however, Draghi is so guarded there in his response I don’t know that on its own that can be useful. We all know that back when we and others were (supposedly/allegedly) using commodity-backed currency (through being tied to the dollar, say) the central banks could have printed lots more money (thus not running out) but at the cost of devaluing their currency. Draghi doesn’t make any comment on that aspect and so avoids opening the kimono to any genuinely revealing extent. The problem lies with the questioner, who to make any point, ought really to have asked if the ECB could keep on creating Euros potentially infinitely without that precipitating any devaluation of the currency. It did appear at one point that maybe Draghi was going to go there when he was talking about having plenty of resources but he seems to have decided ultimately to keep his cards close to his chest.
Thanks very much Bill and Richard – a really valuable collection of material.
There are metaphors we could use; the sun going round the earth, emperor’s new clothes. We are required to keep believing the myth so that their view of how the economy should be run holds sway. Propped up by a large part of economic academia. At some point the bubble will burst.
Sadly the UK is full of lazy individuals who when presented with articulate information links about how money structures human economies quickly resort to saying such information if true stupidly implies unlimited amounts of money will consequently be created by governments creating serious problems! So much more easy to do modern day Orwell “Animal Farm” thinking and believe “Market fundamentalism good, government intervention bad!” and disappear off to the pub, do retail therapy or watch some non-demanding TV!
This blog post should be required reading for every MP!
Worryingly this type of problem also applied to many MP’s with regard to “how the EU works” eg. Nadine Vanessa Dorries.
Banks create fiat money by extending loans into the economy.
Once the principle and the interest are repaid the money is destroyed.
Who does the newly created money belong to?
AND, who does the interest belong to?
The banks, or ‘The People’.
It is being created in ‘The People’s democratic name.
But there never has been a vote on it by ‘The People’ for these bank pampering arrangements.
Just interested parties voting for themselves…
$10 bills have the words ‘We the People’ printed on them.
If the currency is not owned by ‘The People’, how can it be currency?
Commerical banks create money for the oil industry (e.g. Rosebank). Who duly repay these loans with interest. A nice earner for the banksters and oilers which bypass any democratic scrutiny of ‘The People’.
I admit I am not sure what your argument is
Thanks for this – good to have so many sources in one place. There is also this: https://www.bankofengland.co.uk/working-paper/2015/banks-are-not-intermediaries-of-loanable-funds-and-why-this-matters
(I hope the link works, is it automatic?)
I wrote about this paper in the FT:
https://www.ft.com/content/e336ea7e-0d33-11e5-a83a-00144feabdc0
Here’s a sharing link for whoever gets to it first:
https://on.ft.com/3ROaEtB
This is the main gist of it:
“It is surprising that there is any debate about how banks work: surely it is crucial to an understanding of the drivers of both the financial system and the economy. But as a working paper by the Bank of England published at the end of May points out, there is an enormous gulf between how mainstream economic theory views banks and the reality, as described by the authors of the paper, Zoltan Jakab and Michael Kumhof.
Banks do not simply lend out money deposited by savers, the so-called loanable funds model that most economic textbooks propound. Instead they create deposits when they make loans, effectively expanding the money supply. They create most of the money in circulation, and are limited in how much they create mainly by their own assessment of the implications of new lending for their solvency and profitability.
Central banks have limited control over how much money is pumped into the system in this way, and supply whatever reserves are required. “Central banks are committed to supplying as many reserves (and cash) as banks demand” at the target rate of interest, in the interests of financial stability, the paper says. “The quantity of reserves is therefore a consequence, not a cause, of lending and money creation.”
The paper’s description of how banks work can be found in many central bank publications, say Mr Jakab and Mr Kumhof. More challenging is to incorporate it into the models used in macroeconomics. A failure to do so leads to a big underestimate of the effects of changes in bank lending on the real economy.
The authors’ models predict “changes in the size of bank balance sheets that are far larger, happen much faster and have much greater effects on the real economy” in response to shocks affecting the creditworthiness of bank borrowers than if banks are modelled as intermediaries.
They also predict that bank lending will be procyclical, which means a boom in credit creation in good times and a rapid pullback in a downturn. The loanable funds model, on the other hand, predicts lending will be countercyclical, balancing out what is happening in the economy.
In addition, the paper predicts banks will react to adverse circumstances by cutting back on lending rather than just charging more, as the mainstream models expect.”
It’s astonishing that the nonsense of the loanable funds theory is still so prevalent. The powers that be have been effective at closing down debate on this issue. I came up against a brick wall when I tried to engage people on it 10 years ago, inside and outside the FT, where I worked at the time. It seems that wall remains in place.
Many thanks
I last looked at that paper when it was a work in progress, thanks for the reminder. Great write-up too. Yes, it’s a struggle getting MSM attention and you, Pauline, aren’t the first to say that. I have here a copy or two of The Money Bomb https://www.waterstones.com/book/the-money-bomb/james-gibb-stuart/9780853352594 from James Gibb Stuart in which he makes the same observation from a generation or two back. I’ll make mention of it and link to your write-up too – should I use that sharing link you’ve given?
Hmmm… I see I can’t use either link due, I suppose, to the paywall… but the Wayback Machine obliges 🙂 so for your future reference, may I present https://web.archive.org/web/20190917205118/https://www.ft.com/content/e336ea7e-0d33-11e5-a83a-00144feabdc0
Sorry I didn’t get back to you on this Bill. The sharing link only works once I think , but I see you found another link that provides access – thanks for that.
Excellent comments Pauline!!!
Thanks for the kind words all, and to Richard for sharing. I saw https://www.youtube.com/watch?v=o3c_pJ_CLJQ and it’s true!
If banks do not use savers’ deposits to make loans, what does a bank do with the deposits?
Bill
It holds them for customers
Their banking licence requires them to do so.
It’s a service tnat proivides them with a) fees and b) free capital in case they loend to low risk customers
Deposits are liabilities not capital.
You really should understand the basics.
Oh dear, another person who does not understand what they are talking about.
Bank CBRAs are assets for the commercial banks, not liabilities. That’s a bit of a basic error by you, I presume you would agree.
And yes, increased current assets are a contribution to working capital. Another rather basic error.
I am not the one making them here. You trolls really are rolling them out.
Thanks Richard and Bill for putting all these reports together.
Some years ago I met Richard Werner at one of the financial services courses I attended and I realised then that he had a perfect understanding of the banking processes and I learned much from him. The youtube video you have linked above gives invaluable information about UK banking and the connections with The City of London.
Richard, I think some of your detractors may be confusing the loan processes with the general business operations of running a bank ie maintaining adequate capital for property expenses, salaries, pension funding etc
Such a useful post, many thanks.
To follow I suggest we have to ask the question (after Foucault):
If everyone (senior politicians, bankers, etc) knows the reality of money creation and use, whose interest is being served by the rigorous maintenance of the myths of:-
1) deposits being the source of loans, and
2) the household analogy for government finances, and
3) the consequent need to “fiscal discipline”?
In a way, the hiding of the reality of money creation in plain sight and the perpetration of these myths as part of the veil of obfuscation and confusion, are the basis of neoliberal power.
In other words, Bill’s post seems to me to prove that there is NO IGNORANCE on the part of Starmer, Reeves, Sunak, Hunt, et al. They know what they are doing. Which is infinitely more alarming than imagining that they are innocent blunderers.
Richard – Thanks for this great list,
Bill thanks for compiling it. I hope you will add to your list the items I posted yesterday:
In Canada in 1939 the Governor of the Bank of Canada responded this way to questions:
Q. And they issue that form of medium of exchange when they purchase securities or make loans?
A. Mr. Towers: That is right. That is what they are for… That is the Banking business, just in the same way that a steel plant makes steel. (p. 287)
https://parl.canadiana.ca/view/oop.com_HOC_1804_1_1/363
Asked about the 1931 MacMillan Report
Q. I draw your attention to section 74, which is at page 34 of the report:—
“ It is not unnatural to think of the deposits of a bank as being created by the public through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities a bank creates a credit in its books, which is the equivalent of a deposit.”
you find any fault with that statement?
—A. None whatever.
https://parl.canadiana.ca/view/oop.com_HOC_1804_1_1/165
https://en.wikipedia.org/wiki/Macmillan_Committee — Keynes et al
I’m mulling these over, thanks for the suggestions.
Here’s another contribution by Zoltan Jakab and Michael Kumhof, this time for the International Monetary Fund, that is more accessible than the other one I posted. This below is an interesting conclusion, and relates back to what Howard Davies was saying about saving and investment. Is this your understanding as well Richard?
“Many policy prescriptions aim to encourage physical investment by promoting saving, which is believed to finance investment. The problem with this idea is that saving does not finance investment, financing and money creation do. Bank financing of investment projects does not require prior saving, but the creation of new purchasing power so that investors can buy new plants and equipment. Once purchases have been made and sellers (or those farther down the chain of transactions) deposit the money, they become savers in the national accounts statistics, but this saving is an accounting consequence—not an economic cause—of lending and investment. To argue otherwise is to confuse the respective macroeconomic roles of real resources (saving) and debt-based money (financing). Again, this point is not new; it goes back at least to Keynes. But it seems to have been forgotten by many economists, and as a result is overlooked in many policy debates.
“The implication of these insights is that policy should place priority on an efficient financial system that identifies and finances worthwhile projects, rather than on measures that attempt to encourage saving, in the hope that it will finance desired investment. The “financing through money creation” approach makes it very clear that with financing of physical investment projects, saving will be the natural result.”
I wholly agree with that
I may share more of this here
This is the link https://www.imf.org/external/pubs/ft/fandd/2016/03/kumhof.htm
Sorry it has taken time to get to this
Thanks for adding the link Richard – not sure why I forgot to do it.
I am aware this Sunday morning that there are a number of good contributions to this thread that I have not moderated as yet, but they need thought, comment and time and I need some time out this morning. I will get back to everyone later today.
‘Not moderated yet’.
What you actually mean is ‘not censored to support the position I want to portray whilst deleting anything else that might provide evidence for a different opinion…’
Wow, Gemma. You were Charles only short time ago.
You people really are stupid.
The freedoms that Trolls wish to defend are the freedoms to abuse without personal responsibility, and to deceive …… and they wonder why they do not deserve to receive short shrift.
Goodness me – no need to apologies to me – get out there and have that walk or see to your family first Richard.
Your content on this blog is super-stimulating and relevant but there are things closer to home that need to be attended to.
Best wishes,
PSR.
Thanks
We went for our first birdwatch foir three weeks this morning. Not too long – because I still feel far from iver the effects of Covid. But it was really good – lots of fieldfare, some redwing, hundrteds of lapwing because of four march harrier and a buzzard being in action, and much more.
I am refreshed – even if knackered still.
Richard
Hannah V-
As you say, Sunak and Hunt know the reality very well, and cynically mislead on it. Reeves, I suspect, having worked at the BoE knows the reality, but is not very comfortable with it. She knows she is not clever enough to challenge right-wing attacks on reality-based policy, so trumpets the orthodoxy even louder than Sunak and Hunt.
Starmer, though, understands neither the orthodoxy nor the reality. He hasn’t a clue. This, fromhis speech in Bristol last week, displays a level of evasive incoherence which Boris Johnson would admire, I reckon.
“”“The money that is needed for the investment that is undoubtedly needed, saying that the £28 billion will be ramped up in the second half of the Parliament, that it will be subject of course to any money that the government is already putting in, and it will be subject to our fiscal rules,” Sir Keir said.“That means that if the money is from borrowing, which it will be, borrowing to invest, that the fiscal rules don’t allow it, then we will borrow less. It is very clear……”
Richard this has been a tremendously edifying two part series!! Many great contributors. Pauline’s Article was excellent.
A key question no one has asked is about your assertion on the BOE paper’s statement that 97% of money is private bank created:
“NO! That is pre 2008 data and simply wrong Around 40% of moeny is now govermment ceated and aroind 60% commercial bank” … Do you have a post on your reasons?
My view is that with QE since 2008, the banks bought a lot of money with their credit money which the Government spent. The Central Banks bought the bonds with settlement balance money/reserves which the banks hold at the CB and earn interest. Those are just swaps.
If money is a medium of exchange and the public can only spend hard currency and bank credit money, then the settlement balances are more like money under the mattress. They are not part of the functional money supply. Proposals for digital currency or access to CB accounts for the public would make CB money part of the money supply. … In my opinion.
Please get this right
QE was a sham
The whole process was:
1) The government spent – let’s say £10 billion and increased the CBRAs by the that sum
2) It issued debt for £10 billion and reduced the CBRAs by that sum
3) In a pre-announced action they bought £10 billion of bonds so incerasing the CBRAs by £10 billion.
(2) and (3) were always a sham
(1) was all that really happened
You are buying that (2) and (3) were real – and they in macro terms made no differnce at all
Money was created at stage 1 and (2) and (3) only exist to disguise this
Please don’t buy the disguise
Richard you regularly and effectively break down disguises for us – though for most of us a lot of repetition is required 🙂
To my knowledge your very very important position and paradigm shift is unique. To convince the whiz kids – I don’t qualify 🙂 – and to convince the BoE, you need to provide actual data. To convince us – more repetition to slowly lift the fog.
I understand “QE is a sham” ( I would add – and wealth extraction by the banks) and the rest is Greek to me.
I am working on this at an academic level as well now – to provide the evidence
Submission 1
I am somewhat perplexed by the “dodgy lending” scenario as the cause of the 2008 crash. Here is my version.
Prior to extensive financial deregulation in 1985, driven by years of neo-liberal pressure, the practice between Private Commercial Banks (PCBs) was to hold regular discussions to agree mutual mortgage targets, in an attempt to keep end-of-day (EoD) inter-bank settlements (effected within the CBRAs created & held by BoE) to a minimum. This target-matching can however drift to the point where one of our two example banks (imagining for the moment that there are only two banks in the CBRA system) may find its BoE electronic reserves relatively depleted because, say, its lending has outstripped the other, for all sorts of valid & normal reasons.
In such circumstances, Bank A temporarily “borrows” some of B’s reserves via the LIBOR system (you will have heard about this when the PCBs were caught red-handed rigging the interest rates during the banking crisis). Note however that NO MONEY CHANGES HANDS between these banks – the LIBOR transaction takes place INSIDE THE CBRA SYSTEM. When things settle down, balance (remember that word) is restored when Bank A pays back the LIBOR loan + interest to Bank B via those reserves, again INSIDE THE CBRA SYSTEM.
In the years following 1985, enter stage-left Northern Rock in UK (note I am referring UK only). Bankers had been replaced replaced by marketing & sales people who did not really understand the need for that “balance” constraint referred to earlier. All that their greedy eyes could see was that they were allowed to create, from nothing at all, the loaned mortgage money & that there was a huge demand for it. Bring on the bonuses!
A lending spree began on an unprecedented scale, compounded by further deregulation in 1999 with the repeal of the USA’s Glass-Steagall Act (1933) which had separated the retail & investment functions of banks. Given the US Dollar’s status as the world’s reserve currency, the implications were indeed worldwide – the dam was now well & truly ready to burst.
Northern Rock kept on selling mortgages, but were continually running out of those electronic reserves created & held by BoE & therefore were not able to fulfil the daily obligations of the settlement procedures. It then resorted to the LIBOR system but still kept on selling – exacerbating matters & creating a vicious repetitive circle – a vortex! Eventually they could not meet the LIBOR obligations & resorted to packaging their loan accounts into CDOs (Collaterised Debt Obligations) to sell to the other banks at reduced prices, in an attempt to plug now gaping holes in their accounts & to restore the BoE reserves balance – impossible because they still kept on selling mortgages!
As all of this was going on, the other banks/lenders started panicking about perceived loss of market share. Their bankers were similarly replaced by marketing & sales people ignorant about the “balance” constraint referred to earlier. They joined in the spree. Simultaneously they were becoming alarmed at the amount of debt-management work & general debt-exposure involved in the acquisition of Northern Rock’s CDOs. They called time on Northern Rock, who then called in the “lender of last resort” – BoE – all too late!
BoE had been asleep at the wheel & the crash inevitable. Swervin’ Mervyn King, then head of BoE, admitted that he should have been “keeping a closer eye” on things! Really? The crash was thus NOT caused by the “QUALITY” of the lending (the so-called “dodgy lending” idea – which certainly didn’t help matters, but we have to remember that when a PCB lends say 150k it may take anything from 10-30 years to get it back) but by the sheer QUANTITY or VOLUME of UNBALANCED LENDING that tipped the system into meltdown.
And the result was the central bank reserve accounts were boostyed by almost £900 billion
Pauline – there was an excellent reply to your FT article in the comments section which I hope you saw:
The reason why it is important to understand how money is created is that many issues with our system suddenly become understandable such as:
1. Why did the Government bail out badly run private companies known as Banks? (because they create the money)
2. Why are house prices so high? (Banks created too much credit for mortgage lending)
3. Why is the economy doing so badly even though Banks have created enormous sums of Bank Deposits through Lending? (because only about 10% goes towards productive enterprise, the rest is aimed at Property Markets and Stock Market Speculation creating Asset Bubbles)
4. Why doesn’t the Money Multiplier Model seem to work? (because there is no Reserve Requirement enforced on Banks – it is now a voluntary requirement)
5. Why are likely to have another Financial Crisis? (because no fundamental changes have occurred since 2008 – in fact the Bank of England has stated in a Report that with Depositor Insurance and an Implicit Guarantee of support from the Public Purse for Banks, Moral Hazard has increased, making it more likely that another crash will occur).
6. Why didn’t Economists predict the crash? (Some did, Economists and Investment Professionals who looked at Money and Debt in the System warned of the oncoming crash in 2006 but were laughed at by neo-Liberal Economists).
7. Does the Bank of England know what it’s doing? (Probably as they hold very good Statistical Data and have issued accurate Reports describing how the Money System works, but are somewhat constrained by Political and Private Sector Financial Agendas. The BoE will do whatever is asked of it but at present, there is no Political will to change – not until the next crash).
Thanks Joe, I did see that comment when I revisited my story but I don’t recall if I saw it at the time. It is often the case that comments on FT stories add considerable value. Indeed, they are often better than the article – I sometimes only read the first paragraph then go straight to the comments 🙂
Pauline over the years I have been most impressed at how a few special writers at FT have so capably addressed some of our greatest economic challenges with the knowledge of some of our finest economists. In addition to your efforts. Martin Wolf has addressed reforming the money system as has his legendary comrade Samuel Brittan on Friedman’s monetary proposal
Strip private banks of their power to create money Martin Wolf APRIL 24, 2014
December 5, 2008 2:00 am ‘A framework for economic stability’ By Samuel Brittan
https://www.ft.com/content/2f13611c-c23f-11dd-a350-000077b07658
https://www.ft.com/content/7f000b18-ca44-11e3-bb92-00144feabdc0
Wolf more recently did one on land value tax https://www.ft.com/content/fadfbd9e-29ca-4d53-b69a-2497cc3ed95d
Keep up the great work!
Thanks
Pauline this comment to your loanable funds article was also great
This should be front page news everywhere. 90% of politicians wrongly think that the state creates money.I suppose that’s because the last time parliament weighed in on the matter was in when Robert Peel’s government outlawed anyone other than the Royal Mint and BoE from creating money (notes and coins) in the 1844 bank charter act.
The fact that banks have assumed this role purely because we started using electronic money is preposterous, Money is a social construct and a public good, Banks took the right to create it from us without asking and the system they use for this creation is to always create it with an interest baring debt. This is why there is always more debt than money, This is why the only way society as a whole can repay its debts is by borrowing more.This is the insanity that must be addressed, Of course money creation is pro-cyclical, Back in 2008 we didn’t call it “The Financial Crisis” we called it “The Credit Crunch” When almost all the money in the economy exists as credit it would be absurd to think these things aren’t unavoidably tied together,The system where nearly all money is created as debt is the major cause of upwards money redistribution.This has got to change, Positive money have been awesome in doing the research in this matter.
[…] Cross-posted from Richard Murphy’s blog ‘Funding the Future’ […]
I see the dipsticks were dogpiling you Richard.
I see a lot of the answers are technical, however the technicalities are not my bag, the political implications are to my mind much more important.
So as a reinforcement of what you say I bring you this:
This is where Alan Greenspan former fed chair admits governments can create as much money as they want https://www.youtube.com/watch?v=DNCZHAQnfGU and if you lie to a senate committee you get 5 years in gaol so …….he told the truth and he was an arch deficit hawk.
Thing I think here is, if the deficit is in pounds (which it is) and the bank of England can create as much money as it wants, then by virtue of that fact, there can be no deficit!
So austerity is a political decision, as is cutting government funding, so are potholes in the road.
However as you so kindly explain fiat currency is about book keeping double entry, which it is.
So we could say that Governments spend money into the economy to make it grow and reduce spending to make it shrink.
One could even say government losses are “our” gains, Government gains are our “losses”.
It then becomes horribly obvious that these people who have coined the ridiculous phrase “balance the books” are criminally responsible for their actions.
This of course is typical of the Neoliberals, its not in their interest to admit that they either might be wrong or found out for what they are .They are mostly fraudulent actors in a world that makes its money from garbage, because all of this if it is true, would put them out of business and allow the creation of a modern society across the globe.
Well unfortunately for them the Neoliberals are running scared, MMT is moving ahead more and more, all you’ve done is reinforce what MMT say to a greater extent.
Why are they trashing you so vehemently? Because if this spreads as quickly as it can, its game over for the climate sceptics the big pharma the Monsanto’s of this world. Dark money becomes irrelevant.
You may think you’re howling at the moon, sir, you are not.
Let me also point you to this, https://www.sciencedaily.com/releases/2011/07/110725190044.htm – tipping points are not as far away as maybe you think they are.
May I also ask if you are aware or know Prof Steve Keen, I suspect so as you mention Minsky.
Anyway, I want to see the system change for the better, not sure it will happen in my lifetime, but I think it will happen sooner rather than later.
Keep up the great work, you baffle me on occasions but hey ho.
Rik
Rik
That is a powerful video and I may well return to it.
And yes, there is a consopiracy going on.
I know Steve – I wish I had more time to work with him.
The work and thinking goes on. Thanks for your contribution.
Richard