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> I’m talking about commercial banks themselves being in the process of creating money, which in the UK was indeed not an established fact until the 2000s. The

> I’m talking about commercial banks themselves being in the process of creating money, which in the UK was indeed not an established fact until the 2000s. There is a concerted effort amongst some fringe economists to make this argument, which is superficially plausible to the sort of laymen easily convinced that reading a couple of blogs arguing that an entire field is wrong is a substitute for reading anything written by that field. But of course the Bank of England knew that commercial banks were involved in the process of creating money all along. Propping up private bank money was literally their job.

scotty79 4y ago
> Propping up private bank money was literally their job. I thought their job was limiting the private money creation that without them would be totally unrestricted which would result in uncontrolled inflation and runs on banks.
- notahacker 4y ago
  Private banks create monetary aggregates by lending it to private borrowers. The fact that money is created as credit means there are already natural limits to private bank money creation (there aren't unlimited numbers of bank customers who want to borrow money and pay back more later, and some of the people and companies that would like to borrow are not people the bank trusts to be able to make the repayment) The role of the Bank of England is providing the banks with central bank reserves they can borrow as and when needed to back that privately created money up. So it gets to influence the demand for borrowing private bank money by setting the basic interest rate at which the banks can borrow reserves (mainly by intervening in secondary markets for them, but that's an implementation detail), which means it can make it more expensive to borrow reserves, which will lead to banks lending money at higher interest rates to fewer people, which will lead to less money creation This stuff is all in the paper...
  - scotty79 4y ago
    But if the private banks already have some money they can lend it again to borrowers. So they could be inflating money supply pretty much indefinitely. Sure, the number of private borrowers is limited but they are happy to sign all of their future life earnings away in exchange for some money now. And as supply of money grows inflation happens so borrowers need more and more money feeding creation of more money and further inflation. The role of central bank as a limiter of credit action (through fractional reserve) is way more important than feeding new core money into the private banking system so it can be borrowed by private borrowers. Feeding new money is kinda optional and it's most important role is possibly enabling new banks to be created. In absence of it only companies that already have a lot of money could create a bank. The other thing is that if economy development outpaces growth of money supply created by private banks whole system could get stuck in deflation. Which was not great last time it happened.
    - notahacker 4y ago
      Honestly, I have no idea why you're arguing popular misconceptions about central banks under a paper written by a central bank explaining how central banking works... Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). So the quantity of money at a given interest rate is ultimately set by the demand of creditworthy borrowers at that interest rate, which is certainly not unlimited. Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, and it's not "kinda optional" for them to provide enough reserves for the system's day to day needs. Instead, they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy.
      - scotty79 4y ago
        > Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). 2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations. > The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, In the last two decades that requirement was adjusted at least 5 times in my country so tinkering with it is definitely a tool that some central banks use. In the nineties it was even set to 30% to quench hyperinflation. > Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. First formal central bank, The Bank of England was created to finance the war. Central banks gradually acquired their modern roles as they developed. The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere. > they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy. That the thing they do most often but not their most powerful tool.
paganel 4y ago
If they knew it they certainly kept it to themselves. Like I said, it wasn’t until 2008 or shortly after that when King acknowledged it out loud.
- notahacker 4y ago
  Funny that, because I distinctly remember participating in an early 2000s competition the Bank of England organised for schoolkids to teach us about monetary policy. Of course, that didn't exactly guarantee participants a graduate-level understanding even if their team got through the first round, but it's not exactly the action of an entity that's trying to hide what they do! Maybe people not understanding the mechanics of complicated things isn't actually the result of a conspiracy to stop them from understanding complicated things. Perhaps they'd also be somewhat more likely to understand how complicated things work if they didn't start from the premise that the people who know how they work are inherently untrustworthy...

scotty79 4y ago

> Propping up private bank money was literally their job. I thought their job was limiting the private money creation that without them would be totally unrestricted which would result in uncontrolled inflation and runs on banks.

notahacker 4y ago
Private banks create monetary aggregates by lending it to private borrowers. The fact that money is created as credit means there are already natural limits to private bank money creation (there aren't unlimited numbers of bank customers who want to borrow money and pay back more later, and some of the people and companies that would like to borrow are not people the bank trusts to be able to make the repayment) The role of the Bank of England is providing the banks with central bank reserves they can borrow as and when needed to back that privately created money up. So it gets to influence the demand for borrowing private bank money by setting the basic interest rate at which the banks can borrow reserves (mainly by intervening in secondary markets for them, but that's an implementation detail), which means it can make it more expensive to borrow reserves, which will lead to banks lending money at higher interest rates to fewer people, which will lead to less money creation This stuff is all in the paper...
- scotty79 4y ago
  But if the private banks already have some money they can lend it again to borrowers. So they could be inflating money supply pretty much indefinitely. Sure, the number of private borrowers is limited but they are happy to sign all of their future life earnings away in exchange for some money now. And as supply of money grows inflation happens so borrowers need more and more money feeding creation of more money and further inflation. The role of central bank as a limiter of credit action (through fractional reserve) is way more important than feeding new core money into the private banking system so it can be borrowed by private borrowers. Feeding new money is kinda optional and it's most important role is possibly enabling new banks to be created. In absence of it only companies that already have a lot of money could create a bank. The other thing is that if economy development outpaces growth of money supply created by private banks whole system could get stuck in deflation. Which was not great last time it happened.
  - notahacker 4y ago
    Honestly, I have no idea why you're arguing popular misconceptions about central banks under a paper written by a central bank explaining how central banking works... Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). So the quantity of money at a given interest rate is ultimately set by the demand of creditworthy borrowers at that interest rate, which is certainly not unlimited. Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, and it's not "kinda optional" for them to provide enough reserves for the system's day to day needs. Instead, they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy.
    - scotty79 4y ago
      > Banks have absolutely no incentive to provide money to everyone that wants to borrow all their future life earnings now, not because of hard limits on their funds but because they want their lending to be repaid at a profit (when it won't be, you get 2008). 2008 happened because clearly the banks do have that incentive. The only thing that stops them are the regulations. > The "reserve requirement" (technically replaced by a capital requirement) isn't something central banks tinker with, In the last two decades that requirement was adjusted at least 5 times in my country so tinkering with it is definitely a tool that some central banks use. In the nineties it was even set to 30% to quench hyperinflation. > Central banks were created to stop banks with solvent loan portfolios collapsing due to demands on their reserves, by ensuring banks could always borrow the reserves to back up the numbers on their spreadsheet. First formal central bank, The Bank of England was created to finance the war. Central banks gradually acquired their modern roles as they developed. The role you so much focus on is called being 'lender of last resort' to private banks. Private banks use it only if they can't get money cheaper anywhere. > they influence credit action by adjusting the price of borrowing those reserves, and thus the demand for credit in the wider economy. That the thing they do most often but not their most powerful tool.

paganel 4y ago

If they knew it they certainly kept it to themselves. Like I said, it wasn’t until 2008 or shortly after that when King acknowledged it out loud.

notahacker 4y ago
Funny that, because I distinctly remember participating in an early 2000s competition the Bank of England organised for schoolkids to teach us about monetary policy. Of course, that didn't exactly guarantee participants a graduate-level understanding even if their team got through the first round, but it's not exactly the action of an entity that's trying to hide what they do! Maybe people not understanding the mechanics of complicated things isn't actually the result of a conspiracy to stop them from understanding complicated things. Perhaps they'd also be somewhat more likely to understand how complicated things work if they didn't start from the premise that the people who know how they work are inherently untrustworthy...