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Banks are not merely intermediaries between savers and borrowers. Loans create money, but only loans that are not used to repay other loans result in an increas

Banks are not merely intermediaries between savers and borrowers. Loans create money, but only loans that are not used to repay other loans result in an increase to the money supply. The following text comes from an ING Bank research note, quoted by The Economist [1]: "Banks do not view the creation of money as an objective itself. It is a by-product of the banking sector’s business operations. However, it is of great economic and social relevance. Not every loan ultimately results in new money. The majority of new lending is used to redeem existing loans. Money is only created to the extent the gross lending exceeds the value of the existing loans being redeemed." That note refers to the "great economic and social relevance" of these banking operations. Here's Professor Richard Werner talking about this at length. [2] Here's Perry Mehrling (who teaches Coursera's Economics of Money and Banking) weighing in [3]. He explains that it's a nuanced issue but clearly agrees that the "credit creation view" is important and quotes a Group of 30 report: “In a barter economy, there can rarely be investment without prior saving. However, in a world where a private bank’s liabilities are widely accepted as a medium of exchange, banks can and do create both credit and money. They do this by making loans, or purchasing some other asset, and simply writing up both sides of their balance sheet.” [1] https://www.economist.com/buttonwoods-notebook/2014/06/11/where-money-comes-from https://www.economist.com/buttonwoods-notebook/2014/06/11/wh... [2] https://www.youtube.com/watch?v=N-FDdHj7rPk https://www.youtube.com/watch?v=N-FDdHj7rPk [3] http://www.perrymehrling.com/2016/01/great-and-mighty-things-which-thou-knowest-not http://www.perrymehrling.com/2016/01/great-and-mighty-things...

derriz 8y ago
Again banks' role in the creation of M2 money does not reflect how individual retail banks operate. Just because you have a model that seems to describes the behavior of flock of birds doesn't mean that the model is useful when discussing the anatomy and wing-aerodynamics of individual birds. You've posted a bunch of links describing the various forms of money and the role of banks in modern (post 18th century) M2 money creation. I know all of this material but it's not relevant to the operations of individual retail banks.
- mendelsd 8y ago
  OK, so if each individual retail bank only lends out pre-existing, deposited funds, where does the increase in the money supply come from? Bear in mind that money created as a by-product of bank lending makes up the vast majority of the total money supply in various modern economies (97% in the UK [1]). [1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - derriz 8y ago
    The increase occurs because of the different definitions of money. If you define money as the sum of amounts available in demand account at banks (with is roughly what M2 is), then lending from a bank increases this number as the borrowed money ends up in the account of the borrower or in the accounts of the people the borrower spends the money with. This fact means that retail banks "create money out of nothing" only when money is defined as the sum across all banks of the amounts available to customers on demand. No individual bank "creates money out of nothing", individually they borrow money and lend a fraction of it out; they have balance sheets which balance - i.e. ignoring shareholder equity, for every asset (money owed to them by a borrower), there must be a liability (money they owe to lenders including depositors). The M2 money supply counts the latter but does not deduct the former from the sum; as a result, the M2 money supply has a direct relationship with the total size of retail banking balance sheets. M2 is an economic statistic and it's behavior tells you nothing about how individual banks operate.
    - mendelsd 8y ago
      OK, how does that gel with a report from S&P [1] that says: “Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit “creation” – credit is created literally out of thin air (or with the stroke of a keyboard)”? Also Prof Werner's analysis, he reaches the same conclusion. [1] http://positivemoney.org/2013/08/repeat-after-me-banks-can-not-and-do-not-lend-out-reserves-sp-report/ http://positivemoney.org/2013/08/repeat-after-me-banks-can-n...

derriz 8y ago

Again banks' role in the creation of M2 money does not reflect how individual retail banks operate. Just because you have a model that seems to describes the behavior of flock of birds doesn't mean that the model is useful when discussing the anatomy and wing-aerodynamics of individual birds. You've posted a bunch of links describing the various forms of money and the role of banks in modern (post 18th century) M2 money creation. I know all of this material but it's not relevant to the operations of individual retail banks.

mendelsd 8y ago
OK, so if each individual retail bank only lends out pre-existing, deposited funds, where does the increase in the money supply come from? Bear in mind that money created as a by-product of bank lending makes up the vast majority of the total money supply in various modern economies (97% in the UK [1]). [1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- derriz 8y ago
  The increase occurs because of the different definitions of money. If you define money as the sum of amounts available in demand account at banks (with is roughly what M2 is), then lending from a bank increases this number as the borrowed money ends up in the account of the borrower or in the accounts of the people the borrower spends the money with. This fact means that retail banks "create money out of nothing" only when money is defined as the sum across all banks of the amounts available to customers on demand. No individual bank "creates money out of nothing", individually they borrow money and lend a fraction of it out; they have balance sheets which balance - i.e. ignoring shareholder equity, for every asset (money owed to them by a borrower), there must be a liability (money they owe to lenders including depositors). The M2 money supply counts the latter but does not deduct the former from the sum; as a result, the M2 money supply has a direct relationship with the total size of retail banking balance sheets. M2 is an economic statistic and it's behavior tells you nothing about how individual banks operate.
  - mendelsd 8y ago
    OK, how does that gel with a report from S&P [1] that says: “Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit “creation” – credit is created literally out of thin air (or with the stroke of a keyboard)”? Also Prof Werner's analysis, he reaches the same conclusion. [1] http://positivemoney.org/2013/08/repeat-after-me-banks-can-not-and-do-not-lend-out-reserves-sp-report/ http://positivemoney.org/2013/08/repeat-after-me-banks-can-n...