Hi PP, I have been lurking from the start of this delightful site but this is my first trip out, hope my comments don’t annoy or mislead.
Richard Murphy can be really enlightening but he’s not perfect - as with many modern monetary people they rarely answer the difficult questions when it comes to “creation of money”. He says this in the link you kindly posted:
" Very few people seem to understand how money is created. Mainly that’s because when they’re told it seems so simple that they can’t believe something that’s so important that we’re willing to pay a lot to get it is created so easily. This thread explains how money is created.
What this thread also explains is that if we understand money we can completely reimagine how the economy really works, which is the pathway to rebuilding from the mess we are in. Which makes this a pretty big deal. I make no apology for its length as a result.
Let’s start at the very beginning. A person goes into a bank and asks for a £1,000 loan. The bank checks them out, and agrees. And that is all that it takes to create new money. Money is just a promise to pay. That simple exchange of promises is all it takes to create it.
Most people think there must be something that backs up the value of money. Gold, most likely. But there isn’t. Money is just a promise to pay, and has been for almost 50 years now. Mutual promises to pay creates all the money we have.
So in the example of that £1,000 loan, the customer promises to pay the bank. So the bank opens a loan account for them. That records their promise to repay. And the bank puts £1,000 in the customer’s current account. They promise to let the customer spend that how they want.
Two promises. Two accounts. And as a result we get new money. That is how all money is created. It is as simple as that.
There is no one else’s money involved in this process. The bank does not lend out the money saved with them. And there are no notes and coin moved from one pile to another pile to back this all up either. There are just two promises. And then there is new money.
Making money really is as simple as promising to repay it"
I would maintain that money has only been created when it leaves the Bank, until that point it is merely an accounting exercise for the Bank. Take this example :
Banks don’t create money.
The Bank starts off with share capital – it buys a building with it and invests some of it in Gilts and pays the first months salary for some staff – Then the first customer Fred comes in and says can I borrow £100 – Fred signs the loan agreement and the bank deposits the £100 in his account. RM stops there and says – there you see the bank just created £100 of money. But Fred has £100 of debt and £100 of deposit in a Bank – where’s the money?
Next step, Fred wants his £100 in cash. So he asks to withdraw £100 from the Bank – where does the Bank get the £100 to give Fred – well if the Bank could create money they would do just that but they can’t so they have to go the Bank of England and say" here could you give us a £100 to pay Fred". The Bank of England says –“why should we?” The Clearing Bank says: " well we only want it for a while until Fred repays it to us, we’ll give it back to you when he gives it to us!" The Bank of England says – “yeah right, sorry sunshine give me something worth £100 and we’ll give you the cash.” “Ok” says theClearing Bank and transfers £100 worth of Gilts to the Bank of England, which then hands over the cash, which it has newly printed at the Royal Mint. So who has created the cash here – the Bank of England has, and sold it at face value to the Bank.
Before the transaction Fred had nothing, the Clearing Bank had Gilts which its shareholders had paid for ( and who got shares in the Bank in exchange) but no cash, and the Bank of England had nothing as it had not printed any cash.
After the transaction with Fred ,
Fred had no increase in his wealth but he got an asset of £100 cash and a liability of £100 debt which he owed the Bank
The Clearing Bank swapped some of its Gilts for cash from the Bank of England and swapped that cash for a promise by Fred to pay them back – The Clearing Bank has changed the assets it holds but has not changed anything else, the new asset is the Fred loan and this has replaced the Gilts which are more liquid than the Fred loan , Fred pays more for his loan than the Government Stocks (Gilts) as he is a greater risk.
The Bank of England has just acquired some Government stock worth £100 for which it paid nothing ( as it printed the cash out of thin air).
So money has been created but not by the Clearing but by the Central Bank, the Bank of England.
A similar result would flow from a transfer by cheque or credit card of Fred’s funds from the lending Bank to another Bank but instead of the Bank of England printing cash at the Royal Mint it would buy gilts from the lending Bank and transfer the value to an account in the lending Banks name held by the Bank of England. The lending Bank would then transfer Fred’s money to the other Bank by a digital transfer between the two Clearing Banks’ accounts held at the Bank of England. The money is created by the Bank of England out of thin air when it pays the lending Bank for the purchase of gilts.
If Clearing Banks could create money why do they borrow from other financial institutions in the Inter-Bank Market?
If Clearing Banks could create money why would they worry about not being repaid, or going bust?
RM’s other, probably more important, remarks are too broad to unpick and maybe are totally accurate. Although I wonder what he has in mind for a fair tax system to control inflation and if as he says they don’t need taxes to spend, why have taxes at all, why not control inflation and equality through income and price controls?
It may be just a niggling point but RM could have just focused on the Bank of England’s power to create money and not ventured into the murky depths of Clearing Bank activity.
Cheers
