Liberal Forum

Sgt Bilko » 20 Nov 2017 9:36 am » wrote:Try this link.
http://positivemoney.org/2015/07/money- ... ate-banks/

How is money created?

Most people, including many economists, think that central banks and thus government creates our money. The central bank then lends the money to ordinary banks, which bring it into the economy by lending to consumers, businesses and governments. People also believe that, apart from central bank money, the deposits in the (savings) accounts held by bank customers are an important source of the money lent by banks.

The idea that banks work only with money created by central banks and with the money depositors put in their care is wrong. In reality only about three percent of the total money supply, the part consisting of coins and banknotes, is created by the central bank. The remaining 97 percent of money is produced by private banks when they give loans. This is done through a simple accounting practice which results in the amount of the loan – and the money thus created – being added to both sides of the bank’s balance sheet (for accountants among us: to the assets as a loan; to the liabilities as a deposit in the account of the borrower). As the British Central Bank, the Bank of England, put it in 2014:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”
In theory the money created by lending is destroyed when the loan is repaid. In practice that does happen, but at the same time the amount of newly given credit is almost always much higher than the amount of credit repaid. Thus the money supply continues to increase.