dms wrote:
Absolutely, but they didn't end there with a full stop, did they? It is a colon because it's misleading if they left the sentance as you left it. They went on a bit longer than that :
ECB wrote:
is named this way because it is backed by private credit: if all the claims held by banks on private debtors were to be settled, the inside money created would be reversed to zero.
They qualified after the colon "backed by private credit" to mean that the money they create is backed by the liability on the debtor to pay it back. That they're able to do it as it's temporary. They then go on :
ECB wrote:
So, it is one form of currency that is created
If that's what the ECB meant (and you could be right, though "backed" would be an odd word to use in that context) then all they are describing is double-entry bookkeeping where every new asset has to be balanced in the accounts by a new liability and every new liability by a new asset. In the case of a bank loan, the loan is the liability that is balanced by an asset (an IOU from the borrower). But this still does not explain where the bank got the money to lend from in the first place. Some say it's from thin air but in fact it's from money the bank has itself borrowed or will soon have to borrow, as the Bundesbank explained:
Quote:
The banks also keep a constant eye on the costs that may incur by granting loans and creating book money. For example, if the customer uses the new credit balance to transfer money to an account at another bank, from the bank's point of view money will be flowing out. The bank then often has to recover this money, for example by taking out a loan from another bank, or by "refinancing" itself with a loan from the central bank. Alternatively, it can persuade savers to invest cash or credit balances at the bank in the form of savings or fixed-term deposits.
The often (mis)quoted 2014 article from the Bank of England makes the same point:
Quote:
Figure 1 showed how, for the aggregate banking sector, loans are initially created with matching deposits. But that does not mean that any given individual bank can freely lend and create money without limit. That is because banks have to be able to lend profitably in a competitive market, and ensure that they adequately manage the risks associated with making loans. Banks receive interest payments on their assets, such as loans, but they also generally have to pay interest on their liabilities, such as savings accounts. A bank’s business model relies on receiving a higher interest rate on the loans (or other assets) than the rate it pays out on its deposits (or other liabilities). (…) The commercial bank uses the difference, or spread, between the expected return on their assets and liabilities to cover its operating costs and to make profits. The banks also keep a constant eye on the costs that may incur by granting loans and creating book money. For example, if the customer uses the new credit balance to transfer money to an account at another bank, from the bank's point of view money will be flowing out. The bank then often has to recover this money, for example by taking out a loan from another bank, or by "refinancing" itself with a loan from the central bank. Alternatively, it can persuade savers to invest cash or credit balances at the bank in the form of savings or fixed-term deposits.(see:
https://www.worldsocialism.org/spgb/socialist-standard/2010s/2014/no-1317-may-2014/cooking-books-harry-graeber-and-magic-wand
It also doesn't distinguish a bank from a payday loan company or even a pawnbroker. The money they lend is also balanced by an IOU from the debtor, so why are they not said to create new money, whether out of thin air or elsewhere? Actually, a bank is similar to them, and all lenders of money, in that they have to have (or quickly obtain) the money they lend. What all these and other financial institutions are involved in is the mere circulation of money. They are not, as Alan has just pointed out, creating any new wealth for money to buy.
