Thursday, April 5, 2018

Bank of England - How is Money Created?

The Bank of England offers this explanation concerning the question of how money is created. Below are some excerpts from their article.

How Does it Work?

"Money is more than banknotes and coins. If you have a bank account, you can use what’s in it to buy things, typically with a debit card. Because you can buy things with your bank account, we think of this as money even though it’s not cash.

Therefore, if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.

This also means as you pay off the loan, the electronic money your bank created is “deleted” – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too.  So essentially, banks create money, not wealth."

. . . . . .

Can banks create as much money as they like?

"No, they can’t.

Regulation limits how much money banks can create. For example, they have to hold a certain amount of financial resources, called capital, in case people default on their loans. These limits have become stricter since the financial crisis."

Please click here to read the full article on the Bank of England web site

Added note: Not to be outdone, the NY branch of the US Federal Reserve has produced comic books to explain banking and central banks from their point of view. You can find them here if interested:

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