The multiplier model you

The multiplier model you describe of re-depositing which is in many text books does not describe correctly how things work in the UK now, and has not applied for many years. See banking 101 videos on the Positive Money site to get a brief overview of how the system works. I have argued with you before ALB, and we claim that new loans generate new deposits in the banking system as a whole, not the other way around. You have not adequately explained how the money supply increased by 3X in the ten years from 1997, it was not increased by an army of grannies finding extra money at the back of the sofa, or by the Bank of England printing it. The banks became much easier with their lending in this period, lending much greater multiples of income for mortgages for example, so increasing the money supply. It could well be that deposits end up in total quantity the same as loans (M4 lending), and the balance sheet of RBS a few years ago at the start of the financial crisis showed it's loans to be around £1700 billion and deposits to be a little less than this. It was the huge expansion of the balance sheet on both sides which was the problem (as much as UK GDP in the case of RBS), in that it held a very small percentage of reserves at the bank of England (as did all the banks). It is those reserves that banks use to settle up with each other, and only a small percentage is usually needed to make payments because banks do not expect all their creditors to arrive at once.If HBOS for example was to give me loan for £100,000, they do not check the total of their deposits, because they know that other banks will be lending as well, and £100,000 or more should come back to them if they are regarded as a "safe" bank. They should be because all accounts are underwritten by the tax payer up to £75,000 .They know they are getting loan repayments as well. The main thing is that the banking system feels confident as a whole, no one bank gets out of step with the others (so it can meet it's immediate payment obligations), and that they have good borrowers to lend to. If a bank is short of money at the end of a given day, it can borrow of others in the clearing system, which is what Northern Rock did in a big way because it was expanding it's loan book to fast relative to the other banks. Other banks, and then ordinary depositors then lost trust in Northern Rock that it would be able to meet it's obligations. In fact the tax payer had to step in to rescue several banks because there were too many bad debts, and the debt load in society and the economy had become too great. However all this lending did create money, and much of it had to be written off when those debts turned bad, including £50,000 lent to my friend (on benefits, no job, no house, and no assets) on his credit cards. I make no claims as to Mervyn King's thoughts on Quantitive Easing, merely that he agrees with our analysis that "banks do create money when they make loans". The Bank of England has created money through QE by buying gilts on the secondary market andcrediting the account holders, and by providing some cheap money through the funding for lending scheme, in the hope the commercial banks will lend it on. QE has not caused inflation because it is replacing money that is lost when existing loans are repaid, replacing money that has been written off through bad lending, and the fact that banks were creating less money in the economy because they were more cautious and lending less. The government is continually encouraging the banks to lend more, especially for business, because they know that this is how new money gets into the system, and they want to get the "feel good" factor of the boom years back. They are going for the folly again of lending huge amounts for housing, and compounding the error by getting the tax payer to underwrite a large part of this lending if it goes bad, rather than letting the price of housing fall naturally and / or increase the supply.We are not "currency cranks" as you describe it, merely describing how the system works now, and not based on wrong or out of date economics text books. The book "Where does money come from ?" published by the New Economics Foundation is based on extensive research and 100s of documents from the Bank of England and other places. The Banking 101 videos on the Positive Money site give a brief overview of it. The description of one bank on its own creating money by the act of lending is a bit simplistic, but the system as a whole does.