Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

How Banks Create Money Out of Nothing

InvestorEducation / Credit Crisis 2009 Apr 29, 2009 - 10:23 AM GMT

By: Submissions

InvestorEducation

Best Financial Markets Analysis ArticleThe following is from mainstream economics textbook Success in Economics by Derek Lobley B.A. (London: John Murray Publishers Ltd, 1978 edition), which was part of the "Success Studybooks" series. It was intended to be "appropriate to the Economics syllabuses of many of the professional bodies such as ... the Institute of Bankers". It is published verbatim (but with emphases added) from ch.17, pp. 205-206.


Let us imagine an economy in which there is only one bank. Soon after beginning business it finds that individuals and firms have placed £10,000 with it for safe-keeping. Its balance sheet (ignoring the shareholders' capital or property owned by the bank) would appear as follows:
Balance Sheet 1
Liabilities   Assets
Customers' deposits   £10,000   Cash in hand   £10,000

The balance sheet is in effect a photograph of the bank's position at a particular point in time. The liabilities show the amounts that the bank may be called upon to provide to its customers and the assets show the cash and other resources available to the bank to meets its liabilities.

At this stage it is quite clear that the bank has sufficient cash in its till to meet any demands made by its customers.

In practice customers prefer to settle their debts with each other by cheque, ordering the bank to transfer money from one account to another. Thus if Adam and Brown have each deposited £500 at the bank, and Adam owes Brown £100, he can settle his debt by instructing the bank to reduce his account by £100 and to increase Brown's by the same amount. No cash changes hands; the bank still has obligations to its customers of £10,000; there has simply been a slight readjustment to those obligations.

If all the bank's depositors were always prepared to settle their debts in this way the bank could forget all about its holdings of cash. Customers will, however, need to draw a certain amount of cash from the bank each week to make small payments (it is not usual to write cheques for very small amounts) and to pay those people who prefer not to use the banking system.

If the bank discovers that, at the most, the weekly withdrawal of cash amounts to 10 per cent of total deposits, and that this is quickly re-deposited by traders accepting cash payments from customers, then the most cash the bank needs to meet demands from its customers with deposits of £10,000 is actually only £1000.

Alternatively we may take the view that with cash in hand of £10,000 the bank can afford liabilities of £100,000.

In this case let us imagine a customer, Mr Clark, who approaches the bank for a loan of £1000. The bank manager is agreeable and opens an account for him with a credit balance of £1000. Mr Clark can now write cheques to the value of £1000 although he has placed no money in the bank; he simply promises to repay the £1000 plus interest, having probably offered some security to the bank. The bank's balance sheet (2) now shows a different picture:

Balance Sheet 2
Liabilities   Assets
Customers' deposits   £11,000   Cash in hand   £10,000
Total   £11,000   Loans to Customers   £1,000
  (or promises to repay by customers)
    Total   £11,000

There is now insufficient cash to supply all the customers if they wished to withdraw their deposits, but the bank knows that the most that is likely to be withdrawn is £1100.

It will, therefore, be prepared to go on making loans (or creating credit, which is the same thing) until the cash that is held is equivalent to only 10 per cent of deposits (as per Balance Sheet 3):

Balance Sheet 3
Liabilities   Assets
Customers' deposits   £100,000   Cash in hand   £10,000
Total   £100,000   Loans to Customers   £90,000
  (or promises to repay by customers)
    Total   £100,000

So far as customers are concerned the standing of their account is the same whether they have actually deposited cash to open the account or whether it has been created by a loan. When they spend their money the recipient has no means of knowing whether or not they originally deposited cash.

Thus in creating credit the banks have added to the money supply.

Essential Further Reading:

PROSPERITY: Freedom from Debt Slavery
is a 4-page quarterly journal which campaigns for publicly-created debt-free money, edited and published by Alistair McConnachie. A 4-issue subscription is available for £10 payable to:
PROSPERITY at

268 Bath Street, Glasgow, Scotland, UK, G2 4JR
Tel: 0141 332 2214; Fax: 0141 353 6900
admcc@admcc.freeserve.co.uk  http://www.ProsperityUK.com
Or you can follow this link to our subscribe page.

The Grip of Death: A study of modern money, debt slavery and destructive economics by Michael Rowbotham, [Jon Carpenter Publishing, 1998] and Goodbye America! Globalisation, debt and the dollar empire by Michael Rowbotham, [Jon Carpenter Publishing, 2000] both available from the address above.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules