Just followed up Steve Keen’s
Just followed up Steve Keen's reference to what the German central bank has to say about the modern monetary system. Here's what the Deutsche Bundesbank says about what it calls "book money" (the ECB's "inside money"):
Quote:
The banks create new book money when they grant loans. For example, Mr Müller needs a loan to buy a car. He negotiates this with the bank's loan officer. The bank grants a loan to Mr Müller. The loan amount is credited to his account and his credit balance increases. The bank has created new book money. It did this without needing to raise any savings deposits first.
But (and it's at this point that Keen — and currency cranks — stop reading) it has to raise the money somehow in the end:
Quote:
But how much book money can banks create?As described earlier, book money is largely created by granting loans. However, a business will only take out a loan if it has investment projects planned and if the expected returns are high enough to generate the required interest on the loan. The banks in turn check whether the borrower will be able to pay the interest and pay off the loan. Because if the borrower cannot pay the interest and repay the loan, the bank will incur a loss.The banks also keep a constant eye on the costs that may incur by granting loans and creat-ing 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.As a rule, the bank has to pay interest on these refinancing measures. The banks' willingness to create book money therefore depends on how high the cost of interest is for the bank itself.
This is in effect accepting that banks are financial intermediaries, borrowing money at one rate of interest and re-lending it at a higher rate. It's just describing it in rather a roundabout way, by saying that they lend money at one rate of interest and then have to find the money to fund this at a lower rate.