Failure to understand the monetary system has made it more difficult for central banks to act, reads Financial Times on 10th April 2014 in an excellent article written by the Chief Economics Commentator of FT, Martin Wolf. 

Here’s a short extract:

What makes banks special is that their liabilities are money – a universally acceptable IOU. In the UK, 97 per cent of broad money consists of bank deposits mostly created by such bank lending. Banks really do “print” money. But when customers repay, it is torn up.

We highly recommend to read the article in full. It explains seven fundamental points about how the monetary system really works as opposed to how people think it does – banks are not financial intermediaries, the money multiplier myth, what determines how much do banks lend, how can central banks influence the decisions of banks, regulation, central bank reserves and quantitative easing.

 

To learn more you can watch our 6-part video course Banking 101.