How Central Banks Create Money

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Creating Central Bank Reserves

Let’s start by seeing how the Bank of England creates the electronic money that banks use to make payments to other banks. Central bank reserves are one of the three types of money, and are created by the central bank in order to facilitate payments between commercial banks.

In the following example we will show how the central bank creates central bank reserves for use by a commercial bank, in this case RBS. Initially the bank of England’s balance sheet appears as so (this is a simplified example where we’ve ignored everything except this particular transaction): 

RBS’s shareholders have put up £10,000 of their own money which has been invested in government bonds. So RBS’s balance sheet is:

As a customer of the central bank, RBS contacts the central bank and informs them that they would like £10,000 in central bank reserves.

For the purposes of this example it will be assumed that the Bank of England purchases the gilts from RBS outright. Once the sale is completed the Bank of England has gained £10,000 of gilts, but it now has a liability to RBS of £10,000, which represents the balance of RBS’s reserve account, as so:

The Bank of England’s balance sheet has ‘expanded’ by £10,000, and £10,000 of new central bank reserves have been created, effectively out of nothing, in order to pay for the £10,000 in gilts.

However, from the point of view of RBS’s balance sheet it has simply swapped £10,000 in gilts for £10,000 in reserves:

RBS’s balance sheet has not expanded at all; it has simply swapped one asset for another, without affecting its liabilities. RBS can now use these reserves to make payments to other banks, as described below.

N.B. The central bank could alternatively lend RBS the reserves (in this case the assets side of the central bank’s balance sheet would show a £10,000 loan to RBS rather than £10,000 of gilts and the RBS balance sheet would show the new reserves as an additional asset on top of its holdings of gilts, and its obligation to repay the loan as an additional £10,000 liability).

Sale and repurchase agreements (Repos)

However, the standard method by which the Bank of England creates reserves is through what is known as a sale and repurchase agreement (a repo), which is similar in concept to a collateralised loan. Essentially RBS sells an interest in an asset to the central bank (usually a gilt) in exchange for central bank reserves, while agreeing to repurchase its interest in said asset for a specific (higher) price on a specific (future) date. If the repurchase price is 10% higher than the purchase price (i.e. 10% higher than £10,000 = £11,000) then the ‘repo rate’ is said to be 10%. A repo transaction has different accounting rules from an outright sale. The Bank of England balance sheet would not show the gilts as the asset balancing the reserves, but the value of the interest in the gilts (valued at the £10,000 paid, not the £11,000 promised), whilst RBS would retain the gilts on its balance sheet in addition to the central bank reserves but record as an additional liability its £10,000 obligation to complete its end of the repurchase agreement. The extra £1,000 does not appear on either balance sheet but, when paid, is recorded as revenue (profit) for the Bank of England and an expense (loss) for RBS.

You may ask where does RBS get the money to pay the repo rate? – i.e. the interest on the repo. The Bank of England actually pays a rate of interest on central bank reserves equals to the repo rate – so if RBS borrows £10,000 using a repo at 10% it must repay £10,000 plus £1,000 in interest. Prior to RBS’s repayment the Bank of England pays interest on the reserves at 10%. This gives RBS £1,000 extra reserves which it must promptly use to repay the outstanding £11,000.

Whilst this process may seem a bit of a odd, there is actually a good reason for paying interest on reserves in this manner. First, it means that banks are not penalised for holding reserves – having to borrow reserves at interest but not receiving interest on them meant that banks would be effectively charged for holding reserves. Correspondingly, it means that banks will not try to minimise their holdings of reserves. Before the Bank of England paid interest on reserves banks would attempt to hold as few as reserves as possible, which could pose a problem for settling payments.

Secondly, and most importantly by controlling the rate of interest paid on reserves, as well as the interest rate it charges banks to borrow in an emergency (it charges a premium interest rate on reserves lent through its ‘overnight lending facility’), the Bank of England creates a ‘corridor’ around its desired Policy (interest) rate. This ‘corridor’ allows it to set the interest rate at which banks lend to each other on the interbank market. For example, if the rate paid on deposits is 4%, and the rate charged on emergency lending is 6%, normally a bank will never lend reserves to another bank at a rate of interest below the rate it could receive from depositing its reserves at the Bank of England (4%), or borrow reserves from another bank at a rate of interest higher than it could borrow from the Bank of England (6%). Because of this the interest rate banks will be willing to lend reserves to each other on the interbank market will be around 5%. (However today, due to the excess reserves in the system from Quantitative Easing, most banks have too many reserves, and as a result the central bank is setting interest rates through a ‘floor’ system)

How Central Banks Create Money (as Cash )

The process by which the central bank sells cash to banks is similar to that used for reserves. Initially the Bank of England’s balance sheet appears as so:

And RBS’s balance sheet appears as:

If RBS decides it is expecting an increase in demand for cash – for example before a bank holiday weekend –  then it may wish to exchange some of its (electronic) central bank reserves for (physical) cash. The process by which it does so is very simple – RBS simply exchanges £10,000 of its central bank reserves for £10,000 cash with the central bank.

The Bank of England’s liabilities change from £10,000 in RBS’s central reserve account, to £10,000 of ‘cash outstanding’. (The Bank of England records cash as a liability on its balance sheet, for historical reasons that we won’t go into here):

Meanwhile, RBS’s assets have changed from £10,000 of central bank reserves, to £10,000 in cash:

Note that neither balance sheet has expanded or contracted; it is just the nature of assets and liabilities that have changed. When the cash is worn out, damaged, or not needed anymore, the transaction is reversed and RBS simply sells back the cash to the Bank of England at face value, receiving £10,000 in central bank reserves in return.


For more details see:WDMCF2

Where Does Money Come From?

A guide to the UK Monetary and Banking System

Written By: Josh Ryan-Collins, Tony Greenham, Richard Werner & Andrew Jackson

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  • Robert Hoogenboom

    This is confusing. Are the “reserves” which the central bank creates pounds? But then they would be able to be used as digital money in the economy, same as the numbers in accounts that the commercial banks create when they create a loan. Can the central bank create digital money? You say somewhere that it can’t. Then how can it help out a bank if it can’t give them the sort of money that bank can spend in the economy or give to its owners?

    • http://petermartin2001.wordpress.com Peter Martin

      Yes the central bank can create digital money in pounds. Digital money is the IOU of the owner of the computer essentially.

      So if I have a bank and run a computer network then all the IOUs are my IOUs. I’d be responsible for the security and naturally I would not wish anyone to get in there and edit their accounts upwards! The BoE certainly wouldn’t trust me to have responsibility for its computer network either!

      • bill439

        Why do you say money is an IOU? Bank notes issued by the Treasury cannot be redeemed for anything else. It could once when the gold standard was in force.
        What does the Treasury owe me when I ask for it to be paid back.

        • http://petermartin2001.wordpress.com Peter Martin

          It owes you two fives for a ten. That’s all. See also my comment to your question below.

  • iakovos
    • bill439

      iakovos said:

      “To show that private banks cannot “create” money, is very important
      since excessive money creation in the U.S.A., the E.U. and China, was
      one of the main causes of the current crisis. Equally important is to
      explain why excessive money creation is always and everywhere a
      government act.”

      Iakovos, please explain why you think the computer credits, money, entered into a borrower’s current account when he is given a loan is not money. It can be, and is, spent and then circulates as money in the economy. Because everyone accepts it as money, It is money. It is created by private banks.

      • iakovos

        You are confused my friend with the fractional reserve banking idea. Banks are indeed allowed to create more loans than the deposits they take. They are only allowed to do that, because the government wants them to do so, and through their central banks allow them to do so.

        As I expalin in my essay, if governments did not want to use the banking industry to finance their spending or to affect interest rates in order to boost or slow down the economy, private banks could have not been able to create money.

        Moreover, on the money that the government allows them to create, private banks only earn interest, and when a bust follows the artificial boom, private bankers lose their shares and their banks.

        During the crisis, governments’ have to save banks, they nationalized them, and then they resell their shares. Therefore the original shareholders of banks either lost their shares, or they sell them for very low prices.

        • bill439

          iakovos said: “You are confused my friend with the fractional reserve banking idea.
          Banks are indeed allowed to create more loans than the deposits they
          take. They are only allowed to do that, because the government wants
          them to do so, and through their central banks allow them to do so.”

          Banks do not lend savers deposits. They create new money out of thin air. Today there is no fractional reserve banking. Banks lend against the collateral of the borrower.

          You also said: “As I expalin in my essay, if governments did not want to use the banking industry to finance their spending…..”.

          Banks are not used by the government to finance government spending. Banks do not lend government money. Governments finance their spending by taxes and borrowing.

          It seems you are not aware of modern banking practice, my friend..

          • iakovos

            What you say is socialist propagand, I do not know if it is of communist or nazi flavor, but it is pure socialist propaganda, and anyone who reads my essay will realize that

          • Bill Clarke

            It is not pure socialist propaganda but pure monetary reform proposals. MR members (over 28,000 and growing fast) are not left or right and the policies of MR are politically neutral. MR reform would benefit all sections of society including the financial sector that would have a more stable market and economy because the burden of debt woukld be greatly alleviated.

            May I suggest that you really find out out what monetary reform is proposing before you make wild accusations of political bias.

          • bill439

            Why does Discus make it so confusing to post this comment?

          • iakovos

            What makes the market unstable is pumping new money in it all the time. I have read this

            http://www.amazon.com/Where-Does-Money-Come-Ryan-Collins-ebook/dp/B00FFAKEQU/ref=sr_1_1?ie=UTF8&qid=1404360052&sr=8-1&keywords=where+does+money+come+from

            It is pure propaganda. It even quotes Marx. It does not even mention, that if the governmnet wanted it could have imposed all along a reserve ratio of 100% and it would be the end of story.

            Maybe you want to have a look here

            http://iakal.wordpress.com/2014/06/21/the-socialist-myth-of-economic-bubbles/

  • http://petermartin2001.wordpress.com Peter Martin

    This article unnecessarily complicates things by bringing gilts into the picture. There is no need for banks to use gilts (which are issued by Treasury not the BoE) when opening or using a reserve or central bank account. The reserve bank account, say an account at the BoE, just works like any other bank account. Money is put in and money is withdrawn. This money naturally is the IOU of the BoE and is functionally equivalent to the £ notes in our purses and wallets.

    The statement

    “£10,000 of new central bank reserves have been created, effectively out of nothing, in order to pay for the £10,000 in gilts.”

    is misleading at best.

    This ignores the fact that the original £10k in cash lent by bank shareholders was itself an IOU of the BoE and therefore its liability. I suspect that the smokescreen of the gilts was introduced to try to hide the fact that all issued money has to be the liability of someone. The PM idea that you can have ‘debt-free’ money doesn’t make any sense in the era of fiat money. If someone has a financial asset then someone else must hold the corresponding liability.

    That’s not to say that the BoE can’t create its own money, which count as reserves to other banks, from nothing just like any other bank. It simply edits accounts when it lends. But according to the principles of double entry bookkeeping there needs to be two entries made when the bank does this. The first one shows who holds the new asset and the second one shows who has the corresponding liability.

    • bill439

      Peter said: “The PM idea that you can have ‘debt-free’ money doesn’t make any sense
      in the era of fiat money. If someone has a financial asset then someone
      else must hold the corresponding liability.”

      The bank notes issued by the Treasury is free money. No interest has to paid on it. The BoE could issue digital money free of debt and does when it lends to bank reserves.

      Agreed, that financial assets have to have someone’s liability but this is just a bookkeeping convention. Because you call a liability an IOU doesn’t mean that bank notes are liabilities.

      • http://petermartin2001.wordpress.com Peter Martin

        OK so you consider bonds to be debt but issued money to be debt free?

        That may make some sense when the interest on the bonds is 10%. But what if its 1%? What if its 0,01% or 0.000001% any tiny number you can imagine?

        The cash is debt free but the bonds are still debt?

        The only intellectually consistent approach is to treat all issued money, bonds, and stock as Government IOUs. Bonds and Stock may carry some interest. Cash doesn’t.

        • bill439

          A bond issued by the Treasury is obviously a debt because the borrowed money has to be paid back to the bond holder.

          If you insist upon saying government issued money is an IOU, that is, a debt to be repaid, you really must explain what the Government owes to me for the ten dollar note in my wallet.

          i await your explanation. To say “Two fivers” is not enough because I can still ask you the same question as to how they are a government debt.

          • http://petermartin2001.wordpress.com Peter Martin

            Not all debts have to be repaid. Nor should they be repaid. An issuer of currency has to be in debt otherwise they haven’t issued anything.

            Norway has more oil money than it knows what to do with. Yet it still maintains a National debt of some $200 billion. Why doesn’t Norway pay it off like you or I would if we were very wealthy? The answer is that Norway needs its National Debt to allow Norwegians to store their financial assets expressed in Krone. It really doesn’t matter if we call those stores of assets cash, bonds or stocks. If one of them is a debt, they are all debts.

            If we don’t count cash as a debt then we get into logical nonsenses. For example a country could claim to be debt free simply by printing enough money to buy back all the bonds and stock it had ever issued. Does this make any sense at all?

            You’ve not answered my question above. If government print three pieces of paper, call one a bond, one currency, and one stock, how do we define them as different?

            If the stock pays an interest of 0.0000000001% is that enough to make it different from cash? If not, how much would be enough? If a government issued a bond but it has reached maturity so it is worth exactly its face value, is it any different from cash at that face value?

          • bill439

            “Not all debts have to be repaid. Nor should they be repaid. An issuer of
            currency has to be in debt otherwise they haven’t issued anything.”

            What debts don’t have to be repaid? Do you mean government issued bank notes? But they are not debts. You still have not explained why you think they are.

            “An issuer of currency has to be in debt otherwise they haven’t issued anything.”

            Please explain. Why does the issuing of bank notes automatically incur a debt? What has to be repaid? The bank notes? – even if they have been spent?

          • http://petermartin2001.wordpress.com Peter Martin

            No government debts have to be repaid provided they are denominated in their own sovereign currency. All that governments have are pieces of paper, or the digital equivalent in a computer, called currency, bonds or stock. When bonds mature they can pay them off with currency. If they don’t have enough currency they can print some more. Or they can print some more bonds, to pay off the previous bonds, or create some more stock and sell them or swap them for shares of companies if they are in the process of nationalising something.

            That’s all they can do. They can issue bits of paper and call them whatever they like, but their ability to net de-issue bits of paper is extremely limited. It hardly ever happens but when it does it is usually a mistake and is the cause of the recession that follows later.

          • bill439

            “No government debts have to be repaid provided they are denominated in their own sovereign currency.”

            If I buy a government bond denominated in pounds, that is a debt the government has to repay to me. Are you saying it does not have to be repaid because it is denominated in pounds?

            “You’ve not answered my question above. If government print three pieces
            of paper, call one a bond, one currency, and one stock, how do we
            define them as different?”

            They are very different: a bank note circulates in the economy and is held by anyone who sells something or earns it. A bond is held by an individual who expects to be repaid. A stock is a share in a company. The fact that they are pieces of paper does not make them the same thing.

          • http://petermartin2001.wordpress.com Peter Martin

            There are or at least there used to be very high value bank notes which didn’t circulate in the economy. So they aren’t part of the money supply?

            Yes of course the government will repay you at any time you like when you want to cash in your bonds or government stock. They’ll simply sell some bonds to someone else or print some more money. Whatever they feel like at the time.

            It really makes no difference to me if anyone wants to pay me with a $10 bank note or a matured $10 bond or a $10 government stock. I know that others, like yourself, may have hang ups about that sort of thing so it would be easier to swap the bonds and the stocks at the bank. But they are all fundamentally the same thing.

            You keep saying that I haven’t answered your questions when you really mean you don’t like or understand my answers. So how about you have a try at answering some of the questions I have asked you?

          • bill439

            If they are issued, high value notes are in the money supply even if they don’t circulate. Why wouldn’t they circulate? I just spent a $100 note.

            It would make a difference to you if you wanted to buy something from a shop and you offered a bond or a stock. Yes, you could swap a bond at the bank (the BoE) and sell your stock but why go to ll that trouble just to buy something?

            The only thing a bond and stock have in common with a bank note is that they have a monetary value. Oh, and they are all paper. This is not worth discussing. Why not deal with important issues such as the harm private banks cause to the economy?.

            I thought I had answered you questions. Which didn’t I answer? let me have tham, please, and I will respond.

          • http://petermartin2001.wordpress.com Peter Martin

            Some people never get it but let me have another try:

            Suppose government printed a piece of paper saying it was worth £10 but only when it matured in 5 years time. You’d say it was a bond and therefore a debt, right?

            But suppose they printed a piece of paper and said it was worth £10 in two days time. By the above logic that is still a bond right? What would it be in two days time, a bond or effectively a banknote?

            If governments just say it’s a bond then it’s a bond? And therefore a debt? Or if they say it is a banknote then it’s a banknote and therefore it is debt free?

          • bill439

            A piece of paper saying it was worth £10 in five years time is just that. I certainly would not say it was a bond. A bond pays interest. Your piece of paper doesn’t.

            What has this attempt to alter commonly accepted definitions to do with monetary reform? Our differences are not so important as the thing we agree on. Let us see what those are:

            1.. Private banks create money when they agree a loan.
            2. They charge interest which is their profit.
            3. This interest transfers millions of pounds a day from the economy to bank shareholders and executives, increasing the disparity between the rich and the poor.
            4. Banks have self-interest at heart rather than what is good for the economy and society.
            5. Lending too much or too little has inflationary and
            deflationary pressures.
            6. If the Treasury created digital money as it does pound notes it would collect billions in seigniorage that it is not now getting thus increasing its revenue. It would then not have to tax or borrow so much and austerity would be avoided.

            Do you disagree with any of these?

            That’s enough to be getting on with.

          • http://petermartin2001.wordpress.com Peter Martin

            A five year $100 bond is sold at auction as being just that. So if it sold for $78.35 the market would be setting an interest rate of 5%. After the first year it would be worth $82.27, after the second $86.38, then $90.70, $95.24 and then $100.

            It can be resold at any time before maturity so its like having money in an interest bearing bank account. Its effectively just a government IOU with interest attached. Normally interest on government bonds is just about enough to cover inflation so I don’t believe it should be begrudged if it is no more than that.

            When banks lend they charge interest, of course. Not only to make a profit but to give them some insurance against the possibility of default on loans. The greater the possibility of default the more the interest they charge, Yes the banks have self interest at heart but so does everyone else in the economy, so if we want to single out banks for special treatment we need to understand what we are doing.

            Point 6 is known as full reserve banking. It would mean that the banks would act as agents for the central bank. It would mean that money in a savings account was not be easily accessible as now as the actual money would be lent out.

            It wouldn’t change much IMO. The banks would still lend out money as now. If the central bank restricted the money supply there would be lots of potential borrowers chasing a limited amount of money for loans. The law of supply and demand would mean that interest rates would rise.

            That happens now when governments control interest rates. The problem is they should control them better than they do. Would FRB really help? Governments would still have to know how much money to issue to be lent out as the economy went through its various cycles, so they could still get it just as wrong under FRB as they do now without it.

            There is also the problem that no single country in the world has FRB. So any country adopting it would have to be the odd one out in the world banking system. That alone would be problematic. Borrowers could just switch to taking out loans in foreign currencies from foreign banks. Possibly also in £ from foreign banks but as the £ is a monopoly of the UK government they could probably stop that or at least make it difficult if they wanted to.

          • bill439

            “Yes the banks have self interest at heart but so does everyone else in
            the economy, so if we want to single out banks for special treatment we
            need to understand what we are doing”.

            Yes, we all look after our own interests but the affect an individual has an the economy is nothing compared with that of banks.

            Ir the government issued all money it would mean that the bank would only lend money they had and not create it out of thin air. It would mean Full Reserve Banking and PM are not the only ones calling for that.
            You don’t seem to think that seigniorage is worth mentioning, although it would give government much more revenue.

            “Point 6 is known as full reserve banking. It would mean that the banks
            would act as agents for the central bank. It would mean that money in a
            savings account was not be easily accessible as now as the actual money
            would be lent out.”

            If the government created all money and spent it into the economy to fund its programmes there would not be so much debt because firms and public authorities would not have to borrow from banks so much.

            Banks would not be agents of the the central bank but would trade in their own interests a now.

            The money in savings accounts are not lent out now nor would they be under FRB. Read MR’s proposal on transactional and investment accounts.

            Because banks under FRB are lending money that already exists they would not be adding to inflationary pressures as they do now by injecting new, extra, money into the economy.
            Neither would they have a deflationary effect as they do now when they stop or reduce their lending.

            FRB would lead to a more table economy. Do you and MMR oppose it?

          • http://petermartin2001.wordpress.com Peter Martin

            The money in savings would be lent out. It may well be guaranteed by some insurance scheme in the event of a default. As PM itself explains:
            “In practice customers will need to invest their money for a defined period of time. (6 months, 1 year, 2 years etc)”

            So that’s one drawback.

            There ‘s also a presumption of the quantity theory of money in your argument. Money doesn’t have any inflationary effect just by existing. It only does that when it is spent. So when money is lent out, it is handed to a person or company who is is need of spending it. Therefore, no matter what mechanism is in place along the lines you suggest, increased lending is going to lead to increased spending.

            So, it must follow that one way to reduce (or increase) spending is to reduce (or increase) lending and borrowing. Either under FRB or the present system, the amount of lending will be dependent on the interest rates paid by the borrower. For a given level of interest rates, borrowing levels will be exactly the same under FRB as they are now. So its really not going to change anything very much or give governments powers they don’t already have. They already can now set base interest rates at whatever they like them to be.

            For instance in the UK lending is now too high and is causing a speculative bubble in the property market. Money that is being created by the banks ends up fairly quickly in the hands of government as it is spent and respent , through the workings of the tax system. So probably there will be another crash in 2016 -2017. Something like that.

            Therefore, what government should do now, or should have already done, is push up interest rates to slow down the lending. They should also be increasing their spending to compensate and prevent a crash. They won’t though. That will increase their deficit before the election. It will blow out anyway when the crash happens but if they lose the election they can then blame someone else.

          • bill439

            The money in a savings (called by PM ‘transactional’) is not lent out, only investment accounts money is.

            Agreed increased spending leads to inflation under the present system of bank created credit because it puts new money into the economy on top of what is there. PM’s proposals of 100% reserve there is no new money so no inflation.

            ” Either under FRB or the present system, the amount of lending will be dependent on the interest rates paid by the borrower.”
            Agreed, if the interest rates are too high borrowing will be curtailed but in a period of deliberately low rates, as now, this does not apply. Under FRB the late rate regime will be in place because of government policy to boost the economy. Even this won’t work if banks don’t lend. With government created debt-free money spent directly into the economy the need for borrowing is reduced.

            Agreed, lending into the housing market creates bubbles but that money doesn’t end up with government although a proportion of it according to the tax rate.

            The government will not push up the interest rates and cause more foreclosures and bankruptcies.They want to be re-elected.

            Agreed, government could increase its spending to compensate and that would increase its deficit but they don’t seem to worry about that, neither does MMT, because they would rather impose austerity by cutting spending.

            I think we agree that neoliberalism is the basic cauee of the problems society has. problems

          • http://petermartin2001.wordpress.com Peter Martin

            Its not just me saying the £ is an IOU. That’s what the Bank of England say too. Unless you get the foundations of a correct understanding on money then everything which you build on it is likely to be suspect.

            http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q101.pdf

            Your comment ” no new money so no inflation” is wrong too. You say you are opposed to neoliberalism but that is the sort of nonsense they believe in! Money just by existing cannot affect prices. You can’t control inflation by controlling the money supply. A single dollar coin exchanged a million times will have the same effect as a million dollars worth of currency exchanged just once. Governments may be able to control the number of dollars in the economy but they can’t control their velocity of circulation.

          • bill439

            You win, Peter. I concede the argument. Bank notes are a form of IOU. Who can argue against the BoE experts?

            I didn’t know that neoliberals thought that new money in circulation added to inflationary pressures.

            Your point about not being able to control inflation by controlling the money supply (because increased circulation can also cause inflation) is a good one. I hadn’t even thought of that. I’ll think about it.

            It’s great that we agree about something.

          • http://petermartin2001.wordpress.com Peter Martin

            I feel slightly bad now in introducing expert opinion! Its probably not much of an exaggeration to say that anyone can always find an economics expert to agree with them. Its one of the few subjects on which there is no expert consensus. Too much politics involved for that I’d say.

            So thank you for the discussion. These always throw up interesting points. The more I think about it the more I can distill my thoughts. It occurred to me just yesterday that if savings and lendings were pretty much as they are now under FRB, then inflation and boom/bust cycles would still be the same too. So the only way to prevent the cycles of boom and bust is better control of lending and less debt aversion on the part of governments ie they need to spend more on the down cycle without over worrying about their deficits as they do now.

            That can happen under the present system, and of course it could happen under FRB, but the change to FRB would not be enough on its own to fix the problem.

        • bill439

          I don’t see that the only intellectual (theoretical?) approach is to treat all three as IOUs. It flies in the face of what is the case, what are the facts of the real world and actual practice. However, if you want to call bank notes a debt, an IOU, I will take it as your idiosyncratic interpretation and move on to discuss more worthwhile ideas.

          One such is that private banks do not create the interest on a loan so that the total debt in the economy is greater than the money supply. This siphons off billions to the banking sector and represents the hard work of ordinary people.

          There is a better way, as advocated by Positive Money. However, you don’t seem to be interested in such matters. Is this because traditional economic theory, and MMT, ignore ethics?

    • Dylan

      “This ignores the fact that the original £10k in cash lent by bank shareholders was itself an IOU of the BoE and therefore its liability.”
      It is not a fact. The original £10K lent by RBS bank shareholders was an IOU of RBS and NOT the BoE. New money has indeed been created out of nothing to buy the Gilt off RBS.
      The smokescreen here is money can be continually created to pay for gilts i.e. lending money to the government and receiving the interest for free courtesy of the British taxpayer.

  • iakovos

    The Socialist Anti-Semitic Myth of the Creation of Money out
    of Thin Air
    http://iakal.wordpress.com/2014/07/04/the-socialist-anti-semitic-myth-of-the-creation-of-money-out-of-thin-air/

  • James

    During the financial crisis, the quantitative easing injected money in the banks by buying bonds and issuing long term government bonds. The money that was received by banks, were they invested in the money market to increase in order to increase yields for the banks?

  • Marco Saba

    “(The Bank of England records cash as a liability on its balance sheet, for historical reasons that we won’t go into here):” – The historical reason is to hide the seigniorage gain that the BoE has on the face value of money creation – it is a fake liability for tax avoiding purpose. It can be a liability if it is recorded as a LIABILITY TO THE TREASURY – something that is currently carefully avoided… The same hold true for electronic money creation. An honest system should consider redefining the liabilities of the BoE as an asset for the Treasury of UK.

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