How Money is Destroyed

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As we have seen, when banks make loans, new money (in the form of numbers in somebody’s bank account) is created. What happens when these loans are repaid? Exactly the opposite – money is destroyed.

Mervyn King, Governor Of The Bank Of England “What we were doing [through Quantitative Easing] is injecting money into the economy, and what the banking sector has been doing is destroying money [as existing loans were repaid]. As they reduce the size of their balance sheet and deleverage, they’re reducing not just the size of their assets but also the size of their liabilities. And most of the money in our economy comprises liabilities of banks in the form of bank deposits. So what we were doing was partially to offset what would otherwise have been an even bigger contraction.”

Sir Mervyn King, Governor of the Bank of England 2003-2013 (Video)

The principle is the same for all deposit money. This section explains it in terms of commercial bank money. In the example from before, Robert borrowed £10,000 to buy a car. Let’s imagine that he now wishes to repay this loan. (To keep this example simple, we will imagine the loan being repaid in one lump sum, rather than in instalments as is usually the case.)

Recall the situation directly after Robert bought his BMW: the bank has an asset of £10,000, which is its loan to Robert, and some unspecified liabilities totalling the same amount. Robert has a debt to his bank of £10,000:

After working for a few months Robert is paid £11,000 by his employer (forgive the simplification!). This payment is made from Robert’s employer’s bank account to Robert’s account electronically – RBS gains an asset (£11,000 in reserves) and so increases Robert’s account by the same amount:

Robert decides to use the £11,000 to repay his loan in full, with interest. With an interest rate of 10% on the loan, Robert owes £11,000 in total, £1,000 of which is interest. Robert informs RBS that he wishes to repay the loan in full, with interest. From Robert’s perspective, he sees that the £11,000 is ‘taken out’ of his account by RBS. However, in reality, no money is moved at all. RBS simply decreases its liability to Robert (i.e. his bank balance) by £11,000, and simultaneously removes the £10,000 loan from its assets, because the loan has been ‘repaid':

Robert now has no money in his bank account (RBS’s liability to him is zero). He also has no debt. RBS’s assets have increased from £10,000 when they made the loan, to £11,000 now the loan has been repaid. RBS’s liabilities have also increased from £10,000 to £11,000, however. As a result, if the bank were to now close down and sell off all their assets and settle all their liabilities, the shareholders would have £1,000 more than they had before the loan was made – this is their profit.

Of course, in reality the bank doesn’t close. Instead this increase in shareholder equity is likely to be used to pay dividends to shareholders, pay staff etc. For example, RBS may take the £1000 in profit and divide it equally between shareholders and staff as so:


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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  • Alexander Harvey

    Comment on the Video:

    How Money is Created: Why Fractional Reserve Banking must be abolished (last segment).

    As you show elsewhere the difference between the Bank’s Assets and Liabilities is the Equity. The inability to repay all debts when their total amount exceeds the money supply is not inherent. It is determined by what decision is made as to the use that the equity is put to.

    If it is returned as profit to the economy more slowly than it is accumulating the equity will spiral upwards unless the debts are written off as unpayable. If it is returned as profit and recirculated at the same rate that it is accumulating the debt may remain constant. If it is recirculated faster than it is accumulating the debt may be eventually repayed.

    The way it is phrased in the video makes it sound as if there is an structural problem and not a problem of redistribution as I indicate.

    I am quite happy to be wrong about this but if I am right I suggest that in future you make at least some passing reference to the equivalent accumulation of equity or else someone may try to imply that you fail to understand.

    When proposing radical solutions the opposition must tend to exploit any vulnerability in your argument to its fullest.

    Best Wishes

    Alex

  • Sky Wanderer

    “the bank has an asset of £10,000, which is its loan to Robert, and some unspecified liabilities totalling the same amount.”

    The contradiction we can sense behind the above and the assertion of money creation and destruction behind these transactions: if an asset is created from nothing, then it is not an asset, if it is an asset, it cannot be destroyed, or if it is destroyed, it wasn’t an asset to begin with, hence it wasn’t money.

    The contradiction is hidden somewhere here: after Robert had withdrawn the £10,000 from his account to purchase the BMW, the bank’s liability towards Robert ceased to exist. The question here is the other side of the car purchase transaction. If the bank’s Cash account decreased by £10,000 against the £10,000 decrease of Robert’s deposit – as it is stated on another page – then Robert’s loan (IOU) and the corresponding deposit on his account did not NOT represent new money to begin with, it was just an accounting entry representing a mutual promise / liability between the Bank and Robert.

    Accordingly, at the time when Robert repays the £10,000 to the bank, no real money is destroyed (which would make no sense), only Robert’s obligation (IOU) ceases to exist. But if it was the Bank’s Cash account used against Robert’s deposit account at the car purchase then the question is, how come that Robert’s repayment is not accordingly booked that is via an increase of the bank’s Cash account? Why the Central Bank Reserve?

    Thank you in advance for helping this to clear up. The accounting entries underlying the events of private banks creating and destroying money is even less transparent than the idea of such events.

    • GWHodgson

      “if it is an asset, it cannot be destroyed, or if it is destroyed, it wasn’t an asset to begin with” – wear and tear, fire, flood, sabotage, scrapping, abandonment and obsolescence are all ways that physical assets can be destroyed. Only once it’s destroyed does an asset cease to be an asset.

      A right to receive money is just as much an asset as possession of a lathe which can be used to produce goods to sell at a profit, especially if it is enforceable in court, such as a bank’s right to receive repayment of a loan. The fact that promises to pay can be conjured up out of thin air makes no difference, as long as the promises are enforceable. Robert’s promise to repay the loan is the asset which induced the bank to incur a liability to him in the form of the credit to his account at the time the loan was made. In exactly the same way, once the bank signed the loan agreement Robert acquired an asset enforceable against the bank, the right to have his account credited with the amount agreed, even though the bank’s promise had also been conjured out of thin air. The fact that the bank only has to expend a few microwatts of computing power to fulfil its promise, while Robert has to go out and earn a living to keep to his end of the bargain doesn’t enter into the equation.

      When Robert bought the car by cheque and the seller received the money into his account, it would have made no difference whether Robert had the money to buy the car because somebody else had paid it into his account or whether he had borrowed it from the bank. Money in a bank account is money however it got there. When his employer eventually paid £11,000 into his account this meant he had acquired a monetary asset of £11,000. When he decided to pay it to the bank, he lost that asset, but the point is that nobody else received £10,000 of it – that much disappeared completely. Only the £1,000 interest remained in existence for the use of the bank. £10,000 of money was destroyed along with the £10,000 loan.

      If Robert’s employer had paid him £11,000 in cash instead, and he took it to the bank to pay off his loan and interest, then the bank’s balance sheet would indeed have shown an increase of £11,000 in its Cash account. Since, however, in this case he was paid by bank transfer, his employer’s bank transferred over £11,000 in reserves to compensate Robert’s bank for increasing its liabilities to Robert by that amount.

      • Sky Wanderer

        Thank you for your reply – it did help to clear up several details, to
        which I will respond later. Since I posted this comment I researched
        this issue further and I wish to highlight this point:

        Just because an IOU is an asset for the bank, it is not true that it is money – it is merely an Account Receivable. To arbitrarily treat IOUs as ‘money’ is a major issue that needs to be addressed in the first place. (Will get back with more at a later time)

        • Graham Hodgson

          No, it’s not the bank’s asset which is money, it’s the bank’s deposit liabilities, which are assets of the deposit holders. Bank deposits are money in the bank.

          • Sky Wanderer

            Firstly and most importantly, before we continue this conversation, can you please substantiate the statements in your replies? Can you please refer to the official source for the Generally Accepted Accounting Principles applicable to commercial banks, which specify in full detail, how these ledger entries are made and how exactly money creation and destruction is reported by the commercial banks?

            Secondly, the assertion in your last reply is clearly in contradiction with the above explanation given by Positive Money and by BoE bulletins.

            Please notice that what circulates in the banking system with a non-zero balance is the Loan to Robert, and this appears and is an Asset on the Bank’s balance sheet, while the Deposit, the Bank’s Liability towards Robert disappears as soon as Robert makes the purchase. What remains open until it’s repaid is the outstanding Loan to Robert (IOU) as the Bank’s Asset and allegedly “money”. It is this loan or IOU which is said to represent 97% of all money and which disappears from the system when the loan is repaid by Robert, so what you are saying clearly contradicts the very basis of the information presented here or by BoE.

          • Sky Wanderer

            PS: To be more precise, I think this is the point when we arrived at the very heart of THE contradiction. If you are correct – and since what you wrote is what’s stated in the referenced BoE bulletins – this explanation by Positive Money is incorrect and what is demonstrated here is NOT the money-destroying event. That such event exists at all I doubted to begin with and I doubt more with every second.

  • Sky Wanderer

    Based on my former discussion we can safely say this page is in sheer contradiction with the statements in the official Bank of England documents. According to the statements there the private banks use the outstanding loans as “assets” which then circulates in the system as “money”.

    Can someone please – an expert with official references – explain again what exactly happens when the banks pays for Robert’s car-purchase from his IOU Deposit. Which ledger accounts are affected?

    Since the IOU Deposit is reduced to zero after the purchase, then what exactly happens when private banks destroy money? If it is true what BoE says that it is the deposit side of th IOU- which is a liability to the bank – that the banks treat as money and asset, how can the bank refer to a liability as asset (money) how and when exactly such “money’ is destroyed?

    • GWHodgson

      Unfortunately, the Bank of England’s Quarterly Bulletin article “Money in the modern economy: an introduction” completely messes things up by failing to distinguish between the bank’s balance sheet and the customer’s balance sheet. The final sentence of the first paragraph of the section “Money is an IOU” reads “Money in the modern economy is just a special form of IOU, or in the language of economic accounts, a financial asset.”

      IOUs are only assets for the people holding them – the account holders. They are liabilities of the people creating them – the banks. Five pages further on the article goes on to explain that

      “Banks can create new money because bank deposits are just IOUs of the bank; banks’ ability to create IOUs is no different to anyone else in the economy. When the bank makes a loan, the borrower has also created an IOU of their own to the bank.”

      but by the time you get down to that the damage has already been done. The Bank says money is IOUs. The Bank says IOUs are assets. Therefore IOU assets are money. No. Only IOUs created by banks are money, and these are only assets of those holding them. They are liabilities of the banks creating them. Those IOUs held by banks which are created by borrowers are assets of the banks but they are not money.

      This is not an easy subject. When I retired 18 years ago, I set myself the task of researching the role of money in society. Even though I had previously spent 20 years designing and operating accounting systems in a government department, it still took me 13 years of reading and reasoning before I was confident that I understood how banking operated. For the last three years I have worked in the Positive Money office two days a week as a volunteer, checking facts, digging out data and helping to ensure consistency and accuracy.

      The major obstacle to understanding, I think, is thinking of banks like any other businesses. They’re not. Businesses pay their staff and suppliers using cash and the money in their bank accounts. Businesses part with money when they make payments. Banks don’t. Banks don’t pay their staff and suppliers. Banks instead promise them that they will arrange for their payments to be settled. It’s those promises which everybody else rely on and treat as money when they come to make payments. While businesses pay their staff and suppliers by handing over assets (money), banks compensate their staff and suppliers by taking on liabilities (crediting their accounts).

      Accordingly, when Robert pays the car dealer he does so by saying to his bank, “Look, you’ve promised me that you’ll settle payments for me of up to £10,000. Here’s your promise, it’s a credit in my account. Now I want you to fulfil your promise and settle my payment with the car dealer.” So the bank does this by making the same promise to the car dealer, and cancelling its promise to Robert which it has fulfilled. If the car dealer doesn’t have an account with Robert’s bank, then the bank must persuade the car dealer’s bank to make that promise in its place, which that bank agrees to do, provided that at the end of the day its assets and liabilities balance, which may mean that Robert’s bank has to hand over some assets, central bank reserves, to make that happen.

      So the key thing is, for Robert and the car dealer, the money they use is the promises their banks have made to them as recorded in the accounts they hold with them. Banks can create money out of thin air because it’s nothing more than promises, and anyone can create promises out of thin air. So when Robert created a promise out of thin air to pay the bank £10,000 plus interest over some future period, his bank had no problem creating a promise to Robert to settle any payments he wished to make, now or in the future, up to £10,000.

      At this point, I should stress that this is not some metaphorical analogy to simplify understanding. It is not an explanation which says “banking operates as if there were an exchange of promises.” This is an exact description of the process and of the legal relations between the banks and their customers. Because these promises are legally enforceable they count as liabilities of those making the promises, and assets of those to whom the promises are made. It is rather the conventional explanation which treats banking as if it were a series of cash transfers between depositors and banks which is the metaphorical analogy which misdirects attention and obscures what’s actually going on.

      From this, what happens when Robert pays the car dealer is that Robert uses up his promise from his bank, his money is destroyed, but the car dealer’s bank creates an exactly equivalent promise replacing the money destroyed by Robert’s bank. So, overall, the stock of money remains the same, it’s now just in different hands.

      When Robert’s employer pays him £11,000, exactly the same process takes place. His employer’s bank has fulfilled and cancelled its promise to Robert’s employer, and Robert’s bank has created a new promise to Robert. But now, Robert decides to use that money to keep his own promise with the bank, so he says to his bank “If you cancel my promise to pay you £10,000 plus interest (which now stands at £1,000), I’ll let you cancel your promise to me to settle my payments of up to £11,000.” This is the first time since Robert agreed to take out the loan that the bank has made use of its loan asset. These assets do not circluate in the normal course of banking (selling off loans through securitisation vehicles is a recent innovation and not an essential part of banking practice).

      Since being paid by his employer, Robert is holding a promise from his bank worth £11,000 while his bank holds a promise from Robert to pay £10,000 plus interest. Accountancy convention and banking regulation hold that the bank can only count on the interest when it is actually paid, so Robert’s promise is valued on the bank’s balance sheet at only £10,000. When Robert pays off his debt, the bank cancels liabilities of £11,000 and assets of only £10,000, leaving an excess of assets over liabilities on its balance sheet, a profit of £1,000 which it books as earnings. No other customer account in the banking system has been credited in the course of Robert’s loan repayment so the whole of Robert’s £11,000 has disappeared from the money stock. It’s the cancellation of the bank’s liability to Robert, and not the cancellation of its loan asset from Robert, which destroys money.

      • Sky Wanderer

        Thank you for your thoughtful and comprehensive reply – I really appreciate it. Can you please quote the official source(s) for above – I have been searching for it for a long time. Where are these details taken from? If the BoE document is not reliable, is there another official link that you can refer to?

        The contradiction is still unresolved. Not only the BoE document but you also stated – quite clearly – that it is the Bank’s liability (Robert’s deposit in the Bank) that is used as “money” in the system. That means the Bank uses its very own liability towards the client (not the way around) as its own asset/Cash. If this is true, regardless all else and regardless if this is legal or not, this comes down to a blatant fraud/theft.

        Your reply also introduced several new details that only blur the point.

        To make it simple: what I am interested in is the MAIN line of events – presented in several lines – how these events are accounted for – Dr/Cr in the ledger.

        Since the first entry of issuing the loan is clear (which is supposedly the money-creation), let’s start with this event: when the Bank makes the payment for the car-purchase, which accounts are debited/credited?

        On the respective page of Positive Money the Cash acct was credited and this comment was added “it doesn’t matter how money got there, it is cash”. Does it mean that IOUs are merged with the Bank’s Cash account and used as such?

        Thank you again – and thank you in advance for your clarifying this.
        .

        • GWHodgson

          No, I didn’t say the BoE document is unreliable, just that the sentence I quoted is incomplete. There are two aspects to money in the modern economy. It is an asset AND it is an IOU. The document uses “OR” to suggest that being an IOU is the same thing as being an asset. But the IOU in its liability guise is NOT money. An IOU issued by a bank does not work as money for the bank, only for the account holder, since it is not an asset for the bank which it could transfer and exchange. Banks create and issue money. They don’t use money. As I said, they don’t pay their creditors, they compensate them with a promise which their creditors can then use as money. And that promise is not a promise to pay, in spite of what it says on the banknotes. It is a promise to settle payments or, more generally, it is a promise to enable its creditors to make payments. This promise can be fulfilled either by settling payments on their creditors’ behalf or by issuing cash so that their creditors can settle their payments for themselves. It is very important to accept this distinction since otherwise it is impossible to make any progress at all into the concept of bank money.

          The details of my explanation come from 12 years of studying double-entry bookkeeping, scrutinising banks’ annual reports and delving into the historical detail and changes of the banking system’s income and expenditure accounts and balance sheets as published by the Bank of England. There is no other source. Believe me, I didn’t want to have to do all that work but I couldn’t find any other source. That’s why “Where Does Money Come From” had to be written. Banking textbooks written before and immediately after the First World War more accurately describe the role and operations of banks, since the existence of the gold standard anchored understanding. But it was assumed that the abolition of gold rendered these obsolete, as computerisation rendered the manual ledgers obsolete. So now nobody (except perhaps forensic accountants) has the task of recording each step of a transaction laboriously by hand and nobody therefore is required to build up a comprehensive understanding of system from end to end.

          The documented at this link is one I prepared for the WDMCF authors to explain the bookkeeping behind payments settlement. It describes each ledger entry in the process of clearing a check from Bob to Alice which she had paid into her account. It’s a bare-bones gross settlement working model showing a five-step clearing process over three days.

          In the first step, Alice’s bank charges Bob’s bank with the amount of the check and records the amount in Accounts Receivable. Bob’s bank credits Alice’s bank with the amount to be paid, recording it in its Accounts Payable ledger and instructs the Central Bank to transfer reserves to the account held there by Alice’s bank. Bob’s bank then records the transfer of reserves to the account it holds for Alice’s bank and charges Bob’s account with the amount of the payment, clearing the entry in Accounts Payable. Alice’s bank records receipt of the reserves by crediting the account it holds for Bob’s bank and credits Alice’s account with the payment, clearing the Accounts Receivable ledger.

          I can’t find the reference you quote in the final question in the “How Payments are Made” page of the Banking 101 course, but no, as explained above, customer deposits (IOUs) cannot cross over from the liabilities side of the bank’s balance sheet to the assets side to be merged with Cash.

          • Sky Wanderer

            1) Please answer with a simple YES or NO: Earlier you wrote :
            “No, it’s not the bank’s asset which is money, it’s the bank’s deposit liabilities, which are assets of the deposit holders. Bank deposits are money in the bank.”

            Is above correct or not? This is precisely what you wrote earlier and what the BoE claims too in the aforementioned document. Again, please answer my question with one word, a simple YES or NO. I am uninterested in any further evasions and blurring details.

            2) I ask again: please quote the official sources containing the official information on how banks are legally obliged to account for all these events and how banks include them in their financial statements.

            Note 1: Please refrain from any further repetitions, red herrings, ad hominem, strawmen and other logical fallacies. I have been very patient enduring these thus far. And please stop evading above questions. Your patronising attitude and ad hominem asking me to “believe you” instead of offering the official source only gives space for more suspicion.

            Note 2: Since the question at hand is banks creating and allegedly destroying money in the amount of many £ billions, this issue is of the magnitude comparable to a suspicion indicating the biggest accounting crime ever. Rather than me inquiring on these pages, an independent committee should work 24/7 on auditing the books of these Banks, and evidently such work could be carried out only on the basis of Generally Accepted Accounting Principles applicable to commercial banks. If such Principles don’t exist, the issue at hand is even graver than it appeared first.

            Note 3. Even if I ‘believed you’ it would be objective necessity and requirement to substantiate your claims and refer to the official sources from where you – and Positive Money in general – took the presented accounting details. Since it is a FACT that Positive Money presented these ledger entries with major gaps and with blatant self-contradictions, this fact makes this objective request even more essential.

            Note 4: In the case you are unwilling or unable to answer to these two simple questions, please delegate them to someone else. In any case I expect an answer from an official representative of Positive Money. Thank you.

          • GWHodgson

            1) You quote a paragraph which you do not find clear. It contains four simple statements. The lack of clarity must arise from an inconsistency between these four statements as you read them. Therefore a simple YES or NO will add nothing. The statements must be taken in turn.

            “it’s not the bank’s asset which is money” TRUE.

            The specific asset in the context was Robert’s loan obligation to the bank. But the general statement is also true. Banks don’t use their assets to buy goods and services. They use their assets to settle liabilities to other banks and to their customers. You can settle liabilities using any acceptable asset. You don’t need money. You can acquire goods and services by barter (exchange for pre-existing goods), on credit (by assuming an ongoing liability) or by payment (which requires money).

            “it’s the bank’s deposit liabilities” TRUE but possibly ambiguous.

            Deposit liabilities are money for the deposit holders. They are not money for the bank. Banks acquire goods and the benefit of services by crediting the deposit accounts of those who supply those goods and services. Banks acquire goods and services on credit.

            “which are assets of the deposit holders” TRUE.

            One person’s financial liability is another person’s financial asset. An asset can be transferred to another person.

            “Bank deposits are money in the bank.” TRUE.

            Deposit holders can use the credit in their accounts to buy goods and services, with no ongoing liability to the suppliers of those goods and services. Payment by check or bank transfer is not buying on credit. It’s payment with money. The purchaser gives up its deposit asset when it buys goods and services, the seller acquires a deposit asset when it provides goods and services. Deposit holders’ account balances are money.

            2) These are the primary sources from which I compiled my working explanations of banking practice

            International Financial Reporting Standards (IFRSs)
            Prudential Regulation Authority Handbook & Rulebook

            You will also need to read through the Acounting Policies sections of the Annual Financial Statements of the major banks (all available online) to establish how these standards are implemented in practice.

            Banks don’t publish the details of individual ledger accounts and transactions processing practices (for obvious reasons). You will need to impute these from your own knowledge of and skills in double entry bookkeeping. I used Favell’s “Practical Bookkeeping and Accounts” (numerous editions from 1931 to 1999).

            I am sorry if my further attempts at clarification come across as patronising evasions. I do find this an area which is so fraught with misunderstanding and misrepresntation that it is difficult to know where attempts at clarification would be most effective. I do tend to try them all. I appreciate your patience.

          • Sky Wanderer

            “You quote a paragraph which you do not find clear”

            The above is yet another fallacy known as strawman. I did NOT say above and did NOT ask for any clarification from you. On the contrary: I expressly asked you to reply with one YES or NO, a request that you are apparently unwilling or unable to fulfill. If you are unable to simply confirm your very own statement, that alone speaks for itself. With your continuing “clarification” your purpose is apparently to further inflate the overwhelming confusion you cause with your fallacies.

            “One person’s financial liability is another person’s financial asset. An asset can be transferred to another person.”

            Just to spot one among your countless fallacies: the above is a red herring and another non sequitur in one instance. In addition, it is yet another patronising insult, because even the child is aware of what your are trying to “explain” to me.

            “Deposit liabilities are money for the deposit holders. They are not money for the bank.”

            Yet Banks treat their clients’ money as their own money and as such it gets into the Bank’s Cash account – this is exactly what was stated on the deleted Positive Money page and what constitutes the fraud.

            By deleting that page and by the endless fallacies in your comments what you – and Positive Money – are trying to hide is the blatant accounting absurdity – hence fraud – that the Banks treat their own liabilities which are other entities’- its clients’ – assets as their own assets.

            I repeatedly asked you – in fact I asked Positive Money that you seem to represent in this dialog – to present again the respective accounting entries reflecting the event of the Bank fulfilling the payment for the car-purchase – a page that has been deleted from this site. Quite telling and so are all the fallacies and contradictions I have spotted thus far in your comments and on these pages.

            I have no more time and interest to straighten out all your fallacies and to deal with the endless non sequiturs and manipulative evasions you present in your comments.

            Your responses would be immediately debunked
            by any independent expert court, and I am sure the readers of this page can also see through all your contradictions and other fallacious statements.

            Yes, it took immense patience to remain civil to someone who is hiding the most relevant information which would highlight the illegitimate practices behind what is presented by BoE and Positive Money as “modern banking”

            Finally, to make this clear: I expect and will read no more “replies” either from you or Positive Money.

            Since your replies – and lack of replies – on this page represent the official stance of Positive Money, that grossly discredited this organisation.

          • GWHodgson

            So that’s what this has all been about. You think you saw something on this site that would have helped prove your thesis that banks are somehow able to convert their liabilities into assets, and now you can’t find it so you think we’re concealing the facts.

            Well it doesn’t happen. Banks can’t and don’t turn their liabilities into assets.

          • Sky Wanderer

            Another manipulative, rude insult, strawman and self-contradiction. I hope Positive Money can delegate my questions to someone else than you, to a real expert who can actually understand and respond to my points. I no longer address any of my questions to you and won’t read any of your further replies/comments.

          • Sky Wanderer

            PS:
            You wrote: “I can’t find the reference you quote in the final question in the “How Payments are Made” page of the Banking 101 course”

            I no longer can find it either. Apparently Positive Money deleted it in the meantime. Since you are connected to Pos Money and I am not, you are probably aware of this.
            Luckily I made some snapshots (see attached)

            “as explained above, customer deposits (IOUs) cannot cross over from the liabilities side of the bank’s balance sheet to the assets side to be merged with Cash.”

            Then the great mystery remains:
            How are these payments recorded in the Bank’s ledger and from what Cash basis? According to the respective deleted page when the Bank sends the payment, it is done by Credit of £10,000 on the Bank’s Cash account balance and a Debit of £10,000 on Robert’s deposit

            And here is the gap which would call for a comprehensive forensic investigation: the Bank simply can NOT fulfill all these payments simultaneously requested by millions of Roberts from the Cash account (the balance of which is a small fragment compared to the IOU-deposits) UNLESS they first increase the Cash account balance by a Debit of £10,000 – while they increase the Shareholder’s Equity by a Credit of £10,000. (the very likely missing entry hidden from the public)

            And if this is the case – which evidently has to be – what we are looking at is a tremendous fraud.

      • Sky Wanderer

        With all due respect, it is an easy subject, but for some reason it is made into a seemingly excruciatingly complicated one.

        Earlier you wrote: “No, it’s not the bank’s asset which is money, it’s the bank’s deposit liabilities, which are assets of the deposit holders. Bank deposits are money in the bank.”

        Is above correct or not? This is what you wrote and what the BoE claims too in the aforementioned document.

  • Paolo Mari

    Hello,
    I am not an expert so forgive me if my question will sound silly. The thing that i do not understand is why, if banks create money out of thin air and lend it to a customer, it is a problem if this customer defaults and does not repay his debt. It might be very basic but, please, could you clarify this point?
    Thank you very much.

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