This isn’t consistent with the existence of bank runs

The difficulty in all this is multifold. First, cash saving is essentially a negative act. In times of low inflation it is a safe act and, with deposit guarantees, broadly secure but it yields next to nothing and, as importantly, does nothing for the economy. Saving in cash effectively takes money out of active use. It is a loan to a bank that then forms part of its capital (it no longer remains your money: it does belong to the bank once deposited and all you own is a loan recorded in a bank statement) but what we now know is that banks do not then lend this money on: all the loans they create are made out of new money created for the purpose. They do not therefore, effectively, need deposits to make loans.

And given that banks runs do exist therefore this explanation must be incorrect.

91 comments on “This isn’t consistent with the existence of bank runs

  1. No, they don’t lend it on. They store it in a big silo and jump up and down in it.

  2. Murphy is the sort of person who, if people spent all their money and didn’t save a penny, would be lambasting the “consumption culture” and calling everyone spendthrift wastrels.

    In fact, didn’t he go through a phase of doing precisely this? His idiotic idea to heavily tax all bank transactions to stop people spending money?

  3. @Rob: yes one version of the stump thinker was anti-consumption, against what he considered ‘unnecessary’ consumption, and the too many choices facing the consumer. The whole ‘who needs so many types of coffee’ shtick. Possibly when he was courting the Greens, who knows?

    But that was then, this is now. Consumption good, saving bad! We have always been at war with East Asia!

  4. The recent demise of the Banco Popular here in Spain was due to a run.

    It had underlying problems from non-performing loans for poor mortgage investment, but faith wavered and rumours started and people and public institutions started taking out their cash.

    The last phase lasted about three days and sank it.

    How on earth could that happen?

  5. ‘does nothing for the economy’

    So fvcking what? People have no duty to do things “for the economy.”

    He’s a statist creep.

  6. bilbaoboy,

    ‘started taking out their cash’

    a bank run is a liquidity problem, if the people clamouring to take their money out would take a cheque/transfer to a different bank then there would be no ‘run’.

    If you look at the Ts&Cs of your account you may find that there is a daily cash withdrawal limit but no limit on the size of a transfer, banks are asset rich and cash poor.

  7. “a bank run is a liquidity problem, if the people clamouring to take their money out would take a cheque/transfer to a different bank then there would be no ‘run’.”

    Is this correct? It doesn’t pass my smell test. Why did the Icelandic banks go bust? There were no queues in Reykjavik of people from Dorking wanting cash, but a lot of people making online transfer requests, as the accounts were all online. How did they go under?

  8. @BobRocket.
    “If you look at the Ts&Cs of your account you may find that there is a daily cash withdrawal limit but no limit on the size of a transfer, banks are asset rich and cash poor.”

    You need to have a word with Barclays then. Even via internet banking, the maximum transfer’s a paltry £50k. I’ve been trying to find out how to move 500k+, in real time, to take advantage of exchange rate movements & they won’t do it.

  9. But but but didn’t the Great Dicktater tell us last week that banks can create money out of thin air? If so, how does a bank like Banco Popular go bust when they could have just created more money?

  10. Jim,

    Icelandic banks were a Ponzi, customer deposits on the one hand were used to pay directors/shareholders bonuses whilst depositor interest/withdrawals were paid from (deposit backed) incoming loans.

  11. BiS,

    that’s a sop to the money laundering regs on non-commercial accounts, threaten to take your business elsewhere and they will ‘make an exception’ in your case (subject to a fee obviously).

  12. Henry,

    they can’t create cash (£5 notes) and the customers who loaned them money in the first place will only accept a cash payout (only £60bn of cash is available across the whole economy and I’ve got about £30 plus change of that)

  13. “Even via internet banking, the maximum transfer’s a paltry £50k.”

    With Santander UK, I struggle to move £30k. Depends, apparently, on the “profile of movements on your account”. Good deal on business banking, though.

  14. Lloyds let me transfer £53k in one go earlier this year and £51k in one go in 2015. Maybe somebody forgot to tell them about the limit?

  15. “This isn’t consistent with the existence of bank runs And given that banks runs do exist therefore this explanation must be incorrect.”

    Several of the statements are true, but the explanation is incorrect. (I thought we covered this last time? Perhaps everyone dropped out of the conversation before we got there.)

    When somebody takes out a loan from the bank, it’s not the bank that creates the money, but the borrower. The bank just gives it liquidity.

    The usual way to do this is to mix it in with highly liquid deposits. When the deposits are instant-access, you have to retain a reserve to maintain their liquidity, and that’s what the fractional reserve is about.

    However, the deposits don’t have to be instant-access. If instead you raise liquid funds by instead selling fixed-date bonds that you can’t withdraw until they mature, or pay into a pension scheme that you can’t withdraw until you retire, then a bank run is impossible, and no fractional reserve is needed. The depositors have exchanged a liquid form of money for an illiquid one (plus interest), and this liquidity can be transferred to the credit given to the borrowers.

    The money borrowers take out is balanced by the value of the loan agreements they sign and leave with the bank (adjusted for interest paid, weighting for probability of default, etc.). The bank can, if necessary, sell these on to raise liquid funds. They are what “backs” the money created, 100%. Not the deposits. Some other source of liquidity is still necessary, though.

    ‘Money’ is a credible and legally enforceable promise to deliver real value at a later date. That’s why it is the borrower creating it (credibly promising to repay the loan), not the bank. Murphy keeps on missing the bit about repayment. Money has no value if nobody believes you’re ever going to make good on the promise.

  16. @Jim “It doesn’t pass my smell test. Why did the Icelandic banks go bust?”

    The Icelandic banks weren’t just funded by Mr & Mrs Gudjonsonn’s current accounts, but also by money market deposits, typically short term (7/30 days) deposits placed by corporate and other treasurers and money managers looking for the best rate of interest on their spare cash (e.g. several UK local authorities). These deposits are due for repayment at term unless rolled over. If a bank has what American investment bankers call a serious “credit event”, a lot of deposit holders will not roll over their deposits and suddenly the bank as to find a lot of cash to repay the maturing deposits. If there are no depositors willing to place deposits at some ridiculously high rate offered by the bank, there is a bank failure, typically termed a failure of liquidity.

  17. I once worked for a housing association that put £20m on the money markets overnight and every night. Remarkably profitable.

  18. Yeah, what a sad little life that twat must lead. It must take a special sort of person (special in the Olympic sense) to get up every morning looking for something to be aggrieved about. I doubt the shop owners said, “Ackee fruit? Sounds dodgy. I bet the effnics will have it on their toes with that. Better tag it” but instead found that it was, in point of fact, an item that tended to walk out the door (although God knows why).

  19. ‘It’s a metal can of produce that is very popular with a community that has huge issues with poor stereotypes permeated by bigoted old, white people.” – Stereotypes arise for a reason and experience. In this case sainsburys experience is that these items get stolen regularly – thats why theres tags on some sorts of alcohol – spirits etc and not on rose wine (unless very expensive) Obviously this ackee (which i’ve never eaten but sounds bleuurggh – but then i am an old white male) gets stolen regularly – thats why it’s been security boxed. In fact i read that the most stolen item was packs of multiblade razor refills – they are usually rfided- obviously sexist. These snowflakes are part of the reason country is going down the toilet – the inability to face up to whats actually going on.

  20. Here’s a question for the credit creation experts:
    All loans must eventually be repaid. With short term loans – credit cards, personal loans etc – that’s fairly quickly. So, unless one’s in a period of credit expansion, the repayments should roughly equal the new loans being made. In the medium term, as there are also periods of credit contraction, loans & repayments should balance apart from growth due to inflation.
    With mortgages, the repayments are over a much longer period. But at any one time, the existing mortgages being repaid should go a long way to balance the new mortgages being created. Less, of course, the effect of house price inflation & profit going to developers & land owners on new build.
    So the actual level of net credit creation looks, to me, quite small. Not the oodles of bank created free money Spud talks about.
    Or have I got something wrong?

  21. I once worked for a housing association that put £20m on the money markets overnight and every night. Remarkably profitable.

    I hope that (unlike many local authorities) they weren’t all with Kaupþing when they went TU. Remarkably unprofitable. There’s usually a reason for someone having to pay above market rates.

  22. @AlexM: yes I understand that, but BobRocket was making the statement that a bank run can only happen if depositors queue up and demand paper cash, that if they only demand an electronic transfer then the bank can always transfer the money elsewhere. One assumes that large corporate depositors aren’t asking for paper cash to be delivered to them, just for their money to be transferred elsewhere, so how could such a rush of demands for transfers bring down a bank?

    So I repeat, is the following statement true: “a bank run is a liquidity problem, if the people clamouring to take their money out would take a cheque/transfer to a different bank then there would be no ‘run’”?

  23. “One assumes that large corporate depositors aren’t asking for paper cash to be delivered to them, just for their money to be transferred elsewhere, so how could such a rush of demands for transfers bring down a bank?”

    Because in order to transfer a credit, the bank has to pay the other bank to do so in money it will trust/accept. One way of looking at it is to say the second bank wants assets to be deposited in its own vault if it is going to mark a customer in credit on its books. So to transfer the credit, the bank must also transfer the deposits. Another way to look at it is to consider the deposit a contract ‘signed’ by the bank to pay the depositor real value at a later date – it’s a piece of paper that has negative value to the bank. It has to pay the other bank to take on this obligation.

    To transfer credit out, even electronically, a bank has to also transfer out assets that the other banks accept as having real value, like bonds, property, big lumps of gold, or cash. Or even electronic credit that the first bank holds with some third bank. And if it’s got nothing left to transfer, none of the other banks will accept their fund transfers and the customers will not be able to get their money out.

  24. Still a run.

    At 4.30pm every day a bank must make sure that it has deposits equal to the loans it has out there (adjusting for things like reserves, capital etc). So, if the deposits do a runner then the bank must call in those loans to make those books balance. Or get deposits from elsewhere, something. And if it can’t it is bust.

    It doesn’t matter whether those deposits flee as cash, as transfers, as cheques, they’ve gone, the books don’t balance, it’s bust.

    In fact, a very good description of 2007/8 was that the deposits did flee and that’s why banks fell over. The Veneto banks that were bailed out a few weeks back, Banco Popular in Spain two weeks back. This is what happened. A bank run is the most common form of death for a bank in fact.

    This is of course why this idea is ridiculous even by the DickTater’s standards. Banks need deposits to fund loans. The absence of that is how they die often enough. Thus his claim that banks don’t need deposits is entirely gaga.

  25. “At 4.30pm every day a bank must make sure that it has deposits equal to the loans it has out there (adjusting for things like reserves, capital etc).”

    In the usage we’re apparently using here, deposits and loans are entirely separate things, and don’t have to be equal. The banks assets have to equal or exceed its obligations, or it’s insolvent, but assets can include things like loan agreements and investments.

    For example, the bank might have loaned out £10m, with £5m of that as credit in its borrower’s accounts and £5m already spent/transferred out elsewhere, have £10m in loan agreements in the vault, have £6m credited to depositors, and £1m cash in the vault. Assets equal obligations (£10m+£1m = £5m+£6m), and it has enough cash to meet immediate needs, but it neither has enough cash to pay back all its depositors, nor does it have enough deposits to equal the money it has loaned out. However, if the depositors came calling, it has assets it can sell to other banks to raise the cash: £10m in loan agreements. And that’s assuming that the deposits are such that the depositors have the right to get their money back straight away.

    Problems arise for banks when the value of assets change. The share prices drop, or the interest rate on a loan goes up unexpectedly, or there’s a fire. Suppose in my example a lot of borrowers go bankrupt simultaneously and default, so the value of that £10m in loan agreements drops to £9m. Now the bank is insolvent – it doesn’t have enough to cover its obligations. If there’s a run, it may have to sell some of those loan agreements at an even steeper discount, digging itself even deeper into the hole.

    The issues are closely related, but distinct.

  26. The Social Security, autonomus regional gubermints, state-owned enterpriseswere all transferring their funs out in the last few days.

    Finally, all it required was a pensioner to roll up and ask for €200 in cash and they wouldn’t have had it.

    The Santander bought it for a euro ( cue shock horror from the lefties) and reckon they will have to put in 7 thousand million.

    Should work out OK as the underlying assets will not be worthlessand the business brins geographical and sectorial clients that the Santander were weak (for them) in.

    Sharp lady, the Botin. A looker too if you like them classy.

  27. Bloody hell

    The fact I had a beer and 2 white wines before lunch shows up in the spelling. Reward for the 25 kilos of spuds I had just dug up.

    Green asparagus and spring onion risotto for lunch.

    Sun shining, whie wine cold and dry.

    All is well with the world.

  28. “At 4.30pm every day a bank must make sure that it has deposits equal to the loans it has out there (adjusting for things like reserves, capital etc).”

    I don’t think this is even vaguely right.

    When a bank makes a loan to a customer, and therefore creates money, the loan is a liability for the customer and an asset to the bank. Therefore the accounting matches automatically: assets equal liabilities and there is no need for deposits to balance out with loans.

    That’s certainly how the Bank of England describe the process:

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

    Here’s a few interesting quotes from that paper:

    “Commercial banks create money, in the form of bank deposits, by making new loans… At that moment, new money is created.”

    “in practice there will be several factors that may subsequently cause the amount of deposits to be different from the amount of lending”

    “In no way does the aggregate quantity of reserves directly constrain the amount of bank lending or deposit creation”

    “Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out.”

    “Banks first decide how much to lend depending on the profitable lending opportunities available to them”

  29. “When a bank makes a loan to a customer, and therefore creates money, the loan is a liability for the customer and an asset to the bank.”

    The customer creates the money, in the form of an agreement to repay. The bank exchanges illiquid loan agreements for liquid cash/credit.

    “That’s certainly how the Bank of England describe the process”

    It’s how it’s described by whoever they employ to write their public outreach web media/newsletter. Possibly not a job for their most senior economic theorists?

    “Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out.”

    They are an asset of the depositors that can be lent out, with the bank acting as an intermediary – the bank being creditor to one party and debtor to the other. The bank’s transactions cancel out, giving the effect of a transaction direct from depositor to borrower.

    However, the ‘loan’ doesn’t leave the depositor without continued possession of the money – the depositor exchanges liquid cash for a less liquid agreement with the bank, and still *owns* the same amount. The borrower exchanges the illiquid loan agreement for liquid cash – they don’t gain or lose anything by doing so. No monetary value has changed hands. Only the liquidity is transferred – the monetary value stays exactly where it was.

    “Banks first decide how much to lend depending on the profitable lending opportunities available to them”

    Banks are limited in the amount they can lend by their access to liquid funds, and usually (but not always) by their requirement to leave the depositors with at least a little liquidity. However, they can gain access to more liquidity than just their own deposits by selling the debt on the open market. But that’s just effectively pooling the deposits made at or by all the other banks, funds, and investors. They’re ultimately limited by the pool of liquidity in the market as a whole.

  30. “The customer creates the money, in the form of an agreement to repay. The bank exchanges illiquid loan agreements for liquid cash/credit.”

    Sorry, that is just gobbledygook. The bank creates the money, there and then. The customer can spend it immediately, but repays it more slowly. There’s no way the customer can be defined as the money creator, other than bizarre semantics.

  31. “Sorry, that is just gobbledygook. The bank creates the money, there and then.”

    Money is a promise to pay at a later date (read what it says on the notes). Money is a formalised ‘IOU’. When the bank gives you a loan, it’s not promising anything. The borrower is.

  32. It does increasingly look as if he is losing it.

    Unless I am missing some fine nuance, how on earth can “Saving in cash effectively takes money out of active use” be at all consistent with any basic understanding of a financial company’s balance sheet.

    I always find this (national) balance sheet at Table A (or C) interesting in the context of the different parts of UK plc:

    https://www.ons.gov.uk/file?uri=/economy/nationalaccounts/uksectoraccounts/datasets/thenationalbalancesheetestimates/current/previous/v2/nationalbalancesheet2015tables1_tcm77-425494.xls

    And before anyone jumps in – someone with his background not understanding such a balance sheet just isn’t credible.

  33. richard yot

    At 4.30pm every day a bank must make sure that it has deposits equal to the loans it has out there (adjusting for things like reserves, capital etc).

    I don’t think this is even vaguely right.

    When a bank makes a loan to a customer, and therefore creates money, the loan is a liability for the customer and an asset to the bank. Therefore the accounting matches automatically: assets equal liabilities and there is no need for deposits to balance out with loans.

    I hope you are not suggesting that the bank does not itself need a separate matching transaction from the asset (loan)!

    It’s balance sheet (whether at 4.30pm or any other time) must continue to balance. If it creates a loan asset, it must also have a (separate) liability, be it a deposit (owed to a customer), inter bank borrowing or something else.

  34. Let me try it this way.

    You walk into the shop and ask to swap a £10 note for ten £1 coins for the parking meter. Has there been any net transfer of money? No. Is the amount in the till any different? No. From the shop’s point of view, it’s financially a null transaction.

    Now you walk into the shop to get some change for the meter and realise you’re skint. So you write an IOU for £10 on a bit of scrap notepaper, and offer it in exchange for ten £1 coins. Has there been any net transfer of money? No. Is the amount in the till any different? No. It’s just part of it is in the form of an IOU rather than cash. From the shop’s point of view, it’s financially a null transaction.

    That doesn’t mean that the shop can do it without limit. Eventually they’ll run out of £1 coins, and have a till stuffed with IOUs. They can pop in to the shop next door and swap some of the IOUs for £1 coins if they find there’s a lot of demand, but ultimately there’s still a limit in that there are only so many £1 coins in all the shops in town.

    So, in the second transaction, when you walked in skint and walked out with a pocket full of coins, leaving exactly the same value of money in the shop till, was money created, and if so, who by?

    Does that help? 🙂

  35. Have you bothered to read the BoE paper? Because you’re not really getting it.

    “It’s balance sheet (whether at 4.30pm or any other time) must continue to balance. If it creates a loan asset, it must also have a (separate) liability, be it a deposit (owed to a customer), inter bank borrowing or something else.”

    The above quote is factually incorrect. The loan creates both the asset (for the bank) and the liability (for the customer). That’s it. Read the BoE paper.

    “So, in the second transaction, when you walked in skint and walked out with a pocket full of coins, leaving exactly the same value of money in the shop till, was money created, and if so, who by?”

    By your own definition money is an IOU. So when a bank lends it’s IOUs on license from the BoE it creates money. The shop only creates its own IOUs which don’t have the backing of the BoE. Again I suggest you read the BoE paper, it explicitly says that money is created by bank loans, in bolded letters.

  36. @Jim “if the people clamouring to take their money out would take a cheque/transfer to a different bank then there would be no ‘run’”?”

    If it is a cheque drawn on the same bank that they are clamouring to take their money out of, then it doesn’t really address the issue. They still have a claim on the failing bank. That problem goes away if they manage to get their cheque lodged in another bank and through bank clearing before the failing bank goes under.
    Before the cheque is cleared there is still a risk that the bad bank will not have enough funds to settle the amounts it is due to pay in bank clearing that day, in which case the cheque will not be honoured by the second bank.

    To avoid the liquidity risk on the bank the withdrawing depositors would need to be paid in cash, gilts, other negotiable instruments drawn on other banks or possibly physical assets such as gold.

    Transferring money electronically extends the liquidity risk for the depositors until the transfer is cleared, but it doesn’t change the illiquidity of the bank or stop the run on the bank.

  37. richard yot

    “The loan creates both the asset (for the bank) and the liability (for the customer).”

    Well done..;)

    And no, it was not factually incorrect – a balance sheet really does balance….

  38. PF – sounds like we agree then 🙂

    BTW, the difference between a shop making a cash loan when you give them an IOU, and a bank loan, is that* the shop must loan its cash from existing reserves* (ie the till).

    The bank doesn’t need to dip into existing reserves to make a loan, it simply creates the money out of thin air.

  39. “Have you bothered to read the BoE paper? Because you’re not really getting it.”

    I read it. I don’t think it’s correct.

    By your own definition money is an IOU. So when a bank lends it’s IOUs on license from the BoE it creates money.

    Thre is no “license from the BoE”. You can borrow money off your next door neighbour!

    And the bank can’t pay you in IOUs or there’d be no point. If you give it money (as an IOU) it credits your account with the money you’ve just given it. But to *spend* that money the bank has got to issue you with the cash, or transfer cash or something equally liquid to another bank. They can’t just make the numbers up in a computer and have people take them seriously!

    If it simply borrows it – promising to repay funds it doesn’t currently own – then yes, it *is* creating money (by the same process as described here). But most banks don’t like doing that.

    “The bank doesn’t need to dip into existing reserves to make a loan, it simply creates the money out of thin air.”

    To say banks can just print money out of thin air is as Murphyesque as saying governments can just print money!

    Anyone can make promises “out of thin air”, but you have to deliver on them. If the bank pays you your 25 year loan in IOUs that you cannot redeem for 25 years, it’s easy to do, but pretty pointless. You want it to exchange your 25 year loan for money you can spend right now, and there’s a limited supply of that.

  40. So the BoE are wrong, and you’re right – that’s your argument?

    By the way, does your next door neighbor have a reserve account at the BoE?

  41. Also, a serious question:

    how does the money supply grow, to account for growth and inflation? Where does all that lovely new fiat money come from?

    It’s fiat money, by very definition it has to be created from thin air.

  42. “So the BoE are wrong, and you’re right – that’s your argument?”

    No. That’s not my argument. My argument is that money being a promise to pay later, the promise that ultimately generates the money in the case of a loan is the loan agreement signed by the borrower promising to repay later. The bank is only providing liquidity.

    I personally don’t accept ‘Argumentum ad Verecundiam’ as a valid form of reasoning. I know a lot of people do, though.

  43. “how does the money supply grow, to account for growth and inflation? Where does all that lovely new fiat money come from?”

    By people making promises to pay later.

    “It’s fiat money, by very definition it has to be created from thin air.”

    Promises to repay have to be credible and legally enforceable. Making promises is an unlimited resource and can truly be done “out of thin air”, but credibility is in short supply.

    The possibility of fiat money – in the sense of money that has value simply because the law/government says so – is easily refuted by Zimbabwe.

  44. Richard,

    Apols if I am being simplistic or misunderstanding your question, but It’s just credit. As you clearly know, every loan / debt has a counter balance (IOU).

    If I borrow (or have a liability), someone else has a saving or corresponding asset. Everything balances out.

    If it’s just credit, why do we in fact care about the expression “created from thin air”? It’s just a “technical” description. The BoE definition of money is quite different from any layman’s (or dictionary) definition or understanding.

    Hence, lots of people use terms (such as “creating money from thin air”) for emotive or political purposes, especially the Murf, rather than to say anything useful?

    Again, apols if I’ve misunderstood you, which I suspect I probably have?

  45. @PF:

    the argument we are having is this: are loans created by deposits, or is it the other way around?

    Are banks middlemen that lend out depositors funds, as per the mainstream loanable funds theory, or do they in fact *create* the money that they lend out?

    Both the Bank of England and the Bundesbank have released papers to explain that the mainstream theory of loanable funds is wrong. When a bank makes a loan, it creates the deposit – in common parlance it “prints the money”. As the loan is repaid the money is then destroyed.

    That appears to be the operational reality of the banking system. They do not need to acquire deposits before making loans, they simply lend out money which they create to as many credit-worthy customers as they can find.

    From what I can tell, the counter arguments on this thread have produced zero evidence to prove this wrong, but a lot of semantic waffle to try and argue it somehow isn’t so.

  46. You’re missing the point being made – by me at least.

    I really don’t care about the part you’ve laid out there above. Entirely happy for it to be loans first if that’s how you want to put it.

    What I’m arguing about is the next stage of the argument being used by Richard Murphy. Which goes on to make two claims. Firstly, that as the loans come first then deposits are not needed in a banking system. Secondly, given that this is true then savings in cash are just dead money, things which actually reduce the size of the economy.

    I am arguing that it is those two claims which are not true. My major evidence being that banks can and do suffer from bank runs. People withdraw their deposits, the bank goes bust. Thus, clearly, deposits are of use in a banking system. Thus also cash savings are not dead money as they are those deposits which are of use.

    Loans create deposits at a system level, well, OK, if you insist. That’s not at all what I am arguing about, it is what people then go on to say is the implication of that which I do argue about.

    The actual bit being that once someone decides to go spend some of their new loan outside the bank that just created it that bank then has to fund that spending by attracting deposits (note, whole sale deposits are still deposits). In this world where loans create deposits that is still true, deposits, at the bank even if not the system, level still fund lending.

  47. “The possibility of fiat money – in the sense of money that has value simply because the law/government says so – is easily refuted by Zimbabwe.”

    This is an interesting one – are you claiming that the British Pound, the US dollar, the Euro etc… are somehow *not* fiat currencies?

  48. @Tim – thanks for engaging.

    Firstly I’m not here to defend Richard Murphy, I don’t follow his blog.

    “once someone decides to go spend some of their new loan outside the bank that just created it that bank then has to fund that spending by attracting deposits”

    My understanding is that liquidity is managed in the interbank system and reserve accounts at the BoE. Banks lend to each other to ensure that payments clear, and in the event that this doesn’t happen the central bank steps in and offers a loan at a penalty rate – this means that the payments are always made and the system works smoothly.

    Deposits are a separate issue – a deposit is a liability to a bank, and that’s precisely why they are dangerous. If everyone suddenly makes a claim on their assets held at a bank then the bank will run into a liquidity problem. Capital ratios (and not reserve requirements) are supposed to protect banks from this happening.

    As for savings being bad – at the aggregate level that’s true. Keynes’ paradox of thrift. The more people save, the less overall economic activity there is.

  49. Yes, super, so, banks lend to each other. Which, looked at from the point of view of the bank being lent to, is attracting deposits, my very point. Northern Rock’s problem was that no one would lend to it thus it went bust. Because it could not attract the deposits to fund their loan book.

    The paradox of thrift only operates in the short term and when there is spare capacity in the economy. Even Keynes agreed that this doesn’t operate at full capacity. He also agreed that we do need savings to fund investment to create future growth.

    To grasp this point forget money, money creation and all the rest of it and think about the basics. Investment is, by definition, current economic effort being put into something which is not for current consumption. It takes time, real resources, to build a house, a factory. Those real resources being so used are therefore going into the investment, not into current consumption. Someone, somewhere, cannot be consuming those resources as they are invested therefore. Thus someone, somewhere, must be saving those real resources, not consuming them, so that we can invest them.

    Who creates money and how doesn’t change that basic underlying truth.

  50. “Yes, super, so, banks lend to each other. Which, looked at from the point of view of the bank being lent to, is attracting deposits, my very point. Northern Rock’s problem was that no one would lend to it thus it went bust. Because it could not attract the deposits to fund their loan book.”

    Sure – but banks lending to each other via the interbank market is not what most normal people would term as “deposits” – I think in most people’s minds a deposit is something made by an individual or a company, not a loan in the interbank market. Also even if a bank can’t get funds via the interbank market, the central bank can step in and act as a lender of last resort (which it will do if it believes the bank is technically solvent). So I think it’s fair to say your use of the term “deposit” is a little loose here.

    “The paradox of thrift only operates in the short term and when there is spare capacity in the economy. Even Keynes agreed that this doesn’t operate at full capacity. He also agreed that we do need savings to fund investment to create future growth.”

    I don’t disagree with this – if the economy is actually at full capacity then saving may be desirable to curb inflation. Spending is inflationary, and saving is deflationary – so I guess the debate centers around *when* the economy actually is at full capacity. With growth and inflation both as low as they are, it’s unlikely that the moment is now – despite high employment figures, wage growth is at a historical low at this moment in time.

    And again regarding real resources, I’m in agreement – the more the debate centers around real resources rather than the illusion of money, the better. The challenge is how best to put resources to work. You favour a market-first approach, whereas I would advocate a mix of state and market (while fully acknowledging the benefits of the market).

  51. “Sure – but banks lending to each other via the interbank market is not what most normal people would term as “deposits” – I think in most people’s minds a deposit is something made by an individual or a company, not a loan in the interbank market. Also even if a bank can’t get funds via the interbank market, the central bank can step in and act as a lender of last resort (which it will do if it believes the bank is technically solvent). So I think it’s fair to say your use of the term “deposit” is a little loose here.”

    Nope, I’m using the correct definition here.

  52. OK – I hope everyone takes note then. It seems the argument is settled and we are essentially in agreement 🙂

  53. ” I think in most people’s minds a deposit is something made by an individual or a company, not a loan in the interbank market. ”

    Whereas to a bank the distinction is quite clear and a deposit can include an reeceipt of credit in the interbank market. The distinction is prima facie quite clear. A deposit is a liability of a bank that is recorded as a liability in a particular deposit account. Such accounts are also held by banks at other banks, typically the correspondent banks involved in settlement activity with a bank.

    Banks have other creditors: normal trade creditors, creditors under bonds and other long-term loans, creditors under money market instruments issued by the bank and repos entered into by the bank. Strictly speaking none of the latter are deposits, but certain money market instruments, particularly certificates of deposit (CDs) which are money market instruments and not connected to any deposit account, are often considered as part of the banks deposit base.

  54. “Both the Bank of England and the Bundesbank have released papers to explain that the mainstream theory of loanable funds is wrong. When a bank makes a loan, it creates the deposit – in common parlance it “prints the money”. As the loan is repaid the money is then destroyed.”

    They’re correct that the mainstream theory of loanable funds is wrong. They’re correct that money is created during the process of granting a loan, and destroyed as the loan is repaid. They’re only wrong about who creates it.

    “They do not need to acquire deposits before making loans, they simply lend out money which they create to as many credit-worthy customers as they can find.”

    There are two separate issues here: the monetary value, and liquidity. Deposits are not needed to create or provide the monetary value. However, deposits (or some form) *are* required to provide liquidity.

    It’s like the guy going into the shop and exchanging an IOU for coins. The shop is not providing him with any monetary value – instead of £10 of coins they’ve got a £10 IOU in the till. The till’s value is constant. But coins are easier to spend than an IOU – the shop is providing funds with more liquidity. That’s what the banks do too – only they call it “maturity transformation”. And it’s liquidity that limits the amount they can loan.

    “From what I can tell, the counter arguments on this thread have produced zero evidence to prove this wrong, but a lot of semantic waffle to try and argue it somehow isn’t so.”

    What would count as evidence, for you?

    If you understand double-entry book-keeping, it’s trivial. If you don’t, it would take more time/effort than I’ve got to teach it here. I’ve tried it several ways, and I don’t understand why anyone is finding it so difficult to follow. I’ll agree it’s not obvious, but it’s not particularly difficult or complicated, either.

    Loan agreements signed by the borrower meet the definition of ‘money’ – a credible and enforceable promise to deliver something of value later, just like a bank note, or a cheque, bond, security, promissory note, book token, voucher, ticket, mobile phone credit, or bank deposit. They are very definitely created by the borrower. They are given to the bank, who accounts for them as assets, that have current financial value, that can be bought and sold, and that sit in the bank’s vault. When the borrower hands this new money to the bank, the bank credits their account. As far as monetary value goes, the bank hasn’t done anything – they’ve handed out exactly what they’ve taken in – they’ve done the equivalent of exchanging a £10 note for ten £1 coins.

    What part of that do you disagree with, or not understand?

    “You’re missing the point being made – by me at least. I really don’t care about the part you’ve laid out there above. Entirely happy for it to be loans first if that’s how you want to put it. What I’m arguing about is the next stage of the argument being used by Richard Murphy.”

    Yes, agreed. Murphy is wrong, for more or less the reasons you say. We’re just being pedantic.

    “This is an interesting one – are you claiming that the British Pound, the US dollar, the Euro etc… are somehow *not* fiat currencies?”

    In the sense of not having value simply because the government says they do, yes.

    I think, technically, BoE-issued cash is backed by the fact you can pay your taxes in it – on the basis that not going to jail for tax evasion is something everyone values! But as noted above, most (like 97%?) of the pound/dollar/euro’s value is actually backed by all the loans ordinary people have taken out and promised to repay in that currency. It has value because the people of Britain/America/Europe have promised to deliver goods and services in exchange for the money to pay off those loans. That’s why it’s valuable.

    And that’s also why it does the government no good to simply print more. The value of a dollar is the promised economic production of the country divided by the number of dollars printed (to simplify things quite a bit). Trash your economic productivity and print billions of bank notes, and your currency will tank, whatever the government tells you it’s worth.

    “OK – I hope everyone takes note then. It seems the argument is settled and we are essentially in agreement :-)”

    Yes! I hope so!

  55. “It’s like the guy going into the shop and exchanging an IOU for coins. The shop is not providing him with any monetary value – instead of £10 of coins they’ve got a £10 IOU in the till. The till’s value is constant. But coins are easier to spend than an IOU – the shop is providing funds with more liquidity. That’s what the banks do too – only they call it “maturity transformation”. And it’s liquidity that limits the amount they can loan.”

    This is the bit where we disagree. When you give an IOU to the shop in exchange for change from the till, the shop must use it’s existing reserves, the money in the till, to make the loan.

    A bank does not do that.

    The assets of the shop have not changed. Instead of a £10 note, it has £10 worth of IOUs, but the value is the same.

    When a bank lends, it expands its balance sheet, it increases its assets by the value of the loan – precisely why you can say it creates money.

    This is illustrated in the BoE paper on page 3. The diagram clearly shows that bank assets rise when they make new loans. And the BoE explicitly state, several times, in bold letters, that bank loans create new money.

    I honestly think the rest of the argument, that the borrower creates the money with their promise to pay, is just semantics. And yes you might accuse me of making an appeal to authority, but I think it’s reasonable to trust the expertise of the institution that actually runs and manages the banking system over some random person on the internet. And you have produced no evidence at all to back your case, just simple assertions, and assertions are as much of a logical fallacy as any appeal to authority. Basically you don’t really have an argument, other than your own opinion that it is so.

  56. “The value of a dollar is the promised economic production of the country divided by the number of dollars printed (to simplify things quite a bit). Trash your economic productivity and print billions of bank notes, and your currency will tank, whatever the government tells you it’s worth.”

    This bit I agree with. What happened in Zimbabwe was that productive capacity was trashed because the white farmers were kicked off their land and inexperienced veterans took over the farms. Productive capacity tanked, and printing money into that environment led to hyperinflation.

    That doesn’t mean that we don’t have fiat money though, because by any sane definition we do. But it is indeed backed by the productive capacity of our economy, that essentially is what gives fiat money its value. Again it seems the argument is semantics.

  57. Mr Yot, it seems to amount to timescales. The shopkeeper has to provide cash now to make good the IOU. The bank has until the end of the day to make its balance sheet whole. Do you have any practical experience to bring to bear? The blogger Frances Coppola, former banking person, makes it all very clear on her blog. The BoE is taking a high level view rather than seeing what actually happens in a bank

  58. “When a bank lends, it expands its balance sheet, it increases its assets by the value of the loan – precisely why you can say it creates money.”

    OK, let’s explore that a bit more.

    When I take out a loan, the bank records the loan agreement, an asset of the bank, and credits me with the amount of my loan in my account, a liability of the bank. The two cancel out, yes? Or no? (I’m ignoring fees and admin overhead as negligible ‘noise’ on the gross movements for simplicity here.)

    “When you give an IOU to the shop in exchange for change from the till, the shop must use it’s existing reserves, the money in the till, to make the loan. A bank does not do that.”

    Initially, the bank will simply credit the customer’s account with the bank, which is of course an IOU. But almost immediately the customer will transfer the money elsewhere – withdrawing it as cash, or transferring it to a different bank (like that of the guy selling his house or car to the borrower).

    To transfer funds to a different bank, the bank must simultaneously transfer some valuable asset to act as a deposit for the destination bank to credit. When cheque clearing was first set up in Lombard Street, this was cash, but nowadays is usually credit at a third party central clearing bank. Such funds normally have to be liquid, because the new bank may need to honour the credit immediately if the buyer wants to withdraw the money straight away.

    So the bank can only agree to the loan if it has liquid funds to exchange for it – at least to the extent that customers require. If an average 10% of customers immediately withdraw it, say, they need at least 10% of the transferred amount in liquid funds to cover it.

    That’s how I understood the process – are you saying that a bank needs no liquid funds to cover a loan credit, for when it is withdrawn or transferred? How do they do it, then?

  59. “So the bank can only agree to the loan if it has liquid funds to exchange for it – at least to the extent that customers require. If an average 10% of customers immediately withdraw it, say, they need at least 10% of the transferred amount in liquid funds to cover it.”

    I’ll just repeat my earlier post:

    My understanding is that liquidity is managed in the interbank system and reserve accounts at the BoE. Banks lend to each other to ensure that payments clear, and in the event that this doesn’t happen the central bank steps in and offers a loan at a penalty rate – this means that the payments are always made and the system works smoothly.

    @rocco, do you have a link?

  60. “@rocco, do you have a link?”

    I’ve seen this one: https://en.wikipedia.org/wiki/Real-time_gross_settlement

    “Real-time gross settlement are specialist funds transfer systems where the transfer of money or securities[1] takes place from one bank to another on a “real time” and on a “gross” basis.”

    Or how about: https://en.wikipedia.org/wiki/Clearing_house_(finance)

    “Beginning at 5 pm, a clerk for each debtor bank was called to go to a rostrum to pay in cash to the Inspector of the Clearing House the amount their bank owed to other banks on that day. After all of the debtor clerks had paid the Inspector, each clerk for the banks that were owed money went to the rostrum to collect the money owed to their bank. The total cash paid by the debtor banks equaled the total cash collected by the creditor banks.”

    and

    “Cheque clearing (or check clearing in American English) or bank clearance is the process of moving a cheque from the bank in which it was deposited to the bank on which it was drawn, and the movement of the money in the opposite direction. This process is called the clearing cycle and normally results in a credit to the account at the bank of deposit, and an equivalent debit to the account at the bank on which it was drawn.”

    They seem to indicate that transferring liquid assets is usual during clearing.

    On the other hand, Wikipedia is probably an even worse source than the BoE! I’ll be interested if you have something better.

  61. The third link is what you should read… To lend or not to lend.

    A practical guide rather than a theoretical post hoc explanation written from Thunderbird 5

  62. “The third link is what you should read… To lend or not to lend. A practical guide rather than a theoretical post hoc explanation written from Thunderbird 5”

    Thanks. So yes, banks have to have liquid reserves in order to lend. A loan from another bank consists of exchanging liquid cash for an illiquid loan agreement, effectively acting as an intermediary for the customer taking a loan out from the second bank instead. Interbank lending is the equivalent of popping into the shop next door to get more £1 coins. And Frances doesn’t explain what happens when the borrowers try to spend their loans,.

    OK. I had all that covered already. So what’s the problem?

  63. Here is a simplified illustration of the banking system. We have two banks, Barclays and Lloyds, with total deposits of 1 million pounds divided like this:

    Barclays: £600 000

    Lloyds: £400 000

    They both have reserve accounts at the Bank of England with £50 000 in each

    Bill banks at Barclays, and he wants to buy a blue BMW. He takes a loan of £10 000 out from his local branch. This loan creates a new deposit of £10 000 and Bill now has a liability of £10 000 to the bank.

    Total deposits look like this:

    Barclays: £610 000

    Lloyds: £400 000

    Bill goes to Lenny who is a used car dealer and buys a blue BMW from him for £10 000. Lenny banks with Lloyds. Total deposits now look like this:

    Barclays: £600 000

    Lloyds: £410 000

    If this was the only transaction that day, then at the end of the day Barclays would have to transfer £10 000 of their reserves over to Lloyds.

    However later that afternoon, Larry (who is a Lloyds customer) decides he wants a luxury lounge chair. He borrows £8000 from Lloyds. Total deposits now look like this:

    Barclays: £600 000

    Lloyds: £418 000

    Larry goes to see Ben, who banks at barclays, and buys a luxury lounge chair from him, total deposits now look like this:

    Barclays: £608 000

    Lloyds: £410 000

    In the meantime, Lucy pops in to Lenny’s shop and swaps an IOU for £10 from the till. This doesn’t change total deposits in any way, so no new money has been added to the banking system.

    Now at the end of the day, due to the new loans and deposits being made, Barclays has to transfer £10 000 of reserves to Lloyds, and Lloyds has to transfer £8000 of reserves the other way.

    So the final reserve positions look like this:

    Barclays: £48 000

    Lloyds: £52 000

    The following day 2 more loans are taken out, but this time £8000 is borrowed from Barclays and deposited at Lloyds, and £10 000 is borrowed from Lloyds and deposited at Barclays. Total deposits look like this:

    Barclays: £618 000

    Lloyds: £418 000

    At the end of the second day Barclays has to transfer £8 000 of reserves to Lloyds, and Lloyds has to transfer £10 000 of reserves the other way.

    So the final reserve positions look like this:

    Barclays: £50 000

    Lloyds: £50 000

    (Back to where we started)

    So what’s happened here is that the total deposits have grown with every new loan being made, and the reserves are simply used to ensure payments clear at the end of the day. They are for managing liquidity, but the crucial point is that they only reflect the daily balance fluctuations and not the overall amount of money available as deposits. The reserves are shuffled around so that payments clear.

    You can also see that borrowing from a non-bank, such as the shop, does not add deposits in the same way. Only banks can create money when they lend, and they do this by creating new deposits that did not exist prior to the loan being made.

    At the end of day two, there is an additional £36 000 in deposits that wasn’t there before, and reserves are back where they started. Of course there is also an additional £36 000 in debt owed by Bill, Larry etc… so it all nets out.

    And yes this is a simplified model – but it’s not a * theoretical* model (there is a difference). It’s a simplified illustration of how things *really* work.

    Of course a bank could get itself into a situation where it runs low on reserves, because it has lent out more money than it has taken in deposits, in which case it might have to borrow overnight from another bank, or from the central bank. To avoid this banks will need to ensure that they attract deposits from the marketplace – but this does not alter the fact that new money is created from new loans, it’s simply a mechanism for liquidity management.

  64. So I just went and read those Coppola links, and they don’t contradict a single thing I have said, in fact her view is pretty much identical to mine,,,

    A couple of quotes:

    “I would be the last person on this earth to suggest that bank lending doesn’t increase the money supply. It does. Massively.”

    “The vast majority of fiat currency in circulation is created by commercial banks in the course of lending.”

  65. “Bill banks at Barclays, and he wants to buy a blue BMW. He takes a loan of £10 000 out from his local branch. This loan creates a new deposit of £10 000 and Bill now has a liability of £10 000 to the bank. Total deposits look like this: Barclays: £610 000 Lloyds: £400 000”

    Umm. No. I don’t agree.

    First, you’re ignoring the bank’s view of the account credit to Bill. Second, you’re making no distinction between liquid and illiquid funds.

    So suppose Barclays starts with (IL)£600k in illiquid deposits and (L)£50k in the reserve account a the BoE. Total £650k. It agrees the £10k loan, and winds up with (IL)£610k + (L)£50k – (L)£10k = £650k because it has gained both an asset (a £10k loan agreement signed by Bill) and a liability (£10k credit in Bill’s account, which is negative here because the bank owes it).

    Now it does the transfer to Lloyds. Barclays cancels the (L)£10k credit in Bill’s account, and transfers £10k to Lloyds reserve account. Lloyds credits Lenny’s account £10k.

    Barclays (IL)£610k + (L)£40k = £650k
    Lloyds (IL)£400k + (L)£60k – (L)£10k = £450k

    Next we consider the £8k loan taken out from Llloyds. The situation is now:

    Barclays (IL)£610k + (L)£40k = £650k
    Lloyds (IL)£408k + (L)£60k – (L)£10k -(L)£8k = £450k

    and this is transferred to Barclays.

    Barclays (IL)£610k + (L)£48k – (L)£8k = £650k
    Lloyds (IL)£408k + (L)£52k – (L)£10k = £450k

    Now another £8k loan taken out at Barclays, with a £10k loan taken out at Lloyds:

    Barclays (IL)£618k + (L)£48k – (L)£8k – (L)£8k = £650k
    Lloyds (IL)£418k + (L)£52k – (L)£10k – (L)£10k = £450k

    And the transfers:

    Barclays (IL)£618k + (L)£50k – (L)£8k = £650k
    Lloyds (IL)£418k + (L)£50k – (L)£10k = £450k

    The reserve accounts at the BoE are indeed back where they started, but we now have two customers with liquid funds in their accounts totalling £18k, and an additional £18k in illiquid long-term loan agreements. There has been a long-term conversion of liquid to illiquid funds, and when we consider the situation as a whole we are *not* back to where we started!

    And if we keep on doing that, we will eventually run out of liquidity. The banks will owe their customers more in liquid funds than they hold at the BoE, and if the customers all come in and ask for it at the same time, the bank is going to be embarrassed. Bank run!

    “Only banks can create money when they lend”

    Which of the transactions above couldn’t be done by anyone? Unless you mean to say that only banks are allowed to make promises they can’t keep?

  66. Oops!

    That last one ought to be
    Barclays (IL)£618k + (L)£50k – (L)£8k -(L)£10k = £650k
    Lloyds (IL)£418k + (L)£50k – (L)£10k – (L)£8k = £450k
    of course.

  67. NiV

    You’re clearly dealing with the asset side of the balance sheet when talking about the initial £600K and £400K of “deposits”?

    It’s not relevant to marginal changes, but you are assuming they are illiquid. Loans or interbank lending? And what about the existing overall liability base? ie looking at the whole balance sheet?

    The reason I ask, in the context of your post re the issue of liquidity: take a typical bank model, with large illiquid assets (loans), and lots of “repayable on demand” deposits or interbank (liabilities) for example?

  68. Interesting, in that in reading Richard’s example, his depsits are clearly the liability side of the equation (to customers)..

  69. You’re clearly dealing with the asset side of the balance sheet when talking about the initial £600K and £400K of “deposits”?

    Yes, that was another thing that was unclear. But I assumed/guessed from the way it was treated as positive in Richard’s calculation that they were supposed to be net assets.

    It’s not relevant to marginal changes, but you are assuming they are illiquid.

    Yes. I would expect in reality that there would be a mixture. But for the sake of example, and to emphasise how quickly liquidity would run out, I assumed that only the funds Richard specifically labelled as ‘liquid’, were. As you say, it makes no difference to the argument. It would just take somewhat longer to run out of liquidity if I presumed a mixture.

    The main point I wanted to make was that the process Richard described converts liquid assets into illiquid ones, so you don’t get “back to where we started”. Everything else is decorative context for illustration.

  70. “Interesting, in that in reading Richard’s example, his depsits are clearly the liability side of the equation (to customers)..”

    Deposits are always a liability the bank, and an asset to the customer.

  71. Which is why NiV’s reasoning falls down. You can’t add the deposits and the reserves together, because the deposits are a liability and the reserves are an asset (from the bank’s point of view).

    Also, just because an asset and a liability net to zero, that doesn’t mean they don’t exist. NiV removes the new deposits from the accounting because they are “cancelled out” by the loan agreement. They may net to zero, but the new deposit most certainly does exist, and needs to be accounted for.

    In fact NiV’s accounting completely ignores the balance sheet expansion that occurs when a bank makes a new loan.

    If you look at Figures 1 and 2 in the Bank of England document, you can see the expansion of the balance sheet illustrated quite clearly:

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

    Which brings me this point:

    “Which of the transactions above couldn’t be done by anyone?”

    Because when banks loan you money, they create a new deposit that does not draw on their existing reserves or assets. They create brand new IOUs, and those IOUs are accepted as legal tender.

    If I go to my next door neighbour, Bob, and borrow money from him on those same terms he would not be able to just lend me money out of his wallet (because that would be drawing on existing reserves), he would have to write me an IOU in exchange for my loan agreement. Unfortunately Bob’s IOU is not accepted anywhere as legal tender, and so is not money in the way that a bank loan is.

    So that’s the difference between a bank deposit, which is what we call money, and an IOU from Bob. Bank deposits ARE the money supply (with coins and notes in cash added on top). Creating a new deposit IS creating new money.

  72. Richard

    Yes sure, “advances” seems to be the usual jargon for the equivalent bank (asset) deposit.

    Creating a new deposit IS creating new money.

    In banking parlance, I don’t think anyone disagrees.

    An aside, and for what it’s worth:

    Personally (and where I’ll happily admit I initially ended up taking a wrong turn on this in the past – simply re the terminology), I always myself think of money as being a net scenario (I’m prudent!).

    For example, If I have a £10K bank loan and the bank agrees to extend it by £10K, so that now I have £10K of cash (to go and blow on stuff) and a £20K bank loan, I don’t regard myself as having any more money. Ie I’m still net £10K in the red, until I blow the £10K, and then I’m £20K in the red!

    But in banking terms, yes, clearly the bank just introduced (or “created out of this air” #) more broad money (M4) into the economy.

    # – Unfortunately, it’s a bolloxy emotive expression, which (if read in layman’s terms) can give snowflakes and assorted a wrong impression.

  73. NiV

    liquidity

    I understand. It’s just that – when I look at any bank balance sheet – I tend to see (for example) a relatively small % of liquid assets (balances with central and other banks), a very large % of illiquid assets (ie loans & advances etc), and a high % of very liquid liabilities, (customer deposits or interbank etc). With capital ratios (and other etc) being the stuff that stops this escalating into a stairway to heaven?

    Here’s one (of many, this one as we know is struggling!):

    https://www.co-operativebank.co.uk/assets/pdf/bank/investorrelations/annualreports/2016-Annual-Report.pdf

    Page 147: On the liability side, another bank might have more interbank than customer deposits, but all quite liquid (liabilities) all the same.

    Ie, the classic maturity transformation model (as Tim calls it) on which they make their P&L crust (interest received higher than interest paid).

    Hence, new loans (in the example above) is just more of what they do everyday? And if the corresponding liablity becomes interbank, rather than customer deposit creditors, then there are lots out there with higher levels of interbank creditors? That was where I was coming from?

  74. “For example, If I have a £10K bank loan and the bank agrees to extend it by £10K, so that now I have £10K of cash (to go and blow on stuff) and a £20K bank loan, I don’t regard myself as having any more money. Ie I’m still net £10K in the red, until I blow the £10K, and then I’m £20K in the red!”

    Right – but that’s separate discussion. You’re completely right that when you take out a loan, the asset the bank hands you in the form of a deposit is backed by an equivalent liability. In net terms you are not any richer. In fact once you’ve spent the money on coke and hookers you may actually be poorer.

    “But in banking terms, yes, clearly the bank just introduced (or “created out of this air”) more broad money (M4) into the economy.”

    That is the crux of the matter. M4 deposits are legal tender, with which you can buy things – AKA money 🙂

  75. Richard

    “Right – but that’s separate discussion.”

    Yes sure. As I said, “an aside”…

  76. “Deposits are always a liability the bank, and an asset to the customer.”

    OK, then the deposits ought to be negative.

    Barclays: (IL)-£600k + (L)£50k = -£550k
    Lloyds: (IL)-£400k + (L)£50k = -£350k

    etc.

    Although that would mean both banks were insolvent, since they have £1m in liabilities but only £100k in assets. I guess there’s extra bits and pieces you didn’t mention?

    “NiV removes the new deposits from the accounting because they are “cancelled out” by the loan agreement.”

    On the contrary – I retained them throughout. “(IL)£618k + (L)£50k – (L)£8k -(L)£10k”, for example, lists them all separately. I only give the net value to make the point that the total remains constant.

    “In fact NiV’s accounting completely ignores the balance sheet expansion that occurs when a bank makes a new loan. If you look at Figures 1 and 2 in the Bank of England document, you can see the expansion of the balance sheet illustrated quite clearly:”

    I agree that the balance sheet expands – what I’m disagreeing with is where the expansion comes from.

    Everyone sees that money is created during the agreement of a loan between bank and borrower, and everyone, seemingly, jumps to the conclusion that of the two it must be the bank that is creating it. Why?

    “Because when banks loan you money, they create a new deposit that does not draw on their existing reserves or assets. They create brand new IOUs, and those IOUs are accepted as legal tender.”

    Which you therefore can’t spend, because to spend it you need to withdraw cash (an asset) or transfer it to another bank, requiring the transfer of reserves. The IOUs can’t be spent – only the assets that back them.

    “Creating a new deposit IS creating new money. In banking parlance, I don’t think anyone disagrees.”

    Why would anyone value numbers on a page? Or bits of paper? What people value is *real* things: goods, services, rights, things like that. We trade goods/services for goods/services, to our advantage. But sometimes we cannot align the trades at the same time, so we allow the trade to be split into two parts: you give me particular goods/services ght now, and I promise to give you goods/services at a later date. The physical representation and token of that promise in the meantime is what ‘money’ is. So to create money, you need to make a promise. Somebody promises to deliver goods/services in the future, in exchange for something of immediate value (like a house or a car, or coke and hookers) right now.

    For the bank to create money, therefore, it must be making a promise to deliver some goods/services later, as part of its trade. What goods/services is it promising, and how do we collect?

    Numbers in a ledger are meaningless and worthless, unless they can be exchanged for something people actually want. Where does the ‘human-felt’ value come from in the bank’s IOUs? With what will it redeem them? What is it “promising to pay the bearer on demand”?

  77. NiV

    “Money, promises, value, etc”

    On this aspect, I don’t think there is any disagreement? The BoE is talking about a definition of “money” as being broad (M4) for this purpose – and you are talking quite separately about “value”, and which all makes perfect sense?

    I specifically qualified my response with “in banking parlance”.

    Perhaps I am being slow, but I don’t see any conflict..:)

    Unless your point is going back to the specific issue earlier about “who” is making the promise?

  78. “On this aspect, I don’t think there is any disagreement?”

    I was sort of querying whether “Creating a new deposit IS creating new money” was equivalent to “Making a new promise to repay goods/services of value IS creating new money”, which is I think a more fundamental definition. It possibly is, but I don’t think the connection is clear. Is a deposit creating money or simply moving money around? Someone needs to explain where the promise is being made, by who, and promising what.

    I think it might be so – if you deposit cash in the bank and get the bank’s IOU in return, it’s like a reverse of the loan process. You loan the bank cash, and they promise to repay it on demand. I would propose that when you open a bank account and simply deposit a pile of cash in it (i.e. not to pay off a loan or anything), the bank IS creating money.

    Yes, I was talking about M4.

    “Unless your point is going back to the specific issue earlier about “who” is making the promise?”

    Yes. I’m trying to identify the party creating the money by defining money as a promise to pay later and then asking which party is making such a promise. I thought it was pretty clear that the borrower was – that seemed obvious to me and I’m mystified as to why other people don’t. I’m evidently missing something.

    It’s possible, I suppose, that BOTH parties are creating money simultaneously. But if so, what goods/services is the bank promising to deliver, that were not obligations previously? Is their new money backed by their promise to cancel the debt agreement with it, or something? When the people who think the bank is creating money think about it, what do they believe the bank’s promise to be?

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