# Where Does Money Come From * Author: [Josh Ryan-Collins, Tony Greenham, Richard Werner, and Andrew Jackson](https://www.amazon.com/Josh-Ryan-Collins/e/B00E5TZWXM/ref=dp_byline_cont_ebooks_1) * ASIN: B00FFAKEQU * ISBN: 1521043892 * Pages: 184 pages * Publication: September 24, 2013 * Publisher: The New Economics Foundation; 2nd edition (September 24, 2013) * Reference: [[https://www.amazon.com/dp/B00FFAKEQU]] * [Kindle link](kindle://book?action=open&asin=B00FFAKEQU) --- the supply of money is actually determined primarily by the demand of borrowers to take out bank loans. Moreover, when such demand is low, because the economy is weak and hence interest rates are also driven down to zero, the relationship between available bank reserves (deposits at the central bank) and commercial bank lending/deposits can break down entirely. — location: [229](kindle://book?action=open&asin=B00FFAKEQU&location=229) --- First, in the absence of a shared and accurate understanding, attempts at banking reform are more likely to fail. Secondly, the creation of new money and the allocation of purchasing power are a vital economic function and highly profitable. This is therefore a matter of significant public interest and not an obscure technocratic debate. — location: [250](kindle://book?action=open&asin=B00FFAKEQU&location=250) --- New money is principally created by commercial banks when they extend or create credit, either through making loans, including overdrafts, or buying existing assets. In creating credit, banks simultaneously create brand new deposits in our bank accounts, which, to all intents and purposes, is money. — location: [276](kindle://book?action=open&asin=B00FFAKEQU&location=276) --- We identify that the UK’s national currency exists in three main forms, of which the second two exist in electronic form: Cash – banknotes and coins. Central bank reserves – reserves held by commercial banks at the Bank of England. Commercial bank money – bank deposits created mainly either when commercial banks create credit as loans, overdrafts or for purchasing assets. — location: [280](kindle://book?action=open&asin=B00FFAKEQU&location=280)Money is: notes & coins, central bank reserves, and bank deposits. --- Since central bank reserves do not actually circulate in the economy, we can further narrow down the money supply that is actually circulating as consisting of cash and commercial bank money. Physical cash accounts for less than 3 per cent of the total stock of circulating money in the economy. Commercial… — location: [285](kindle://book?action=open&asin=B00FFAKEQU&location=285) --- Banks do not need to wait for a customer to deposit money before they can make a new loan to someone else. In fact, it is exactly the opposite: the making of a loan… — location: [291](kindle://book?action=open&asin=B00FFAKEQU&location=291) --- This is a more accurate picture, but it is still incomplete and misleading, since each bank is still considered a mere ‘financial intermediary’ passing on deposits as loans. It also implies a strong link between the amount of money that banks create and the amount held at the central bank. In this version it is also commonly assumed that the… — location: [294](kindle://book?action=open&asin=B00FFAKEQU&location=294)Fractional reserve banking is more accurate in recognizing the bank role in creating money. However it implies the bank is an intermediary and that reserves are tied to the stock of bank deposits. --- Furthermore, we argue that rather than the central bank controlling the amount of credit that commercial banks can issue, it is the commercial banks that determine the quantity of central bank reserves that the Bank of England must… — location: [301](kindle://book?action=open&asin=B00FFAKEQU&location=301)Banks lend out what they want and borrow reserves to meet requirements. --- Although possibly useful in other ways, capital adequacy requirements have not and do not constrain money creation and therefore do not necessarily serve to restrict the expansion of banks’ balance sheets in aggregate. In other words, they are mainly ineffective… — location: [306](kindle://book?action=open&asin=B00FFAKEQU&location=306) --- In a world of imperfect information, credit is rationed by banks and the primary determinant of how much they lend is not interest rates, but confidence that the loan will be repaid and confidence in the liquidity… — location: [308](kindle://book?action=open&asin=B00FFAKEQU&location=308)The primary goal of the bank is making backthe money it lent out and this will determinehow much they lend. --- Banks decide where to allocate credit in the economy. The incentives that they face often lead them to favour lending against collateral, or existing assets, rather than lending for investment in production. As a result, new money is often more likely to be channelled into property and financial speculation than to small… — location: [310](kindle://book?action=open&asin=B00FFAKEQU&location=310)Banks are more likely to lend against collateral which can lead to asset bubbles. The system would be better off if lending is done against productive uses like expanding production or technology --- We criticise the view, often presented in mainstream economics, that money is a commodity and show instead that money is a social relationship of credit and debt. — location: [320](kindle://book?action=open&asin=B00FFAKEQU&location=320) --- There is significant confusion about banks. Much of the public is unclear about what banks actually do with their money. Economics graduates are slightly better informed, yet many textbooks used in university economics courses teach a model of banking that has not applied in the UK for a few decades, and unfortunately many policymakers and economists still work on this outdated model. — location: [351](kindle://book?action=open&asin=B00FFAKEQU&location=351)Although the monetary regime has changed, most textbooks have not and therefore people have outdated ideas about banking. --- When a member of the public makes a deposit of £1,000 in the bank, the bank does not hold that money in a safe box with the customer’s name on it (or any digital equivalent). Whilst banks do have cash vaults, the cash they keep there is not customers’ money. Instead, the bank takes legal ownership of the cash deposited and records that they owe the customer £1,000. — location: [372](kindle://book?action=open&asin=B00FFAKEQU&location=372) --- The balance of your bank account, and indeed the bank account of all members of the public and all businesses, is the bank’s IOU, and shows that they have a legal obligation (i.e. liability) to pay the money at some point in the future. Whether they will actually have that money at the time you need it is a different issue, as we explain later. — location: [378](kindle://book?action=open&asin=B00FFAKEQU&location=378)Bank account deposits are all IOUs --- The process of saving and investment indirectly through banks, and directly to companies, is summarised in Figure 1.5 Figure 1: Banks as financial intermediaries Banks, according to this viewpoint, are important, but relatively neutral, players in our financial system, almost like the lubricant that enables the cogs of consumption, saving and production to turn smoothly. — location: [394](kindle://book?action=open&asin=B00FFAKEQU&location=394)According to the intermediary theory banks are neutral actors acting like lubricant in the economy. --- This theory is incorrect, for reasons that will be covered below. It also leads to assumptions about the economy that do not hold true in reality, such as the idea that high levels of savings by the public will lead to high investment in productive businesses, and conversely, that a lack of savings by the public will choke off investment in productive businesses. — location: [416](kindle://book?action=open&asin=B00FFAKEQU&location=416)The intermediation theory is incorrect and leads to the assumption that high savings necessarily leads to high investment in businesses. --- While many assume that only the Bank of England has the right to create computer money, in actual fact this accounts for only a tiny fraction of the money supply. The majority of the money supply is electronic money created by commercial banks. How these mostly private sector banks create and allocate the money supply remains little known to both the public and many trained economists, as it is not covered in most textbooks. — location: [432](kindle://book?action=open&asin=B00FFAKEQU&location=432) --- Transactions between banks can either be settled bilaterally between themselves or via their accounts with the central bank -where they hold what is known as central bank reserves. These central bank reserves, created by the Bank of England, are electronic money and are risk-free. However, unlike cash, members of the public cannot access or use central bank reserves. — location: [436](kindle://book?action=open&asin=B00FFAKEQU&location=436)Reserves are electronic moneyused for bank settlements. --- This third type of money is what is in your bank account. In banking terminology, it’s referred to as bank deposits or demand deposits. In technical terms, it is simply a number in a computer system; in accounting terms, it is a liability of the bank to you. — location: [441](kindle://book?action=open&asin=B00FFAKEQU&location=441) --- In effect what the UK and most other countries currently use as their primary form of money is not physical cash created by the state, but the liabilities of banks. — location: [456](kindle://book?action=open&asin=B00FFAKEQU&location=456) --- most payments can be settled electronically, without any physical transfer of cash, reducing the balance of one account and increasing the balance of another. As we shall see in Chapter 3, this form of ‘clearing’ has been a function of banks as far back as historical records go. The vast majority of payments, by value, are made in this way. — location: [459](kindle://book?action=open&asin=B00FFAKEQU&location=459) --- As a Deputy Governor of the Bank England puts it: 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. — location: [548](kindle://book?action=open&asin=B00FFAKEQU&location=548) --- In reality, rather than the Bank of England determining how much credit banks can issue, we could argue that it is the banks that determine how much central bank reserves and cash the Bank of England must lend to them. This is particular obvious in the case of countries where compulsory reserve requirements have been reduced to zero – such as the UK. — location: [558](kindle://book?action=open&asin=B00FFAKEQU&location=558) --- banks’ reserves with the central bank are not a very meaningful measure of money supply: they may indicate that the amount of money could potentially rise, but at any moment in time they do not measure money that is used for transactions or necessarily affecting the economy in any positive way — location: [574](kindle://book?action=open&asin=B00FFAKEQU&location=574) --- Our research finds that the amount of money created by commercial banks is currently not actively determined by regulation, reserve ratios, the Government or the Bank of England, but largely by the confidence of the banks at any particular period in time. — location: [585](kindle://book?action=open&asin=B00FFAKEQU&location=585) --- When banks are confident, they will create new money by creating credit and new bank deposits for borrowers. When they are fearful, they rein in lending, limiting the creation of new commercial bank money. If more loans are repaid than issued, the money supply will shrink. The size of the commercial bank credit balloon, and therefore the money supply of the nation, depends mainly on the confidence and incentives of the banks. — location: [590](kindle://book?action=open&asin=B00FFAKEQU&location=590) --- One reason that banks’ confidence may be volatile is the fact that, despite their ability to create money, they can nevertheless go bust. Banks can create deposits for their customers, but they cannot create capital directly for themselves. Banks must ensure at all times that the value of their assets are greater than or at least match their liabilities. If the value of their assets falls, and they do not have enough of their own capital to absorb the losses, they will become insolvent. Once a bank is insolvent, it is illegal for them to continue trading. Equally, while banks can create deposits for their customers, they cannot create central bank reserves. Therefore, they can still suffer a liquidity crisis if they run out of central bank reserves and other banks are unwilling to lend to them. — location: [596](kindle://book?action=open&asin=B00FFAKEQU&location=596)Once a bank is insolvent it is no longer legal to trade. Does that mean no longer allowed to issue loans. It also cannot create CB reserves which are required for liquidity. --- Unproductive credit creation (for non-GDP transactions) will result in asset price inflation, bursting bubbles and banking crises as well as resource misallocation and dislocation. In contrast credit used for the production of new goods and services, or to enhance productivity, is productive credit creation that will deliver non-inflationary growth. — location: [608](kindle://book?action=open&asin=B00FFAKEQU&location=608) --- Historical evidence suggests that left unregulated, banks will prefer to create credit for non-productive financial or speculative credit, which often maximises short-term profits — location: [612](kindle://book?action=open&asin=B00FFAKEQU&location=612) --- In the next chapter we shall see that political and economic developments, coupled with financial innovations, led to a situation where bank-created credit-money (henceforth ‘commercial bank money’) came to be accepted by the state and eventually came to dominate the monetary system. — location: [617](kindle://book?action=open&asin=B00FFAKEQU&location=617) --- Money is generally described by economists in terms of its functions rather than any kind of overarching property or essence. It is generally viewed as having four key functions: — location: [703](kindle://book?action=open&asin=B00FFAKEQU&location=703)Store of value, medium of exchange, unit of account, means of settlement. --- The classical economics account of money is as a way of optimising the efficiency of exchange. Money ‘naturally’ emerges from barter relations as people find certain commodities to be widely acceptable and begin to use them as media of exchange rather than keeping or consuming them.10 Commodities with the most money-like properties (intrinsic value, portability, divisibility, homogeneity) naturally become adopted as money over time. Hence, gold and silver coins, possessing all these properties, became the dominant medium for money, according to the classical account. — location: [723](kindle://book?action=open&asin=B00FFAKEQU&location=723) --- money was built in to models of general equilibrium with the concept of its neutrality effectively maintained. Mainstream macro-economic models today treat money this way, by including a ‘money-in-utility’ function that attempts to show why people desire money, whilst preserving its neutrality. — location: [759](kindle://book?action=open&asin=B00FFAKEQU&location=759)Money was basically assured as a commodity used for transaction and has a neutral role. --- As Marx pointed out, in the capitalist system, money (or capital/financing) is required prior to production,26 rather than naturally arising after production as a way of making exchange more convenient. This is why it is called ‘capital-ism’. — location: [777](kindle://book?action=open&asin=B00FFAKEQU&location=777) --- As American economist Hyman Minsky argues: ...we cannot understand how our economy works by first solving allocation problems and then adding financing relations; in a capitalist economy resource allocation and price determination are integrated with the financing of outputs, positions in capital assets, and the validating of liabilities. This means that nominal values (money prices) matter: money is not neutral.27 — location: [781](kindle://book?action=open&asin=B00FFAKEQU&location=781) --- The orthodox economics narrative rests upon deductive* assumptions about reality that enable the construction of abstract models.30 In contrast, researchers who have chosen a more inductive approach, investigating empirically how money and banking actually works, have been more likely to favour the view that money is fundamentally a social relation of credit and debt. — location: [801](kindle://book?action=open&asin=B00FFAKEQU&location=801) --- the earliest detailed written evidence of monetary relations is to be found in the financial system of Babylon and ancient Egypt. These civilisations used banking systems thousands of years before the first evidence of commodity money or coinage. — location: [810](kindle://book?action=open&asin=B00FFAKEQU&location=810) --- The state then defines the unit of account as that which it ‘accepts at public pay offices, mainly in payment of taxes’.50 The Government’s acceptance underpins the broader acceptability of these tokens.* As we have seen, the means of payment varied over time, but for many centuries the instrument used was not coins. When coins did come into common usage, rarely was the nominal value of coins the same as the value of the metal of which they were made. — location: [861](kindle://book?action=open&asin=B00FFAKEQU&location=861) --- In England, Queen Elizabeth I established in 1560-61 a setting of four ounces of sterling silver as the invariant standard for the pound unit of account. Incredibly, this setting lasted until World War I, the longest historically recorded period for an unchanging unit of account in any state.53 — location: [867](kindle://book?action=open&asin=B00FFAKEQU&location=867) --- As historian Niall Ferguson says, ‘Money is not metal. It is trust inscribed.’57 The long period of the use of gold and silver coins as the tokens of choice to represent money may be one explanation for the powerful grip that the commodity theory of money has on the imagination. Another may be the history of the development of modern banking and the role of the goldsmiths of London in the story. — location: [872](kindle://book?action=open&asin=B00FFAKEQU&location=872) --- All three of these innovations came fatefully together in Britain in the seventeenth century, a time of almost continual warfare.* At the time, silver coinage was the state currency. Crown and Parliament were in a constant struggle to raise enough taxes and mint enough silver coinage to meet the resulting debts. — location: [885](kindle://book?action=open&asin=B00FFAKEQU&location=885)Promissory notes, Bond issuance and certificates of gold deposits in excess of gold on hand (in effectfractional reserve banking). were the three innovations. --- The ‘seizure of the mint’ by King Charles I in 1640 coupled with the outbreak of civil war in 1642 led to a significant increase in demand for their custodial services in particular. — location: [893](kindle://book?action=open&asin=B00FFAKEQU&location=893)Did he seize the mint in order to pay off the debt or pay for the war? What was the reason? --- Goldsmiths also began to carry out clearing and bookkeeping activities.* Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. The bankers’ deposit receipts effectively became a medium of exchange, much as had the Bills of Exchange that began circulating through Europe considerably earlier.† — location: [898](kindle://book?action=open&asin=B00FFAKEQU&location=898)Goldsmith deposit receipt were used like money, just like bills of trade in continental Europe. --- Soon goldsmiths further realised that as the real deposit receipts were being used as a means of exchange as opposed to the metal itself, they could equally issue deposit receipts instead of actual metal for their loans. And this meant they could issue more gold deposit receipts than they had actual gold deposited with them. — location: [907](kindle://book?action=open&asin=B00FFAKEQU&location=907)Fractional reserve banking is born throughthis maneuver. Given that these deposits were a certificate of gold, issuing this excess receipts was actually fraud. --- With their ability to create new credit seemingly from nowhere, it was not surprising that goldsmiths were popular. Soon the King and Parliament, unable to raise enough taxes or mint silver coinage quickly enough to meet the demands of the Civil War and French wars of the period, began to borrow from goldsmiths, too. The demand for goldsmiths’ lending services, from both private individuals and government grew to be so profitable that in order to boost their deposits they began to offer to pay interest on ‘time deposits’ – that is, deposits left for a guaranteed period of time. Any remaining doubts about the negotiability and status of goldsmiths’ notes was removed in the Promissory Notes Act of 1704 which confirmed the legality of the common practices that goldsmiths had being employing since the 1640s.74 — location: [938](kindle://book?action=open&asin=B00FFAKEQU&location=938)Although the goldsmith deposit issuance was technically illegal, it was in demand by society as well as used by the state to finance the civil and French wars. It eventually became accepted practice through law. --- The Bank of England was created in 1694 and three years later was granted a royal charter and the right to take deposits, issue bank notes, and discount promissory notes. The promissory notes that had previously circulated only amongst the goldsmiths and trader networks, could now be traded at the Bank of England at a discounted rate for state money. The two major monetary innovations of the period – public debt in the form of state bond issuance and promissory notes – were now integrated for the first time in history in a single institution: the newly created, privately owned Bank of England. — location: [979](kindle://book?action=open&asin=B00FFAKEQU&location=979)Institutionalizing the new form of commercial banking. What impact could this have had on the future growth of the economy --- Whilst private banks in London were gradually absorbed into the Bank of England, elsewhere in the UK industrialists were forming regional commercial banks – or ‘country banks’ -which played an important role in the industrial revolution.82 These did not have access to the backing of the central bank as lender of last resort and relied on working through accounts at London clearing banks. — location: [993](kindle://book?action=open&asin=B00FFAKEQU&location=993) --- As financial crises continued into the first half of the nineteenth century, the Government eventually acted. First, the Bank Charter Act 1833 made Bank of England notes legal tender for the first time in England and Wales. In addition, the act abandoned the 5 per cent usury laws for the Bank of England’s discounting facility. The hope was that by increasing the discount rate, the Bank could suppress the issuance of notes by private banks by driving up the cost of converting them into legal tender. As Davies suggests, ‘in this quiet way, what was to become the famed ‘Bank Rate’ instrument of policy for the next 150 years was born’.86 — location: [1006](kindle://book?action=open&asin=B00FFAKEQU&location=1006)How short-term bank ratesand monetary policy came tobe. --- However, importantly, the Act exempted demand deposits – the accounting entries that banks made either when people deposited money with them or, more likely, were created as a result of borrowing – from the legal requirement of the 100 per cent gold reserve backing. We have seen how fractional reserve banking allowed banks to lend multiples of the amount of gold in their vaults. Similarly, they could create new bank deposits through lending or purchasing assets, which were multiples of the amount of now restricted banknotes. Because these account balances were technically a promise by the bank to pay the depositor, they were not restricted by the Act in the same way that banknotes were. — location: [1020](kindle://book?action=open&asin=B00FFAKEQU&location=1020) --- As banks work as the accountants of record – while the rest of the economy assumes they are honest accountants – it is possible for the banks to increase the money in the accounts of some of us (those who receive a loan), by simply altering the figures. Nobody else will notice, because agents cannot distinguish between money that had actually been saved and deposited and money that has been created ‘out of nothing’ by the bank. 89 No doubt the failure to include demand deposits in the 1844 Act was also related to the strength of the commodity theory of money (Section 3.2) at the time, manifest in the rhetoric of the Bullionist school. — location: [1029](kindle://book?action=open&asin=B00FFAKEQU&location=1029) --- The result was that the 1844 Act failed to stop fractional reserve banking – the creation of new money by private banks. It merely led to a financial innovation in the medium of exchange. At the same time it made the ability of banks to create money out of nothing far less visible: while it is more obvious in Scotland and Northern Ireland, where banks continue to issue paper money carrying their own branding, the general public in England and Wales has no daily reminder of the banks’ role as the creators of the money supply. This has served to perpetuate the myth – widespread even today – that only the central bank or possibly the Government can create money. — location: [1047](kindle://book?action=open&asin=B00FFAKEQU&location=1047) --- Britain left the gold standard in 1914 by unofficially ceasing specie payments: meaning that one could no longer redeem banknotes for gold coins. Following the successful US example, the Government instead issued its own money (Bradbury bills, named after the then Secretary to the Treasury, John Bradbury) to raise finance for the war. — location: [1071](kindle://book?action=open&asin=B00FFAKEQU&location=1071)When did the US gov't issue the Bradberry bills? --- The rigid adherence to the standard, the consequent inability for exchange rates to adjust to reflect changes in international competitiveness and the high interest rates required to defend currencies from speculative attacks have been blamed for deepening the Great Depression, with some studies finding a correlation between the length of countries’ adherence to the standard and the severity of the depression in that country.96, 97 — location: [1086](kindle://book?action=open&asin=B00FFAKEQU&location=1086) --- Following WWII, a 20-year period of relative financial stability ensued in much of the Western world, with the Bretton Woods agreement providing a fixed exchange rate against the US dollar, which in turn was convertible into gold at a fixed price. The system lasted into the 1970s until, just like Britain in 1931, the USA found itself unable to live up to the promise to convert dollars into gold. European commentators accused the USA of abusing the system by simply creating too many dollars, with which US firms then bought European companies and assets. The French government responded by demanding the conversion of its dollar balances into gold. As with the British gold standard, it turned out that the promise to convert into gold worked only as long as it was not acted on. In response to the French ‘raid on Fort Knox’, US President Nixon cancelled the dollar convertibility into gold. By 1976 all the world’s major currencies were allowed to float freely against each other. — location: [1092](kindle://book?action=open&asin=B00FFAKEQU&location=1092)The dominance of the US dollar and its broken link to gold. --- As with the earlier Golden Period, where the UK’s well-established currency and institutions were associated with international stability, it was the institutional structures and macro-economic context of the immediate post-war period that underpinned the stability of currencies rather than the US retention of a gold standard of $35 an ounce. Importantly during this period there were strict credit controls placed on banks in many Western states. Britain was no different. Banks were required to hold 8 per cent of their assets in the form of cash and a more general liquidity reserve ratio of 28-32 per cent was imposed.98 — location: [1099](kindle://book?action=open&asin=B00FFAKEQU&location=1099)Post war stability was created by the broader economic growth context, rather than the gold backed currency. --- Such ‘window guidance’ bank credit controls were abandoned in the early 1970s. As Figure 7 shows, that is when bank credit began to increase rapidly. — location: [1117](kindle://book?action=open&asin=B00FFAKEQU&location=1117) --- Most of all, despite its name, the Act marked the abolition of credit controls. A credit boom followed, fuelling a housing boom, which led to the inevitable banking crisis (see Box on the Quantity Theory of Credit in Section 5.6), known as the secondary banking crisis of 1974. Property prices collapsed as bank credit became tight, and banks had to be rescued by the Bank of England. — location: [1144](kindle://book?action=open&asin=B00FFAKEQU&location=1144)CCC Act in the 70 s --- As Davies suggests, the Competition and Control reforms saw a fundamental shift in emphasis from the central bank which: ....changed from rationing bank credit through quantitative ceilings on bank advances and qualitative or selective guidance... to rely on the more generally pervasive influence of the price mechanism, with variation in the rate of interest becoming the main weapon.105 — location: [1153](kindle://book?action=open&asin=B00FFAKEQU&location=1153)Does this reflect a shift in beliefs towards the rate of interest being the primary factor driving the money supply? --- The oil crises of the 1970s and rapid inflation helped usher into power the free-market-oriented governments of Margaret Thatcher and Ronald Reagan in the UK and USA, respectively, who, influenced by neoclassical free-market economics, — location: [1166](kindle://book?action=open&asin=B00FFAKEQU&location=1166) --- since the 1980s, bank credit creation has decoupled from the real economy, expanding at a considerably faster rate than GDP. According to the Quantity Theory of Credit (see Section 5.6) this is evidence that an increasing amount of bank credit creation has been channelled into financial transactions. — location: [1178](kindle://book?action=open&asin=B00FFAKEQU&location=1178) --- Credit that finances trading in existing assets, real or financial, does not contribute to GDP, but instead it can contribute to unsustainable asset inflation. Since the 1970s there has not been any direct oversight of whether credit contributes to GDP or not. Neither has there been any monitoring of whether credit creation funds investment in productive capacity or consumption transactions (the latter creating more direct inflationary pressure).111 — location: [1184](kindle://book?action=open&asin=B00FFAKEQU&location=1184)What if credit creation going to investment into existing assets makes the market more efficient? How do we differentiate between consumption and productive uses? what if consumption (or leisure) increases production? --- The process of creating commercial bank money – the money that the general public use – is as simple as a customer signing a loan contract, and the bank typing numbers into a new account set up for that customer. — location: [1474](kindle://book?action=open&asin=B00FFAKEQU&location=1474) --- Assets can be thought of as legal contracts that entitle the bank to a stream of future income (interest received) in return for payment of an initial sum (principal) which will eventually be recovered by the bank. Liabilities can be considered as a promise to pay a certain sum in the future, which incurs a stream of expenses (interest paid) until that time. — location: [1487](kindle://book?action=open&asin=B00FFAKEQU&location=1487)Isn't bank money creation similar to cashflow swaps. As in, swap a long-dated bond (the deposit) for cash payments by the borrower. The bond/deposit can thenbe used as money. --- In Chapter 5, we analyse the extent to which the need for central bank reserves and interbank settlement will limit the willingness of banks to create credit or money in the manner just described. — location: [1501](kindle://book?action=open&asin=B00FFAKEQU&location=1501) --- Principally, there are two ways for banks to get around this problem. The first is for banks to use their accounts with other banks to settle transfers directly, having netted out transactions in opposite directions. This is called ‘bilateral settlement’. An alternative method is for banks to use their accounts with the central bank. The Bank of England has its own clearing system with its own equivalent of demand deposits that have the status of final means of payment, just as cash or legal tender. — location: [1512](kindle://book?action=open&asin=B00FFAKEQU&location=1512) --- In the same way that you have a bank account with a particular bank, the banks themselves have bank account(s) with the Bank of England called reserve accounts (Figure 12). Just as you must maintain enough balance in your account to ensure all your payments go through, so private banks must maintain reserve balances in their Bank of England account in order to enable payments to other private banks requested by customers. It should be noted that commercial banks have been using central bank reserves as means of settlement with other banks since the 1770s, as discussed in Sections 3.4 and 3.5. — location: [1518](kindle://book?action=open&asin=B00FFAKEQU&location=1518) --- Other things being equal, the smaller the bank, the relatively larger the amount of central bank reserves it requires to settle its customers’ transactions, and so the lower the amount of more profitable assets it will be able to hold. — location: [1598](kindle://book?action=open&asin=B00FFAKEQU&location=1598) --- At the end of each day, commercial banks will either be ‘short’ of central bank reserves and need to borrow more or they will be ‘long’ on central bank reserves and have ‘excess’ liquidity. As in Figure 13, we can imagine banks’ reserves with the central bank as buckets with different volumes of liquid. Some banks will have too much and others too little, so they will trade with each other to balance this out in preparation for the following day’s trading. To adjust its reserves, a bank can either borrow funds directly from the central bank or, more usually, it will engage in overnight trading with other banks on the interbank money market. Banks that have excess reserves will typically lend them to banks in need of reserves in return for highly liquid interest-bearing assets, usually gilts (government securities) (see Chapter 3, Box 3 on bond issuance). The rates of interest on loans between banks will typically be better than banks could attain when borrowing directly from the central bank. — location: [1599](kindle://book?action=open&asin=B00FFAKEQU&location=1599) --- if all the banks ‘move in step’ and all create new loans, which is quite typical during times of economic confidence, the aggregate amount of money will increase in the economy and the central bank may be forced to increase the aggregate amount of reserves in the system to ensure the payment system does not collapse.11 — location: [1650](kindle://book?action=open&asin=B00FFAKEQU&location=1650) --- On average, prior to the financial crisis of 2008 onwards, the banks had £1.25 in central bank money for every £100 of customers’ money. In the more cautious, post-crisis environment, the banks still have on average only £7.14 for every £100 of customers’ money.‡ — location: [1746](kindle://book?action=open&asin=B00FFAKEQU&location=1746) --- With all 46 reserve accounts, there are a total of 2,070 different payment flows in both directions between the accounts (money can be transferred from each individual bank to every other bank).* Rather than each bank having to deal with 45 other banks in order to make payments between them, they can simply send payment instructions to the Bank of England’s RTGS (real time gross settlement) processor. — location: [1759](kindle://book?action=open&asin=B00FFAKEQU&location=1759) --- The central bank cannot directly determine the market rate of interest in the interbank market, but it can affect the market rate of interest by lending and borrowing reserves itself on this market to try and keep this rate close to the policy rate. These loans are conducted via repurchasing agreements (repos) and other open-market operations or through providing ‘standing facilities’. — location: [1799](kindle://book?action=open&asin=B00FFAKEQU&location=1799)