Money creation in the modern economy - Quarterly Bulletin

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rahimnathwani · 2021-09 · Recommendation

Some of the content is in this short video: [VIDEO] Money is created by both the central bank and retail banks. When the Bank of England buys an asset, it pays in newly-created pounds. These pounds are an obligation of the central bank, i.e. a debt owed by the bank. So these pounds are 'central bank money'. When a commercial or retail bank gives you a loan, you have two accounts at the bank that move in opposite directions: - current account is credited by $X (bank owes you money) - loan account is debited by $X (you owe the bank) So the net effect is zero (the sum of all your balances with the bank is still the same as before the loan was made). But now there's more money in your current account, so there's more money available for you to spend. Money has been created. Even though this new money isn't central bank money: - it's denominated in the same units as central bank money (pounds) - it's almost as safe from default (it's protected by a deposit guarantee scheme) - you can use it to pay for things (bank transfers are widely accepted as a means of payment) In practice, there are capital adequacy requirements that limit how much banks can lend. They are required to keep a buffer between assets and liabilities (equity capital). As the bank's balance sheet gets bigger, more equity capital is required.

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namelost · 2018-03 · Recommendation

You can't miss the accompanying videos that they recorded down in the basement: 1) [LINK] (beginner) 2) [VIDEO] (advanced)

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jazzyjackson · 2021-09 · Reference

When a bank loans 10,000 dollars, the amount is credited to a checking account. It does not have to come from somewhere else. What use would a loan be if you kept it in your checking? Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around." [0] [VIDEO]

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