Money creation in the modern economy

Posted by dbhalling 5 years, 7 months ago to Economics
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There are number of misconceptions about money. This article from the Bank of England is surprisingly blunt about how money works. "Money creation in practice differs from some popular misconceptions — banks do not act simply
as intermediaries, lending out deposits that savers place with them"

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  • Posted by $ blarman 5 years, 7 months ago
    One sentence I have a real problem with is on the first page: "The Bank of England aims to make sure the amount of money creation in the economy is consistent with low and stable inflation."

    NO, NO, NO! Inflation should never be the impetus behind banking. Inflation destroys value - especially that of savings - and dilutes the value of loans. Inflation is there primarily as a tool to dilute nation-states' reckless spending through borrowing; QE is just a cover for that. Inflation also creates a constant spiral in the economy that forces growth and price expansion to cover its effects.

    This article may describe what they are doing, but the foundation for it is a recipe for disaster.
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  • Posted by Zenphamy 5 years, 7 months ago
    Good find db. A well put together description, though I'm not as satisfied with the description of the actual effects of QE. It's difficult to explain to a large portion of people the difference between cash and money, of which cash is a part of. The majority of what makes up money is not cash and can't really be thought of in the same terms. Generalist or populist economic and financial writers are the most at fault for much of that difficulty, as well as general education limitations.
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    • Posted by 5 years, 7 months ago
      Agreed about the QE, but its the explanation of how banks and money really work that I think is surprisingly clear. A related article by the Bank of England is

      I am going to have an article on money coming out shortly and I hope to follow that up with an article on banking. I am writing these for two reasons. One is that the Austrians and the Keynesians have put out all sorts of nonsense about money and banking. Unfortunately, Objectivists seem to fall for the Austrians nonsense on point. The second one is to round out my ideas on economics.
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      • Posted by term2 5 years, 7 months ago
        The real issue for us in this forum is what we do about all this in our own personal lives. Their house of cards has to crash at some point, as wealth cant be created by a printing press. For us in retirement, this issue is particularly important.
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  • Posted by $ mminnick 5 years, 7 months ago
    I think this is the way it still works, but not 100% sure so take with a grain of salt.
    Banks can in effect create money. They are required to hold a specified % of deposits in reserve. As long as the reserve quantities are met, the bank may make loans. Most banks , when you receive a loan simply credit your account at the bank with the amount of the load. No cash actually changes hands. As long as the reserve limit is not broached they can make loans and conduct other business.
    Not all countries require the same level of reserve and not all even require a reserve.
    Assuming this all to hold true, there is an almost unlimited supply of money available to be created. Also note, the Federal Reserve Banks do not have the same requirements. They can create money without let or hindrance.
    A much better explanation with more of the side issues expain is at the link DBHALLING cited.

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  • Posted by chad 5 years, 7 months ago
    Inflation is a misnomer, it misdirects blame for the problem to businesses in the economy for raising commodity prices when in fact it is the bank and its fiat currency (not the same as money) policies that is creating devaluation of the currency increasing costs and devaluing ones labor usually at a faster rate than can be compensated for by increasing wages especially if the people are told a great lie; i.e. inflation is less than 2 % if you don't count energy and food. All who do not use energy and food are in great shape. Basically this article is a great (because it works on almost all who hear it) and complicated lie about what money is or should be. Money should represent a store of value somewhere that can be traded, if all you are trading is debt there is no money. If I trade you my Jeep by giving you the paper title for produce from your garden, you trade the title to someone else for something you want and one day someone wants the Jeep only to find out there is no Jeep the trades were all done in a confidence game where the individual who asks for the value of the paper is the one who received nothing and everyone in the trade was oblivious to the fact there never was any value in the paper.
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  • Posted by $ Olduglycarl 5 years, 7 months ago
    Time is short tonight, so I saved the article for later reading, but so far, I'm getting the impression that the system is already operating as if money is just a digital creation. If they solely used physical money there would not be a destruction of deposits or a decrease in reserves, it would be the opposite...just like the old days.
    If this view is accurate, one can understand why they are pushing for a digital economy only.

    But those of us aware that a destruction of the electrical grid IS in fact would seem unwise at the present time to go this route until we can protect ourselves from the inconvenience of a natural or man made EMP.

    I still believe that physical money is not just a convenience, it also creates a physical reality needed for responsible human behavior.
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  • Posted by Herb7734 5 years, 7 months ago
    I'm sure that the descriptions of this article are accurate. But let's look at the fellow who only passed algebra with a "C" That's me. With this confession in mind, my IQ score is fairly high. As I see it banking is a lot like that Insurance commercial which when trying to find out if she is covered she is told to turn to page 5 where she discovers that it says, blah blah, blah, blahbblah blablah blah. Then they tell me about FIFO, LIFO, (First in First Out - Last In First Out, etc.) I tell them my way is FIST (First In Still There). When it comes to banks all I know and all I need to know is that one can no longer use banks to make money with your money in the good old traditional ways. You will make pretty much the same by stuffing the money in your mattress or in your safe if you have one. So, in order to keep the cost of my checking account low I keep just enough in the bank so that it offsets checking costs and that, as far as I can see is all a bank is good for. If that.
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  • Posted by DeanStriker 5 years, 7 months ago
    Uh, whenever (which is always, yes?) we are stuck with Governments of Force putting itself in total control of "money". That's no way to run a railroad!
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