Thursday, 20 March 2014

Bank of England explain the creation of money

Finally the Bank of England have published a clear-as-day document explaining:

The majority of money in the modern economy is created by commercial banks making loans.

Banks are not simply intermediaries, lending out deposits that savers place with them. They also do not merely ‘multiply up’ central bank money to create new loans and deposits as the ‘money multiplier’ model teaches. Private banks create new money when they make loans. Most economic textbooks do not represent this reality – they are wrong. So most peoples’ understanding of money is wrong too. Isn’t that amazing when we talk about money all the time?

Plenty of people have been making this point in recent years – Ann Pettifor in her book Just Money, the New Economics Foundation in their book Where Does Money Come From? and the group Positive Money.

David Graeber has just written an excellent article for the Guardian explaining the significance of this publication from the Bank of England. It’s essential reading. Is this the start of a revolution in our understanding of what money is and how it is created?