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[erolz66]

No you don't get it.

It's not creating money. It's creating an IOU.

Subject only (but crucially) to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money

Others sometimes point out that commercial bank money is credit and then proceed to distinguish this from 'money' and measures of the money supply. Such an argument is mere smoke and mirrors. It is impossible for anyone else to distinguish between a balance on my current account that got there because I paid in £1,000 in cash over the counter, and the same balance that got there because the bank advanced me a £1000 loan. Even the cash I pay in over the counter had to be withdrawn from another bank account, which may have been funded by a loan or overdraft. In any event, as opinion polls referred to in chapter 2 demonstrate, if you stopped someone in the street and told them that the balance in their current account was not actually money at all, they might well think you had taken leave of your senses

It's all about definitions. They have definitions for everything and I am not familiar with them all. To really get into it, you have to learn all about the M indices. It is a very complicated theory which requires considerable technical knowledge which I don't possess so all I can do is try and explain in laymen's terms.

The 'M indices' as you call it are used by central banks when looking at 'money supply' and are used to categorise different types or forms of MONEY, not to distinguish 'money' from 'iou's' as you call them. It typical classifies different types of money based on it's liquidity. Cash is liquid. Current accounts are liquid. A savings account where I have to give 3 or 6 months notice of withdrawal are not as liquid. This is what the 'M indices' are used to distinguish.

Central Bank money (also know as M0, high powered money, monetary base, or narrow money)
1. Notes and coins in circulation (sometimes referred to as cash)
2. Reserve balances at the Bank of England

Broad Money
M1 Notes and coins in circulation with the non-bank public plus sterling current accounts.
M2 M1 plus sterling time deposits with up to three months' notice, or up to two years' fixed maturity
M3 M2 plus repurchase agreements, money market fund units, and debt securites up to two years - estimated by the European central bank (ECB) for the UK to be consistent with the M3 measure used by the ECB for the euro area
M4 M3 plus other despoits at UK banks or building societies

It is all money. You are in fact choosing to define money as only being 'Central Bank Money' or M0 - which indeed can only be created by the Central Bank alone and then choosing to call all the other forms of money (other than cash) in M1 to M4 'IOU's not money'. This to me is a totally spurious argument. The 'amount' in my current account IS money. It is not Central Bank Money but it is Money.

[Robin Hood]

There seems to be some confusion as to terminology?

There are three terms that are all linked to banking operations but each is different:

• IOU – is primarily a written acknowledgement of a medium to long terms debt. It is usually settled using currency. An IOU is therefore related to a debt .... it is not normally used as a unit of currency but I could sell your IOU to another in exchange for currency.

• Currency- is a medium of exchange/transfer which is portable, sub-divisible and of equal unit value i.e. My €20 has the same value (purchasing power) as your €20. Currency WAS also an IOU but that passed when it was no longer exchangeable for money.(i.e. something of intrinsic value.)

• Money - has the same qualities as currency but it also a store of value over time, whereas currency devalues over time.

You could say that when the barman puts my beer on the counter top, he has my verbal IOU for a few seconds and when I pay I have settled the IOU with currency........ but that is not reality. I ask for a beer he gives it to me and I pay. The transaction was all done using currency as a medium of transfer of a relative and accepted value from me to him in exchange for the beer.


The banks accounts consider two things, like any account’s ..... ‘assets’ and ‘liabilities’.

• Banks book loans as assets because they have an IOU from the borrower acknowledging a debt and they have no liability. The borrower redeems the debt with currency.

• Banks book deposits as liabilities because someone else holds their IOU for their acknowledged debt. They will redeem their debt with currency when the lender (YOU) calls in the loan when you make a withdrawal from your account as either an electronic transfer or a cash withdrawal.

Does that make sense?

[Paphitis]

No you don't get it.

It's not creating money. It's creating an IOU.

Subject only (but crucially) to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money

Others sometimes point out that commercial bank money is credit and then proceed to distinguish this from 'money' and measures of the money supply. Such an argument is mere smoke and mirrors. It is impossible for anyone else to distinguish between a balance on my current account that got there because I paid in £1,000 in cash over the counter, and the same balance that got there because the bank advanced me a £1000 loan. Even the cash I pay in over the counter had to be withdrawn from another bank account, which may have been funded by a loan or overdraft. In any event, as opinion polls referred to in chapter 2 demonstrate, if you stopped someone in the street and told them that the balance in their current account was not actually money at all, they might well think you had taken leave of your senses

It's all about definitions. They have definitions for everything and I am not familiar with them all. To really get into it, you have to learn all about the M indices. It is a very complicated theory which requires considerable technical knowledge which I don't possess so all I can do is try and explain in laymen's terms.

The 'M indices' as you call it are used by central banks when looking at 'money supply' and are used to categorise different types or forms of MONEY, not to distinguish 'money' from 'iou's' as you call them. It typical classifies different types of money based on it's liquidity. Cash is liquid. Current accounts are liquid. A savings account where I have to give 3 or 6 months notice of withdrawal are not as liquid. This is what the 'M indices' are used to distinguish.

Central Bank money (also know as M0, high powered money, monetary base, or narrow money)
1. Notes and coins in circulation (sometimes referred to as cash)
2. Reserve balances at the Bank of England

Broad Money
M1 Notes and coins in circulation with the non-bank public plus sterling current accounts.
M2 M1 plus sterling time deposits with up to three months' notice, or up to two years' fixed maturity
M3 M2 plus repurchase agreements, money market fund units, and debt securites up to two years - estimated by the European central bank (ECB) for the UK to be consistent with the M3 measure used by the ECB for the euro area
M4 M3 plus other despoits at UK banks or building societies

It is all money. You are in fact choosing to define money as only being 'Central Bank Money' or M0 - which indeed can only be created by the Central Bank alone and then choosing to call all the other forms of money (other than cash) in M1 to M4 'IOU's not money'. This to me is a totally spurious argument. The 'amount' in my current account IS money. It is not Central Bank Money but it is Money.

Once again, money supply and the M Indices are the responsibility of the Central Bank. That is what I am saying.

IOUs are what Banks can create up to a certain point. They have no control over money supply other than within their own internal institution. They certainly can not create money.

And yes, every bank has its own M score the way I understand it in order to evaluate it under a stress test.

And don't worry, we know what money and currency actually is and it isn't a data entry but rather the supply of money which is the sole responsibility of the Central Bank

I got no agenda in this argument. I am just a seeker of the truth. I like to learn new things and Banking can be fascinating when you look at how our economies work.

I'm not the one who is grudge-obsessed, or the one that has a paranoid obsession with Banks, and who delivers sermons like an evangelical preacher against Banks. I don't even particularly like them, but they can be helpful too. Very helpful!

So now that we are satisfied as to the true functions of Commercial Banks compared to their over arching Central Banks, it's probably time to move on.

I am no follower either. Certainly no sheep. Just because I may not like Banks, I do have a healthy respect for them because of all the activity they help people generate. Yes, Banks do make the world spin.

And just because I might not like them much is no reason to construct a narrative.

Just give me the FACTS!

If some one was to say that "Big Banks treat their customers badly at times and have poor service" then I would agree somewhat. I would agree because there is an element of truth in that. Banks place their profits ahead of people and their clients most of the time as do most corporations. That is an honest fair dinkum criticism.

But to say they can create money as if they are the over arching criminals beyond government! Nope! Next idiot please!

[erolz66]

But to say they can create money as if they are the over arching criminals beyond government! Nope! Next idiot please!

A bank can not just write in it's ledgers that IT, the Bank itself, has £500 billion pounds and then use that ledger entry to buy Apple Corp. It CAN however write in its ledgers that I have £5000 in my account with them (or 50,000 or 500,000) and I CAN then use that 'ledger entry' to buy £5000 pounds worth of apple stock or pay £5000 pounds of taxes to the government or buy anything I like. For me that ledger entry is 'money' in every sense of the word. For the bank to be allowed to write £5000 credit in my account with them it does NOT have to have £5000 of its own, unused for anything else and in liquid form - not as cash or as central reserves. It does literally create in effect an entirely new £5000, that did not exist before the ledger entry was made. The total supply of money in circulation within the UK (if it is a sterling loan from a UK bank) increases by £5000 at the point they make that ledger entry saying I have £5000. To me and to anyone I pay with this money, it is exactly the same and indistinguishable from £5000 I may have deposited in cash over the counter with the bank. That IS creating money.

read this quote from the deputy Governor of the Bank of England in 2007

Paul Tucker, Deputy Governor at the Bank of England in 2007 wrote:
Subject only (but crucially) to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money.

I am just a seeker of the truth. I like to learn new things and Banking can be fascinating when you look at how our economies work.

Again I really would recommend you buy and read http://www.amazon.co.uk/Where-Does-Mone ... +come+from if you are interested in this subject.

[Paphitis]

But to say they can create money as if they are the over arching criminals beyond government! Nope! Next idiot please!

A bank can not just write in it's ledgers that IT, the Bank itself, has £500 billion pounds and then use that ledger entry to buy Apple Corp. It CAN however write in its ledgers that I have £5000 in my account with them (or 50,000 or 500,000) and I CAN then use that 'ledger entry' to buy £5000 pounds worth of apple stock or pay £5000 pounds of taxes to the government or buy anything I like. For me that ledger entry is 'money' in every sense of the word. For the bank to be allowed to write £5000 credit in my account with them it does NOT have to have £5000 of its own, unused for anything else and in liquid form - not as cash or as central reserves. It does literally create in effect an entirely new £5000, that did not exist before the ledger entry was made. The total supply of money in circulation within the UK (if it is a sterling loan from a UK bank) increases by £5000 at the point they make that ledger entry saying I have £5000. To me and to anyone I pay with this money, it is exactly the same and indistinguishable from £5000 I may have deposited in cash over the counter with the bank. That IS creating money.

read this quote from the deputy Governor of the Bank of England in 2007

Paul Tucker, Deputy Governor at the Bank of England in 2007 wrote:
Subject only (but crucially) to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account, which can be paid away to wherever the borrower wants by the bank 'writing a cheque on itself'. That is, banks extend credit by creating money.

I am just a seeker of the truth. I like to learn new things and Banking can be fascinating when you look at how our economies work.

Again I really would recommend you buy and read http://www.amazon.co.uk/Where-Does-Mone ... +come+from if you are interested in this subject.

I don't need to buy this book. Fact is, there is so much material on the net and a lot of it is pushing a very misleading narrative that Banks can create money from thin air. The internet is rife with false narratives. Probably because Banks are very unpopular with the vast majority. Very few sources are actually explaining what really happens. One excellent source was the BoE paper linked in this thread.

This is very false. Fact is, banks are unable to fund themselves, and if they did, you can imagine there would be nothing stopping them. They can only act as intermediaries, or facilitators of a transaction. When you buy something, you have to give up something of equal value to pay for it. So Banks issue an IOU to facilitate the transaction in exchange for a security. However, the IOU is in effect a liability (because the IOU is a credit to someone's account and is at call) to the Bank even though it is listed as an asset. The Bank however has a promissory note from the Borrower who has to make installments + interest. This is not money creation in my book.

But we often hear that banks create money “from thin air”. Doesn’t that mean that a bank never has to obtain payment assets from some external source in order to pay its debts? Can’t the bank simply create its own payment assets out of the thinness of air, so to speak, and pay its debts with those newly-created assets? Aren’t banks in this sense self-funding?

No, banks are not self-funding, either individually or in the aggregate. The “out of thin air” language, while containing elements of truth, can be extremely misleading, and people using this language sometimes woefully under-represent the significance of central bank liabilities and the government in the US financial system. Banks can indeed create deposit account liabilities from thin air, just as you and I can create liabilities from thin air when we issue IOU’s and someone accepts them. But those deposit liabilities are debts of the bank, just as the IOUs that you and I issue are our debts. And these bank debts are not just so-called debts or pro forma debts. They are real debts which banks must and do routinely pay off in the course of doing everyday business; and the assets a bank uses to pay these debts come from sources external to the bank. A bank cannot simply manufacture its own payment assets from thin air.

[Robin Hood]

Paphitis:

Just give me the FACTS!

You have been given the facts time and time again from authoritative sources but you reject them because they do not match you understanding and narrative! Other than saying the BoE have written their report badly just to distort the story ..... you have presented no rational explanation. When I don't understand, I enquire, not just make it up as I go along. I have had e-mail contact with Richard Werner as I had a query on his paper, he explained it to me and I listened .... that way I learn from those that know more than I do. Your narrative is just a joke!

But to say they can create money as if they are the over arching criminals beyond government! Nope! Next idiot please!

Unfortunately you are the idiot for not understanding what you read and then referring to those who very evidently know a LOT more than you do, as idiots and children. You are utterly confused by what you read, if you ever read it properly, and start expounding a load of disjointed, ill-informed rubbish due to ignorance.

[Paphitis]

Paphitis:

Just give me the FACTS!

You have been given the facts time and time again from authoritative sources but you reject them because they do not match you understanding and narrative! Other than saying the BoE have written their report badly just to distort the story ..... you have presented no rational explanation. When I don't understand, I enquire, not just make it up as I go along. I have had e-mail contact with Richard Werner as I had a query on his paper, he explained it to me and I listened .... that way I learn from those that know more than I do. Your narrative is just a joke!

But to say they can create money as if they are the over arching criminals beyond government! Nope! Next idiot please!

Unfortunately you are the idiot for not understanding what you read and then referring to those who very evidently know a LOT more than you do, as idiots and children. You are utterly confused by what you read, if you ever read it properly, and start expounding a load of disjointed, ill-informed rubbish due to ignorance.

Sorry but you know nothing. You are just preaching some anti-banking hysteria in an evangelical manner with extreme zeal in order to harness the public discontent and anger against the Banks. Little do you know, that by undermining confidence, you are actually playing with fire and when it blows up in your face, it is usually the poor and vulnerable who will suffer, not the super wealthy you claim to despise. I have an issue with this as well. Because people who say such things also despise genuine hard working individuals who have worked hard for their success. You can keep your class war to yourself.

In addition, your argument doesn't even make sense. You are claiming that Banks can create money from thin air. That means they can self fund. Well isn't this the most stupidest thing of all. Why didn't the self fund the 5 billion haircut they got for the Greece bailout since it was all created?

And no, I do not believe for one second that the BoE have distorted the story. It is YOU who is distorting everything to support a very misleading narrative from the angry public. Usually these feelings are ideologically driven.

I will only look at sources coming from the BoE and other central banks like it. Not some idiotic agenda driven drivel which is claiming Banks can create money from thin air. Or that Banks are the most evil of institutions bleeding countries dry and ripping off their infrastructure. I mean please.

But if for one second you want to get real, and say something that is actually quite valid about the manner in which Banks treat people, customers and those who default, then sure, I might be inclined to agree with you. I don't like to hear of a bank throwing a family out on the streets or a farmer off their land. it's down right awful! These are fair dinkum criticisms against banks, but let's not just make things up to make them look like institutions which are run by Darth Vader and the evil Empire from Star Wars. Despite these negatives, there are also millions of positives, such as all the micro business start ups getting off the ground, people buying housing and a lot more, which generate wealth, prosperity and employment to millions. They get it right 99.99999999% of the time. Overall, I can honestly say how impressive the overall system really is.

[erolz66]

Paphitis would you agree that an Executive Director, Markets and a Member of the Monetary Policy Committee at the Bank of England knows what they are talking about and is not 'some anti banking zealot' ?

If you can agree this, then I would like to refer you to this document of a speech given by Paul Tucker, Executive Director, Markets and a Member of the Monetary Policy Committee, Bank of England at the Monetary Policy and the Markets Conference, London 13 December 2007.

http://www.bankofengland.co.uk/archive/ ... ech331.pdf

This link then to this speech is a primary source. It is from the Bank of England own website. I would like to draw your attention to this part specifically , but please do read all of it if you wish to ensure it is not taken out of context.

Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the draw­down of back­up lines – to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence.

What do YOU think he means when he says "That is, banks extend credit by creating money" ?

I think he is saying that Banks can and do 'create money' ? What do you think he is saying ?

[Paphitis]

Paphitis would you agree that an Executive Director, Markets and a Member of the Monetary Policy Committee at the Bank of England knows what they are talking about and is not 'some anti banking zealot' ?

If you can agree this, then I would like to refer you to this document of a speech given by Paul Tucker, Executive Director, Markets and a Member of the Monetary Policy Committee, Bank of England at the Monetary Policy and the Markets Conference, London 13 December 2007.

http://www.bankofengland.co.uk/archive/ ... ech331.pdf

This link then to this speech is a primary source. It is from the Bank of England own website. I would like to draw your attention to this part specifically , but please do read all of it if you wish to ensure it is not taken out of context.

Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer’s current account, which can be paid away to wherever the borrower wants by the bank ‘writing a cheque on itself’. That is, banks extend credit by creating money. This ‘money creation’ process is constrained: by their need to manage the liquidity risk – from the withdrawal of deposits and the draw­down of back­up lines – to which it exposes them. Adequate capital and liquidity, including for stressed circumstances, are the essential ingredients for maintaining confidence.

What do YOU think he means when he says "That is, banks extend credit by creating money" ?

I think he is saying that Banks can and do 'create money' ? What do you think he is saying ?

No no Erolz. I'm sorry but I didn't come down in yesterday's shower.

The BoE also refers to money creation but then it goes on and explains how this is done. It makes it abundantly clear they are talking about IOUs or Broad Money, not physical money. When the Bank makes a loan, they issue an IOU or credit. that is what this statement is referring to.

You are going to have to do a lot better than that. The general consensus, even of the document you link to, is that banks can create IOUs which are a credit in someone's account. The very same document also distinguishes credit from money creation. In other words, it's not the same thing at all. It's not money creation from thin air, but they acknowledge at the same time that money is created metaphorically in the form of Broad Money into the economy which needs to be supported by the Banking system.

In addition, Banks are unable to be making these loans (credits) or IOUs if they are not in a position to support the lending through their money supply. Hence why Banks undergo stress tests.

And yes, banks are able to issue Cheques or slips of paper which is effectively money. These cheques are also negotiable and are also an IOU or a liability to the Bank. So if the Bank issues you with a Cheque of $100 dollars and you owe the grocer $100, then you are allowed to sign the Cheque over to the grocer. The bank now owes the grocer $100 whilst you have cleared your debt. An example of how you are able to pay a debt with money that doesn't exist all because you have a promissory note from the Bank. So you are paying a liability with a liability or transferring your Banks liability to you to the grocer.

[erolz66]

No no Erolz. I'm sorry but I didn't come down in yesterday's shower.

I do not think you had (come dopwn in yesterdays shower). I am in fact trying to find some 'common ground' here - something we can agree on.

The BoE also refers to money creation but then it goes on and explains how this is done. It makes it abundantly clear they are talking about IOUs or Broad Money, not physical money. When the Bank makes a loan, they issue an IOU or credit. that is what this statement is referring to.

What do you mean by 'physical money' ? Actual notes and coins ?

Why do you insist that 'Broad Money' (in the form of an entry in a banks computer system that says I have £2307 credit) is not 'money' but is only in fact an 'IOU' ? Can I convert this 'ledger entry', this 'IOU', this 'not money' (according to you), into notes and coins at will by visiting my Bank ? Yes I can. Can I buy anything I want with it ? Yes I can ? Can I pay my taxes with it, without first having to change it into 'physical money' ? Yes I can. If I were to transfer £500 of it to your account would you really say I had not given you money but in fact have just given you an IOU from my bank ? The non physical ledger entry for my account with my Bank can and does do everything that 'physical money' can do, yet you insist it is NOT money ? That is what I am struggling with.

Is money in the form of physical notes and coins different from 'money' in the form of 'ledger entries in bank accounts' ? Yes it is but that does not mean that such ledger entries are NOT money. It just means (to me at least) that they are a different FORM of money. A less 'physical one (than notes and coins) but money none the less in the sense that I can do anything with them that I can do with notes and coins and I can change them into notes and coins (and back from such) at will.

Can private banks create money in the form of notes and coins ? No they can not, only the central bank can do that. Can they create money in the form of Central bank reserves ? No they can not, only the central Bank can do that. Can they create something (a ledger entry in my account) that I can then use to pay for things, to change into notes and coins and back again at will if I want and that allows me to do exactly the same as I can with notes and coins ? Yes they can and what I am struggling with is why you insist that such 'ledger entries' are NOT money. It (the ledger entry) can be used by me to do anything and everything that I can do with 'physical money' and can be changed into 'physical money' and back again without cost or let or hindrance to me - yet you claim it is NOT money ?

Can you see what I am saying / trying to say ?

I would like to also try this extract from the same document

And for this reason,banks are after all decisively different from other intermediaries

I think it clearly states that banks and only banks, are not just 'intermediaries' no different from no bank intermediaries - that actually they are decisively different for non bank intermediaries. What do you think ?