{"id":63474,"date":"2022-06-21T06:33:53","date_gmt":"2022-06-21T05:33:53","guid":{"rendered":"https:\/\/www.taxresearch.org.uk\/Blog\/?p=63474"},"modified":"2022-06-21T06:33:53","modified_gmt":"2022-06-21T05:33:53","slug":"the-double-entry-behind-the-money-creation-in-the-central-bank-reserve-accounts","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2022\/06\/21\/the-double-entry-behind-the-money-creation-in-the-central-bank-reserve-accounts\/","title":{"rendered":"The double entry behind the money creation in the central bank reserve accounts"},"content":{"rendered":"

I have been asked for a blog post explaining the double-entry that explains the money creation in the central bank reserve accounts that commercial banks hold with the Bank of England and apologise for the delay in delivery: this took more time to write than I thought it would. The full post is below, but for those who would find it easier there is also a PDF version, here<\/a>.\u00a0<\/em><\/p>\n

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I have already written a note about what the central bank reserve accounts<\/a> that commercial banks maintain with the Bank of England are, and how they are funded. However, that note could not answer every question that comes up with regards to these accounts, and in particular how they operate on a day-to-day basis.<\/p>\n

I understand that there are real conceptual issues in understanding how it is that the base money that is created day in and day out by the Bank of England to let the government spend in fulfilment of its policy decisions within the UK economy can, nonetheless, be wholly ring fenced within the central bank reserve accounts maintained by the commercial banks with the Bank of England. Put another way, the question people struggle with is how the \u00a3900 billion or so in the central bank reserve accounts of the commercial banks at the Bank of England never transfers over from those accounts into the commercial banking sector, and similarly, why commercial bank money never transfers into the central bank reserve accounts.<\/p>\n

The conceptual problem in understanding this does, I think, result from a lingering belief that most people have somewhere deep down inside them that there really is something physical and tangible that they might actually touch which represents money. That, however, is completely untrue. Even notes and coins are simply physical representations of an intangible promise made by the government to pay whomsoever might hold them as property at any particular point in time. They have no implicit value in themselves and yet it seems very likely that people do think that that there is a movement of some form of tangible property between bank accounts when payments are made and received between accounts.<\/p>\n

This note seeks to explain why that is not the case and to demonstrate how government spending can both create central bank reserve account balances and simultaneously increase commercial money supply even though the base money and commercial bank created money remain quite separate, one from the other.<\/p>\n

To explain this assume that the following quite simple series of transactions takes place:<\/p>\n