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Jesup, IA | James - The BOE video is technically correct. They book the loan and effectively put the proceeds in the borrower's account. So technically money is created. But that is not what expands the money supply. It's the act of withdrawing and redepositing it, again and again. In the real world, this is done by several people and in several financial institutions, but the net result is the money is "multiplied"
What the BOE guys don't explain well, or in adaquate detail is bank accounting. That the money must be withdrawn to "multiply", and this is simply not possible unless the bank already existed with some depositors currency, balances or bank equity already available. They also don't talk about the necessity that new depositors must replenish the currency and balances. Think Jimmmy Stewart in "It's a Wonderful Life" when there is a run on the bank. Everybody wanting to take money out, without somebody willing to put and leave it in does not work. This is also exactly why the bank must maintain reserves.
John has started a new thread, and included a link to a Dallas Fed publication. On page 11, it explains the multiplier effect and how that is what creates spendable money.
I wish I could elaborate more, but I just don't have time today. But my message is that booking a loan and a deposit to increase the money supply does not work unless the bank already exists, has currency or balances to make external payments, and has new depositors to replenish the currency and balances. When both exist, the multiplier effect can take place, and the money supply swells.
Another misconception is that Fed borrowings create money, whereas in actuality, they are more or less no different than any other depositor. The bank deposits reserves (balances) as an asset and correspondingly must book a liability indicating the obligation to pay the money back to the Fed. Now the Fed (Central Bank) extending that loan is another story. | |
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Banking, one more time....
