Money creation: who creates money?

HAMISH_MCTAVISH

debtcutter wrote: »

This thread got weird, fast.

:rotfl:

They can do that around here.

But look beyond it and there's also some cracking debate/discussion and the chance to learn an awful lot from some great posters.

@ HAMISH_MCTAVISH maybe I should have said "People don't realise that banks have the power to create money".

Technically they don't.

They only have the power to lend a percentage of the money on deposit with them. But as they have no way to track money and thus prevent multiple claims on the same money, then in practical terms it's the same thing.

Some economists would argue the supply of credit is not the same thing as the supply of money, but given that most bank credit is now backed by the same state that issues money, it pretty much is.

purch

debtcutter wrote: »

Apologies to anyone that is annoyed/upset, apart from Purch, who just appears to be a bit paranoid.

Paranoid :eek:

I just asked you not to insult the members of this forum by assuming that they had no idea of how money is created.

IronWolf

I actually don't think that video is accurate. It seems to be suggesting that banks can just make up money and loan it out. That is not what fractional reserve banking is.

My understanding is much closer to the apparently "wrong" notion that banks loan out deposits, or money loaned from other banks. The increase in money supply comes from the same cash being loaned and deposited through several different banks, not because banks just "create" money and loan it out. That sounds fraudulent to me and I'm pretty sure the Bank of England has the legal monopoly on money creation.

jamesmorgan

IronWolf wrote: »

I actually don't think that video is accurate. It seems to be suggesting that banks can just make up money and loan it out. That is not what fractional reserve banking is.

My understanding is much closer to the apparently "wrong" notion that banks loan out deposits, or money loaned from other banks. The increase in money supply comes from the same cash being loaned and deposited through several different banks, not because banks just "create" money and loan it out. That sounds fraudulent to me and I'm pretty sure the Bank of England has the legal monopoly on money creation.

It depends on your definition of money. If I have a £10 note and I lend it to someone else there is still just one £10 note - ie no more £10 notes have been created. However, the definition of money is a lot broader than just currency - it also includes all of the balances in deposit accounts. So if a bank lends me £10 and I put that money in a deposit account, then the amount of money has been increased by £10. The bank doesn't have to take £10 out of another deposit account to lend me the £10 so there is no debit to offset this credit in the amount of money (in practice there is a small debit due to fractional reserve banking rules).

Note that this concept of the creation of money is purely a function of the way that money is defined. If the definition of money included all the loans that banks issued (as negative money) then it would not be possible to create money in this way. As such it is a mathematical concept and not a physical concept (ie nothing is actually 'created').

IronWolf

jamesmorgan wrote: »

It depends on your definition of money. If I have a £10 note and I lend it to someone else there is still just one £10 note - ie no more £10 notes have been created. However, the definition of money is a lot broader than just currency - it also includes all of the balances in deposit accounts. So if a bank lends me £10 and I put that money in a deposit account, then the amount of money has been increased by £10. The bank doesn't have to take £10 out of another deposit account to lend me the £10 so there is no debit to offset this credit in the amount of money (in practice there is a small debit due to fractional reserve banking rules).

Note that this concept of the creation of money is purely a function of the way that money is defined. If the definition of money included all the loans that banks issued (as negative money) then it would not be possible to create money in this way. As such it is a mathematical concept and not a physical concept (ie nothing is actually 'created').

Yes, the gross amount of money on deposit will increase, but that's not the same as saying the bank just creates money to loan out which it what they said in the video.

e.g. they are saying that if someone deposits £10 with them, the bank will loan out £100 created out of nothing and keep £10 in reserve.

jamesmorgan

IronWolf wrote: »

Yes, the gross amount of money on deposit will increase, but that's not the same as saying the bank just creates money to loan out which it what they said in the video.

e.g. they are saying that if someone deposits £10 with them, the bank will loan out £100 created out of nothing and keep £10 in reserve.

No, not quite. What they are saying is that someone deposits £100 with the bank. The bank then loans out £90 of that deposit. If that £90 is deposited back with the bank (ie now creating £190 of total money) then the bank can lend out £81 etc etc.

System

"Money" is such a wide and nebulous topic it's hard to know which aspects this thread is supposed to be addressing.
Define money:
money is a means of exchange
money is a store of value
money is as money does
money is when something with low liquidity is used to release high liquidity without loss of overall value
etc.

Who creates money? Anyone who facilitates any of the above. In war-torn Germany in 1945 cigarettes and GI rations were the common currency.

Enoch Powell used to argue that ONLY the government can create money, because only they authorise or permit the various practices that result in money creation.

IronWolf

jamesmorgan wrote: »

No, not quite. What they are saying is that someone deposits £100 with the bank. The bank then loans out £90 of that deposit. If that £90 is deposited back with the bank (ie now creating £190 of total money) then the bank can lend out £81 etc etc.

Yes that's how I understand it works, but that's not what I interpretted the video as saying.

Did anyone else interpret it as I did?

ruggedtoast

There's nothing wrong with reposting this, its a fundamental part of the unsustainability of our economy that most people don't know about.

Even this part of the board gets new members now and then.

One thing which is even less discussed is why we have a fractional reserve system.

As ever its because it suits the ruling elite and maintains their position of advantage. The gold standard was ok for ruling elites for a while, if you needed extra money you just had to instruct someone to dig it up, or order the serfs to work harder and make things for you that you can sell to other countries in exchange for their gold.

This is tiresome and slow however, and does offer the worrisome possibility that the ruling elite could actually run out of money, or be found out fiddling with the money supply to make the gold and silver go further (one of the key loss of confidences that led to the fall of the Roman Empire).

Its a far more elegant solution if you can just print your own money. Of course just printing responsibly and in accordance with the economies needs isn't going to make 1% of the world obscenely wealthy at the expense of the other 99%.

Much better to only print the money when it's loaned to the 99%, who will then have to work to pay back the debt, only to find that the debt is now larger than ever and can only be paid off by transferring it onto their children, while still feeling like they have "earned" something.

This is our species greatest self delusion. The old bait and switch on an epic scale.

It's also a perfect system for the 1% as only a few people can benefit. People who co-incidentally are the strata of society that control who can print money and who can't; and the vast majority of people will always be in debt to them, one way or another.

Anyone who disagrees with this system is derided as an innumerate communist, and if they are a country they will be attacked with war and sanctions until they give up, join in or inevitably turn into the corrupt basket case they were meant to be at the beginning.

antrobus

jamesmorgan wrote: »

No, not quite. What they are saying is that someone deposits £100 with the bank. The bank then loans out £90 of that deposit. If that £90 is deposited back with the bank (ie now creating £190 of total money) then the bank can lend out £81 etc etc.

Of course, if the someone concerned decides not to deposit £100 with the bank, but rather goes onto Zopa, they can lend that £100 without any fractional reserve whatsover. And when that same £100 ends up in the hands of someone else, they can do the same thing.

Clifford_Pope wrote: »

...Who creates money? Anyone who facilitates any of the above.

That's about it. It's the process of lending money that creates money, it doesn't matter who does it.