Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers.Quoting Michael McLeay, Amar Radia and Ryland Thomas of Bank of England’s Monetary Analysis Directorate
Lars P. Syll | Professor, Malmo University
McLeay et al quote is from Money creation in the modern economy. Their article, Money in the modern economy: an introduction is also available for download.
6 comments:
I don't know about Britain, but in the USA the outstanding balance of private credit is about $46T and the total of all government spending since WWII about $68T, so someone is confused. I already debunked this here:
http://economicsrantsnmusings.blogspot.com/2013/06/does-credit-drive-economy.html
Looks to me like someone thinks taxes accrue only against public spending, which cannot be the case.
The outstanding credit balance is dollar LIABILITIES, not dollars. These things are not the same.
"taxes accrue only against public spending"
the govt can only tax as much as it has spent or lent, right right?
Taxes accrue against gains on all taxable transactions. Many of these transactions are funded with credit. So in principle taxes can be higher than government spending. And total taxation includes not only federal but also state and local taxes in the US. Taxes are payable only in currency (rb or cash).
Therefore government either has to keep the tax bill in line with spending (deficit or balanced) or taxpayers will have to draw down savings or borrow, in which case the Fed will automatically make sufficient rb available to clear by adjusting quantity of rb by selling tsys. Therefore, banks would not need to borrow from the Fed to get the needed rb.
Strikes me the textbooks are right. As the BoE article itself says, and in reference to a bank making a loan, that will lead “..other things equal, to increased inflationary pressure..”. And that in turn means the central bank has to raise interest rates, which will cut lending. So if a commercial bank makes a loan and there is no corresponding saving, the central bank will cut total lending. Ergo, commercial banks cannot simply expand the total amount loaned unless someone somewhere does a corresponding amount of saving. Thus the textbooks are right.
I’ve expanded on that point here:
http://ralphanomics.blogspot.co.uk/2014/03/when-bank-makes-loan-does-it-create.html
It all depends on the state of the economy.
If there is a significant amount of slack, new loans (with no ex ante saving to support them) will increase aggregate demand and real GDP, with no inflationary pressure.
And higher GDP means higher savings, ceteris paribus.
At full employment more loans and demand will translate into higher inflation while GDP stays put.
This should be quite uncontroversial, really.
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