Brilliant quotes, Alan.This

[ALB]

Brilliant quotes, Alan.This is another bit you could have put in bold:

Quote:

Some interpretations of the ‘loans create deposits’ meme overreach in their desired meaning. The contention arises occasionally that ‘loans create deposits’ means banks don’t need deposits to fund loans. This is entirely false.

I would think that will be more in line with how Sir Mervyn sees things too. Certainly, it's what practical bankers will know. These days banks don't just depend on deposits for obtaining money to lend but also on themselves borrowing money from the money markets to relend — at a higher rate of interest. Northern Rock got into trouble because it relied too much on this and got caught out when money market rates rose and squeezed the margin between the rate at which they borrowed and the rate at which they re-lent.

simondv wrote:

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.

M4 is a more a measure of bank (and other) lending than of the "money supply"  It only merits this description if you define bank loans as part of the money supply; in which case it is true by definition. What you have overlooked is the other source of the money banks lend: what they themselves borrow to re-lend. The claim is not that banks cannot lend more than their deposits but that they cannot lend more than they have, whether deposits, what they've borrowed or their own capital.Alan's quotes explains how banks manage their daily cash flow and balance their books at the end of the day (literally), which doesn't really have all that much to do with the point at issue since not all payments in are deposits or bank borrowings and not all payments out are loans.

simondv wrote:

We are not "currency cranks" as you describe it, merely describing how the system works now, and not based on wrong or out of date economics text books.

Actually, I don't think Positive Money are currency cranks as you don't think that a single bank can create what they lend out of thin air. The reform to the banking system you propose could work to give the government and central bank more control over bank lending (if that's what you want), but from a capitalist point of view is unnecessary as bank lending depends on the state of the economy and it is this that governs the demand for bank loans. Your scheme could also risk increasing inflation.

simondv wrote:

The description of one bank on its own creating money by the act of lending is a bit simplistic,

I'm not sure that "simplistic" is the right word. I'd say "cranky" but at least we agree that a single bank on its own cannot create money to lend out of nothing, a widespread belief in currency crank circles..