Consider three individuals A, B and C. A has £100 (had to use $ for the image), B has nothing and C has a Car (but no money). A deposits the money in the Bank. The Bank then lends £100 to B. But now A decides he/she would like to buy the Car. The Bank is not able to lend the money to B and give it back to A at the same time so A exchanges his/her "bank account money" with the Royal Mint via the Bank. So now the Royal Mint is holding an account at the bank.

When B eventually pays back the Loan (plus interest) the Bank is able to cancel the account with the Royal Mint.

If we exclude A and C from our analysis (because they have only exchanged a Car for £100) we see that in effect the Bank has received an interest-free loan on newly-issued money which it "borrowed" to make the Loan to B.

i'll reply when my head stops banging, nice pic btw

think you need to add in the central bank and the repo rate or 'discount rate window' etc etc and your pretty close

This is a classic run on the bank as all the cash it has is insuficient to pay the demand from depositors.

It is bust. No wait- is it a turd?, is it a pain?, NO, NO its NATIONALISATION MAN,

Once all the buried bodies have been found and accounted for then maybe a good time to invest in the banks given that model.

I think it would be easier just to write out a cheque!

sh!t car though...

Poor banks, it's such a difficult business inventing credit out of thin air and expecting it back with interest. I'm surprised banks don't fail all the time in the struggle.

/massive ******ing sarcasm directed at the rapacious pricks

Sorry, so where does the Royal Mint come into this and why? Are you saying that the Royal Mint has commercial bank accounts equal to all the cash in circulation?

Perhaps I am being a bit slow, but I am not really sure of what is going on or why in your example.

and why are the Royal mint issuing dollars?

Except that if the bank borrows from the BoE (which I think is what you mean by the Royal Mint) it pays interest on that borrowing. Well unless the that bank is nationalised and at some point in the future the Government decides to write off interest payments owed, in which case your model becomes accurate retrospectively.

total bulls**t

Not sure what you are saying here?

Isn't it, A deposits £100 cash with the bank. The banks lends to B, and has an IOU from B agreeing to repay the £100 in the future plus some interest (say £8 per annum on the £100)

Then the bank securitises the loan to B, and sells it on to a commercial bank, it is also giving up a portion of the interest, say £4 of the interest, and in return the commercial bank gives the original bank £100. (by the way, the £100 came from another depositor - called D).

A withdraws the £100 from their deposit account, and buys the car from C (who does whatever the hell they like with the money).

No one got an interest free loan, no one magicked any money from anywhere, the Royal Mint keep on issuing commemorative coins.

The main problems that can occur are:
1) If A and D chose to withdraw their money at the same time. B would have to repay, and he might not be able to repay quickly - causes a run.
2) If the bank borrows short term from A, and lends to B long term, then the bank is relying on the commercial bank to buy up the loans - that causes a funding problem if the commercial bank won't play. That is what happened to Northern Rock.
3) If the lending to B is secured against a falling asset (like UK house prices at the moment), then B has a lot of misery in store, working to pay off interest and capital on an asset that isn't worth what they paid for it. It is B's problem, they are the ones who took on the 125% loan.
4) The other problem can be that the government doesn't understand case 3) properly (the key part being - it is B's problem). Then all sorts of mess occurs and it takes years for things to get sorted.

Optobear

I'm still not sure what this example is about. A deposits £100 with the bank, the bank pays interest on this money, but is then able to create credit up to this amount (providing the organisation as a whole has sufficient capital adequacy) to lend to B - this money is in addition to the £100 deposited i.e there would now be £200 in existence with only £100 of it in cash form. Transactions for large purchases such as cars are usually carried out through a bankers draft, cheque or electronic means. If A withdrew the money the bank would require overnight funds from the BoE and then funds from elsewhere - other depositors or lenders.

only know Japan used to have 0% interest borrowing.... that the reason many hedge funds borrow from Japanese banks and poured into world equity markets

if you add in a central bank, a treasury department and some govvie bond investors, i may read it.....

The national mint doesn't work like that - it doesn't lend money and couldn't care less what is in individuals' bank accounts. The national mint sells cash for treasury bills.

In the diagram, A - the original depositor - would be repaid in money borrowed from another commercial bank... quite possibly the commercial bank of "C" - whose bank balance is raised by the sale of the car.

That is quite the most misguided exposition of our monetary system I've seen... it almost deserves a prize.

Blimey, A Level Economics questions have really dumbed down since I took them

Still, as you have such a masterful grasp of how banks work, I'd say you're more than qualified to be the next Chancellor.

What about if we obtain ownership of objects that have been created through labour by exchanging them for other objects that can't be created out of thin air and are relatively scarce in relation to the objects we want to obtain ? I wonder if they have ever tried that before

A has £100 in notes. He puts it into the bank. The bank sticks it inot a pile with lots of other people's currency to handle day to day legal tender requirements.

A has £100 on an accounting sheet or bank statement at one bank, which other banks are contractually obligated to treat as the same as £100. He gives it to another bank or a customer in cheque form (or whatever) and the accountancy changes between the two banks. No legal tender changes hands until a withdrawl.

This has nothing to do with making a loan. Nothing.

B wants to take out a car loan. The bank gives him a form to sign, where he promises to pay £100, The bank takes his promisory note to the central bank and accesses his infinite credit there*. Either subsidary bank gives him cash (promisory notes) or it's own accounting slips which most people accept as being the same as legal tender. The banks books are balanced.

Then the bank asks him for "repayment". At this point he can do a few things, one of which is feel guilty for having accessed his infinite cerdit and run around like an idiot making payments to a non existant debt. Another is he doesn't pay, but still thinks it's valid and fails to ask the right questions at the right time or reveal any knowledge and the bankers will make him bankrupt to keep the game going. Very few people ask any questions and fewer still the right ones.

In short, the "borrower" provides both sides of the transaction. It is the borrower who intoduces new credit/money into the system.




*Modern currency are debt notes. Try getting a bank account without being a citizen anywhere.

with a car loan, the bank would not create any money, it would hand B £100 from its own ill gotten stinking stock.

So in effect, B does owe the bank its money back.

If we do that to any significant degree the Inland Revenue will lock us up for tax evasion.

We are debt slaves to the monetary system, and this is enforced by law..

Sure if they did hand over their own money, yes.

They don't. Why would they?

They have just been handed the cash by some stranger, who is going to give them even more for the priviledge of doing so. What would you if you found such a sucker?

Bob gives you something worth £1,000 "to the right people" aka his signature. You sell it on and give him £1,000 as a "loan." Bob thought his signature was worthless and will "pay you back". You now have £2,000 + interest if he does so and £1,000 if he doesn't. Can't lose.

no, bobs signature has got him some goods or services, valued at £1000.

..because it's worth £1,000

Signature in - Bank adds £1,000.

Payment out - Bank subtracts £1,000

Bank even, Bob even, merchant paid.

Then bank asks Bob for it's £1,000 back. This is double billing, this is fraud.

No, cos the bank starts with £1000 of its own ill gotten, family in the gutter, funds, once it has passed the £1000 to Bob, they are £1000 down, with a signature as security.

At the end of the loan they will have no signature, their £1000 back, some interest and Bob has his goods.

Apart from the family in the gutter, whats the problem with this example?

Thatll be 100inj please.

nothing apart from the fact that it's not what the banks do.

The banks value bob's signature at £1,000. Then they give him £1,000 to spend. Bob spends it. At this point all books are balanced, everyone is square.

Banks books are balanced, Bob's books are balanced, Merchant is paid.

Bank now claims £1,000 + interest from Bob. But bob has already paid them, in fact he is the only one with anything of value to offer - his signature.

I see your logic, but in the banks eyes Bobs Signature is a LIABILITY.

If they sell it on, the liability is off their books, if they dont they need it paid back to balance the books. If he defaults, they are down.

Its all a paper exercise and it is counterintuitive.

I'm not sure what you're smoking, but can I have some please?

They go UP then down.

Bob gives them £1,000, then they give it back to him.

Start off with £10million.

Bob adds £1million

Bank has £11million.

Bob spends £1million.

Bank has £10million again.

Bob now thinks he has been given something by the bank because he signed a loan form that is, a promisory note with LOAN written at the top. (Calling your dog "cat" doesn't make it stop woofing, btw) From Bob's position he thinks he has been given something by the bank, and so makes efforts to repay what he thinks he has been loaned.

Bob is now a revenue stream for the bank, a source of energy and income. he is an asset.

From this position, if Bob stops paying, he ceases to be an asset and becomes a liability.

As I said its counterintuitive.

Bob HAS received the Banks own money.

The outstanding loan to bob is the Asset, and its that that provides the income. Bob could sell his loan on along with any goods he sells on, eg he bought a car for his £1000, so he sells the car on to Injin for £100 cash and Injin pays the rest of the loan.

The bank dont care where the loan repayments come from. ( in simple terms that is)

He only recieves the banks money because he has given them something worth it in the first intance.

He doesn't actually owe them anything, because no loan was ever made. He paid them with something worth the value of the money he recieved, which he provided, his signatue and ability to access credit at the central bank.

It's much easier to see if you replace money with a real substance, which is why bankers hate gold etc. Real things you can't call 15 names and get away with it, and if you try to do it the other way around, and call 15 things all by the same name, people don't fall for it.

Bob gives bank bar of gold.

Bank gives bar of gold back to Bob.

Bob thinks he has received a loan of a bar of gold. Bob gives bar of gold to bank again + some coins.

Bank has 2 bars of gold.

Bob fails to give bank bar of gold. Bank has no bars of gold, exactly where it was before it met Bob. Bob still has bar of gold, exactly where he was before he went into the bank.

Bank was thinking that Bob would pay them the bar of gold + coins and had him down as an asset. Bob's failure to provide bars and coins is a liability.......fraud though it is in real terms because no one can claim anything from others but a real loss.

Bob's books are balanced, Banks books are balanced only if Bob doesn't pay them anything other than his initial input.

when did Bob give the bank £1000? youve made that up

When he signed the loan form.

It's a promisory note.

Look at a cheque - it's a pomisory note.

Now look at a fiver - it's a promisory note.

Now look at a "loan form" - it's a promisory note.

But what is being promised?

Nothing, nada, nix, sweet ****** all. There is nothing at the end of this rainbow and a promise is a promise is a promise if there is no substance to be provided for it.

he has promised to pay back the £1000 the bank gave him. He could equally have promised to give back 1000 sea shells.

His promise is the same as the banks.

The £1,000 is itself a promise. Read a tenner.

It's a promise ot promise to promise to promise.......nothing, just more promises........so all that's been exchanged are promises so everything is equal.

Edit: Posted in error

Should have left it, never stops most of us.

Banking Law enables banks to Borrow Money Into Existence At 0% Interest.

Thank you for all the comments. I have managed to respond to a few below. The diagram has been changed in response to some very good points...

We start out as before with three individuals A has £100, B has nothing and C has a car but no money. A deposits the money in the Bank. If we lived in a system of full-reserve banking the Bank would be obliged to keep the money available for A to take it out on demand. Fractional-reserve banking allows the Bank to lend the money (to B...) on the understanding that, if required, the "bank account money" belonging to A can be exchanged for cash.

When A decides he/she would like to buy the car the Bank is able to use the Royal Mint to exchange the bank account money for cash (notes and coins). A then buys the car for £100 from C.

Regarding the choice of currency, my computer is from the States and so I don't have a "£" on the keyboard. Normally this is not a problem because I can 'copy and paste' but the software used to create the image (http://www.izhuk.com/painter/) would not allow 'copy and paste'.


Thanks! The diagram is getting a bit cluttered but if you wanted to include it, the Bank of England would be an entity lending to the Bank at the "base rate".

Bank of England lending to banks is M0 so it isn't hugely significant when compared with commercial bank lending. Narrow money in the UK is less than £50 billion and UK broad money is approaching £1,700 billion.


Thanks for your comments, hopefully the new diagram improves things?


If you assume, for a moment, that A keeps the £100 on deposit (at 0% interest) and doesn't buy the car, then by the time the loan is repaid the bank has paid no interest on the money used to lend to B.


Please see response to "northernbear" regarding central banks.

The Treasury Department allows the Government to borrow from both the private sector and the central bank. I'm not sure of the figures in the UK but in the States roughly 55% of borrowing comes from the private sector (source). When the Government borrows from the Bank of England in this way, it is as though the Bank of England is a private bank to the Government (since Government Debt is broad money not narrow money).


"The national mint sells cash for treasury bills" Can you find a link to support this? What rate of interest does the Royal Mint earn on the Treasury Bills?
"A - the original depositor - would be repaid in money borrowed from another commercial bank" If the Bank can't find anywhere to borrow the money from is the customer able to get his/her money back?
"quite possibly the commercial bank of "C"" C doesn't have any money (initially at least), only a car.

"No one got an interest free loan" Assuming the Bank is paying nothing to the depositor A, what is the rate of interest the Bank pays on the money loaned to B?
"no one magicked any money from anywhere" If we consider the situation when the deposit has been withdrawn (to buy the car) the Loan remains. So where has the money come from to make the Loan (and what interest rate does the Bank pay)?
"the Royal Mint keep on issuing commemorative coins" The Notes Circulation Scheme if you prefer! http://www.bankofengland.co.uk/banknotes/a...circulation.htm
" 1) If A and D chose to withdraw their money at the same time. B would have to repay, and he might not be able to repay quickly - causes a run." The Bank can't force B to pay back the Loan before it's due (unless he/she wants to or in the case of negative equity).
" 2) If the bank borrows short term from A, and lends to B long term, then the bank is relying on the commercial bank to buy up the loans - that causes a funding problem if the commercial bank won't play. That is what happened to Northern Rock." If D wants his/her money back (as well as A) then it won't matter if the commercial bank want to play or not, they won't have the funds.


"the bank pays interest on this money" How can the Bank pay interest on deposits when they are available for withdrawal on demand? The Bank can't loan the money out (to make interest to pay the depositor) because the money needs to be available for withdrawal (at all times).
"If A withdrew the money the bank would require overnight funds from the BoE and then funds from elsewhere - other depositors or lenders" Looks like the Bank would save a bit of money if the depositor A kept his/her money in the account!

No Banking law does not allow any such thing.

Money can be created when loaned against a pledge that has a value, eg a house.

I pledge (mortgage) my house to the bank who says OK, that house is worth 100K, we will loan you 100K (100% mortgage) and for the privilege of creating that 100K we will charge you an interest.

Where does the banks 100K come from.

Well, 1, they can create it, as it is backed by the value of the house. they are limited as to how much they can do this based on their CAPITAL reserves ( Banking Law)

2. they can borrow it from the money markets and keep the difference in interest.

3. They can lend all their own money from their own stock and keep all the interest.

I don't think that is correct.

Option "1), they can create it," doesn't exist. The bank must borrow it from someone else to lend on. The capital reserves sets a ratio between shareholders funds and the amount they can lend out.

I don't know where this "banks can create money". It seems to me down to a misunderstanding of fractional reserve banking. Commercial banks cannot magic money into existence. Only central banks can do that.

Of course money is created- you dont think 100trn exists in a vault somewhere ready to be lent?

http://edmi.parliament.uk/EDMi/EDMDetails....amp;SESSION=681

Publicly created money was down to 3% of all created money in the UK- the rest is privately created on which the government pays interest, like the rest of us

There is nothing in place in law that allows for the creation of money and then calling it a loan. Equally there is nothing stopping them doing it either. it's just an ability they have, like everyone else has. There is no legal basis for pursuing debts based on fractional reserve banking, which is another story.

It happens all the time because no one complains but that's the basis of the legal system - no complaint, no case.

And I see Mr. Optobear needs some Injindollars, seeing as he thinks money cannot be created.

£1,000,000 for you, Mr. Optobear. Spend it wisely.

Even though I have no idea what any of this is about I believe there is an ex bank boss in Newcastle looking for new business models and this may be useful to him. All you need is a risk analysis showing this is low risk , or better still no risk at all, and off you go.

the biggest confusion over the creation of money arguement is that people are arguing from two sides of the coin.

the mix-up depends on what you consider "money".

the correct answer should be that only central banks can create new money.

however it depends on how you define money. if your bank balance reads as £1000 and someone elses bank balance reads as £1000, does this means that the £2000 is matched directly as "real money" in a bank vault? the answer is no.

essentially your bank statement is simply an accounting principle. it is not actual money matched in a vault, instead it mereley indicates that a bank owes you £1000.

quite simply, a bank doesnt have enough money to match all the money that it appears to owe to all its customers.

so although to an individual, a bank would have enough to cover your £1000 deposit - as a whole market, a bank would not have enough money to cover everyones deposits should they wish to withdraw their money at the same time.

take an example of:

person A deposits £1000 at barclays.
barclays lends that £1000 to person B. it would appear that new money has been created on record:

A still has a £1000 deposit shown on his bank statement.
B has the actual £1000 in cash.

the actual money stays the same (£1000) but on record, it looks like £2000 now exists, which in reality it doesnt.

A's money is simply an accounting principle showing that the bank owes him £1000. person B actually has the £1000 in cash.

however, this arguement goes a lot further as people could say "but credit money is pretty much as good as actual money" - which essentially is true, as long as a bank run never occurs. but this is a seperate issue, and again dependant on how you define money.

one side is looking at the mechanics of actual money, the other side is looking at the everyday effects of credit money.

Here is an actual court case from the USA:

http://www.webofdebt.com/articles/dollar-deception.php

I never got to court, they vanished when I asked for various proofs.

no, we had money long before we had central banks.

read the article from the houses of parliament http://edmi.parliament.uk/EDMi/EDMDetails....amp;SESSION=681

money is just a piece of paper, or a record in a book or computer, that somebody owes something to somebody.

Banks create these IOUS "at will" subject to rules, which were themselves created to prevent the creation in itself having too much of an advantage for the creators (banks).

97% of all money created ( as at 2003) in the UK was created by private banks.

They said so in parliament.