Wednesday, January 28, 2009

Fractional Reserve Banking - A Problem?

As promised, a post on fractional reserve banking (FRB). It is rather an odd subject, and some might think a little too much a matter of detail. However, I would encourage you to read on, as this is something that is useful to discuss in understanding the economy. It is, after all, a central part of our banking system, and also the subject of lots of debate, not to mention a favourite subject of conspiracy theorists.

I will confess that I have had to come back to this introduction, as it has turned into a very long post. However, at the end, you will see why there are some problems with what you are hearing regarding failure of regulation, and also some problems in what is being understood about the state of bank lending and the money supply. I believe that this is important, and that it is important that we all understand FRB.

I had hoped to discuss central banking, but that will have to be left for another time - which means that there is a hole in this discussion. It is a hole I will fill at a later date.

I mentioned when I discussed FRB in a recent post that I had some nagging doubts about the subject. At the time I had read several discussions of the impacts and operations, and had also seen lots of references to the subject from various conspiracy theorists. However, there seemed many interpretations so the subject remained opaque. I thought I had a good understanding, but was not sure. As such, I thought I would look a little deeper, and see if I could grasp why the different interpretations cause so much confusion, and offer my own understanding of the subject.

As what I am presenting is my own interpretation, I have put a list of some of the reading I have undertaken below, as you may want to take a look at the different arguments first hand.

A good starting point in understanding the subject is to understand where FRB came from, as this is very revealing. It actually originates with medieval money changers, whose role was assuring the quality of gold, holding gold securely and facilitation of transactions between merchants. If you believe the conspiracy theorists, they propose that these 'wicked' people would take gold deposits, then secretly and sneakily lend the deposits to other people. In doing so they profited from the money of others, and only kept a fraction of the gold deposited with them. This is, according to some thinking, a fraud in which the depositors are duped by the money changers. They claim that today such wickedness continues (see note 1).

Regardless of the conspiracy theorists, in this situation we can see the essential points of FRB. A depositor deposits gold with an intermediary, the intermediary lends out a proportion of the deposit, and keeps only a fraction of the total deposits. To this we should add that one of the key parts of the system was that, if a depositor wanted their gold, it had to be repaid on demand. As such, we have a situation where, if all the depositors ask for the return of their deposits at the same time, then the gold changer goes bust. They do not have all the gold that has been deposited....

Having heard the conspirator view, an alternative point of view is that there are some good reasons why the gold changers lent the gold deposits. I have given these as a summary below:
  • The law in the medieval period was immature, such that there were cases of gold changers running off with deposits (it still happens today - of course). If only having a fraction of the deposits available, there was less that the gold changer could steal at any one moment. It was a reassurance.
  • For the same reason (that only a fraction of the gold is available) it was more difficult for monarchs/princes to expropriate it. This was common during the medieval period, in particular during times of war.
  • Depositors are also potential borrowers. If you have a person who is a depositor, you will get to know their business. If you know their business, you are more likely to lend to them, as they are less of a credit risk. In addition, lending to them encourages them to keep their deposits with the money-changer. A merchant would want to deposit with a gold changer who also lent, as such a person was most likely to provide credit when it was needed
A more commonsense argument against the idea of the money changers 'cheating' the depositors is that a medieval city was a place of limited size, with trade dominated by merchant guilds, and this makes it highly improbable that the gold changers could secretly lend their depositor money on a regular basis without people noticing. I simply can not imagine that it would be possible to cheat a narrow group of merchants in this way.

Another interesting point from history is that gold changer (from now on I will call them bankers) were sometimes regulated. In one Italian city, the bankers placed collateral with the city in order to be allowed to have a cloth with a shield on their trading table. This was an assurance to the people who deposited with the banker that he had collateral, but others could still act as a banker without such collateral. In other cases a city would have a system of limited licenses, which allowed them to only have a few bankers to monitor. This oligopoly regulation had an advantage for the 'regulators', which was that the city would be able to demand preferential credit terms for the city government as part of giving access to the city banking market.

It is interesting how absolutely clear the situation of FRB is when we look at it in the historical context. In particular, when we see the picture of the depositors giving the gold coins to the banker, and the banker then lending out those same coins to the borrower, we can see that the discussion of banks 'creating' money looks rather odd. I will quote my last discussion, to express how the money 'creation' argument is expressed.
However, the system gets a little bit weird when we think of a bank using my £100 deposit to invest it/deposit it with another bank. That bank then has an £80 deposit from the original bank, but only needs to keep £16 in reserve, leaving £64 which they can then lend. If we think about this, my deposit has allowed lending of £80 + £64, which means that they are lending more than I have deposited (£80 is lent from the original bank, and £64 from the second bank). If we add up the two sums of money available for lending, then we appear to have created money. This is the standard picture of FRB, that money is created from nothing, but I will illustrate further.
However, I went on to say the following (think of it as gold coins not £):
When I enter into bank A and deposit £100, the bank effectively writes me an IOU for the £100. The bank then takes my money and lends £80 to bank B, who writes an IOU to bank A for £80. That bank then lends £64 to a consumer, who writes an IOU to bank B. Whilst it may appear if we look at it in some respects that we are creating money, as more money has been lent than deposited, I think that this is an exaggeration of what is actually happening. In the end, the amount of credit that reaches the end user of the credit has not expanded in the way that those who are anti-FRB seem to imply. Whilst each bank appears to be creating money, the reality is that the more banks that touch the money, the less money there is available to be lent into the economy outside of the banking system.
If we think of it as pieces of gold coming out of one banker's strong box, being placed into another banker's strong box, then being lent to a final borrower, it is very clear that no money is actually 'created'. It is just pieces of gold being moved from one bank to another, but each time the gold moves, there is a note on the balance sheet. The point here is that recording money does not mean the creation of money. I am genuinely puzzled that so many economists seem to have fail to see it this way. A quick reading of the history of FRB makes this obvious, but I thought it was self-evident before this.

Now, having established that FRB does not 'create' money, there are some complications that I will come to later.

Before I deal with anything else, what of the issue of us all being 'dupes'. This is the idea that somehow we are all unaware that the banks are going out lending our money without our knowledge. In the modern world, because of deposit guarantees by governments, we have come to a point where we do not (normally) worry about such issues. However, what if we took the guarantees away? Would we all be 'duped' into depositing at such risk?

The reality is that, even without government guarantees, it is difficult to make the case that depositors are being duped. If this was the case then, in the time when there were no guarantees (e.g. pre-1930s USA), what would have stopped a person from publicising that everyone is being duped and offering a 100% reserve bank. If we all wanted 100% reserves, then someone would have offered a fee based 100% reserve deposit system. In effect, they would corner the banking market. The reality is that, before government guarantees, all depositors would know that the banks lent money, or why else would the banks be in business?

There still remains the idea that it is somehow 'wrong' that a bank can take £100, promise to return the money on demand, and yet still lend £90 of that money. The idea is that this is a fraud. They do not have the right to lend that money, as it must be available for immediate return. This is a common idea amongst Austrian economists, and the link takes you to the relevant section. The interesting point here is that there is a mixing of the role of central banks, and the role of FRB in general. More of that another time....

In the meantime, to answer the question of whether it is wrong to lend the deposits, I will return to discussion in my post on banking regulation (I did not realise it was so long until I looked again today). I discussed an example of an individual with £10,000 to invest. He could put the money in a bank, he could buy shares in the company that he works for, or he could invest the money in his sister's business. In all cases, ignoring government guarantees, he would be in a situation where the capital has gone out of his hands and where he might at some point not be able to withdraw his money. In the case of the bank, there is the possibility of a bank run, in the case of the shares his company share price might be volatile and fall, and in the case of his sisters business (a restaurant) the money might be tied up in equipment.

In all cases he has risked his money, and in all case he is in a position where he might not have immediate access to all of his money. In this example, I would like to highlight the case of his investing in his sister's business. Would we say that his sister is acting fraudulently by taking his money and not being able to return it on demand? I think few would say such a thing.

However, when it comes to banks, they do make this promise. This is the problem, not the FRB system. It is the promise that is the only problem, but there is also an element of self-delusion. If we invest money, then we are surely living a delusion if we think that it is not at risk. When we deposit money with a bank, they will invest that money, and will therefore risk the money. It is no different to our investing with our brother/sister/uncle, who may lose all of our money if their business fails. The only difference is that we choose to allow another fallible individual to invest the money rather than us. If you really want to understand this, I can only suggest that you go through my post on bank reform and money.

Quite simply, the idea that a bank can be regulated such that it will not lose your money is delusional. I address how to manage this in the bank post, so will not repeat it here.

At this point, it might be worth recapping with some key points:
  1. FRB does not 'create' money, however attractive and clever the arguments to the contrary. Think of the strong-boxes and gold as you read the arguments
  2. There is nothing wrong with lending depositors money, provided that you are explicit that there is some kind of risk to their deposit
  3. It is not possible to invest and gain a return on money without risk
For the moment, I would like to return to the example of the person investing £10,000 in his sister's restaurant. Having made the investment, let's imagine that a year later he needs his money back. He goes to his sister, but she does not have the cash available in the business, as she has used her revenue to expand the business. However, she calls her accountant, and asks the accountant to value her business, and provide her brother with the report. Her brother owns a share in the business, and this is given as having a value of £15,000. The brother takes the report to a bank, and asks to borrow £9,000 and offers his share of the business as security. The bank agrees to the loan, and the brother draws down and spends the money in the form of bank notes. The brother writes an IOU.

Have we created money here? The business has £15,000 of equity that he has borrowed against, and the bank has given £9,000 as money in the form of credit. Yesterday the money in the business did not exist, today it does not exist, but there is an entry in an accountants book of £15,000, and an actual £9,000 in physical banknotes circulating in the wider economy. The £15,000 in a book is only notional money, 'perhaps' money, but £9,000 in bank notes has appeared because of it. The money supply measured in the economy appears to have increased. Where has it come from?

In this case, the money is coming from a depositor somewhere. For the sake of simplicity, we will imagine the bank only has one depositor However, the money has been committed to the loan. On the one hand, a person who is a depositor has put £10,000 in their account and the money remains in that account. Nothing is debited from that account. On the other hand, the bank gives the brother £9000, and records that the brother now owes the bank £9000. If you look at the bank it appears that the £9000 has never left it, as it is recorded as still being in the account of the depositor. It looks like there is £10,000 in the bank, and an additional £9000 in the economy. The money supply appears to have increased.

The reality is that it is loaned out, in this case with the notional security of a share in the business. This is the 'fraud'. The bank just hopes that the depositor does not ask for more than £1000 before the payment is made.

If the depositor was to ask for £2000, then the bank would be insolvent, even though it has a very good prospect of returning the full £10,000 to the depositor in the long term. If the depositor asks for £2000, this is a bank run.

As another thought, what happens if the bank refuses to loan the brother the £9000? They do not think the restaurant business is a good business at the moment, and therefore do not accept the accountants figures. In this case, the deposit in the bank sits unused. In this case, there is still £10,000 in the depositor's account, but no £9000 in the wider economy. The money supply has not increased.

All of this looks very reasonable, right up to the point where you think about the movement of the gold coins. When we think about this, we can see that, outside of the banks books, the amount of money has not changed. There is no more money, even though it is recorded that there is. The reality is that, money is not appearing and disappearing, it is just a question of whether the money is utilised or not utilised for lending, and the rest is just book keeping entries.

What is the key difference to the wider economy in these situations? If you believe some pictures, there has been a contraction in the money supply in the second case, and an expansion in the first. However, in both cases the real amount of money available in the economy is the same. It appears that this causes some confusion. People are mixing up book keeping with the actual money. We know that there is no more money, or the bank would be able to lend the money and be able to return the depositor's money.

I will give another example, which is about what counts as money.

In this case, I am going to lend money to my friend Fred. He needs to borrow £10. I give him the money in return for an IOU (I would obviously not ask for an IOU in real life). The same day another friend, David, comes to me also asking to borrow £10. However, I have no money left. The friend has a problem that he pays petrol money to George for a lift in his car to work, and the George will not trust that he will pay later.

I then offer Fred the IOU and sign at the bottom that I am giving the IOU to him. David takes this to George, and presents it to him as payment. George knows me and knows I fulfill my promises, and knows Fred (who wrote the IOU), and trusts that he will pay me. He accepts the IOU and gives David his lift into work.

Have we just created money? Have we just added £10 to the money supply, or even £20? After all, George has just accepted the IOU as payment for a service. I have accepted the IOU as a future payment. The IOU looks and performs exactly as money does. Even more odd is, what happens when Fred pays me, and I pay off the IOU? George rips up the IOU. Have we destroyed money?

How about if, in a different scenario, George knows Fred and also knows that he works in the building industry. George also knows that the building industry is in a slump, so doubts that Fred will be able to pay. He therefore does not accept the IOU. How does this fit with money creation? Have we just shrunk the economy? Does the non-creation of money mean that the money supply has shrunk, or not grown?

The point that I am hoping that I am making here is that the notion of what counts as money is very flexible. This is important in the consideration of FRB, as one of the big questions that is important in the consideration of FRB is what actually counts as a reserve. Furthermore, at what point does something become money? In the case of the IOU for example, does it only become money when it is accepted by George, or is it money anyway? Is it money when it is in my hand, before Fred returns the £10?

This is not an abstract debate, but is at the heart of why there is disagreement over whether FRB is a good or bad thing - a key part of the debate is the definition of what money is....

On the one hand the 'Austrian School' says that it is 'a present good' not a form of credit and therefore a bank becomes like a warehouse, whereas the Keynesians define it as a 'future good'. I am not sure that either perspective is actually very useful, and they also do not account for how ordinary people view money. In my post on banking reform, I offered this definition of money, which I hope will make sense:
In other words, money is a contract for the provision of x amounts of goods and/or services. It allows us not to have to go through life making lots of impossibly complex contracts, between all of the specialisms in which we participate, which would be quite impossible and inefficient to manage. Quite simply, it is better that we use an intermediary that offers the same contractual commitment. In order for this to work, the contract implicitly must have the same value tomorrow as it does today.
You may want to read the full explanation here, if this does not make sense to you. Under this definition, the IOU is money, as there is an underlying contract and it can be used as a unit of exchange. However, it is not very useful as it can only be exchanged in the future, and it is necessary to know that Fred is a builder and that he works in the building industry before we accept or do not accept the value of the contract.

This is important, as what is held as a reserve in a fractional banking system depends on how we look at money. For example, a government bond looks remarkably like an IOU type of money. We need to know a lot of detail about the state of the government in order to know whether the government is likely to be able to honour the underlying contract. The same goes for many financial instruments...they are all IOUs that are money, but with a necessity that we have an understanding of the underlying condition of the issuer of the IOU. In this respect, for all but specialists (and they also struggle with understanding the value of the underlying contract), such money is not much use to ordinary people.

It should be mentioned here that the perception of ordinary people is important in defining money. All money is a collective belief that x will provide y, and any money that does not provide such a belief may be money, but is money of little use. As in the case of the IOU, it only becomes useful if we think Fred will actually get work to support the value of the IOU.

On the other hand, if the money is backed by a fixed specie of a commodity, such as gold, then we know that, whatever happens, we can exchange our money for x amount of something. The contract is explicit and clear to everyone. What this means is not that we have produced price stability, or come to a formula for perfect economics, but rather that we have given money a point of reference that we can all understand. You do not need to be an expert to understand that, if you really want, you can swap x units of currency for x units of gold. Again, you should read my full discussion if you have outstanding questions.

It is here that we come to one of the problems of modern FRB. The problem is that new banking regulations have seen playing around with what can be effectively counted as a reserve. In particular the Basel Committee, which was formed by central bank governors from the G10 countries, established two regulatory frameworks for banks, called Basel I and Basel II. Basel I was drafted in 1988, and has been widely implemented such that it is the key regulation that has been in place in recent years, and Basel II was drafted in 2004 and has therefore been adopted as the de facto modern regulatory standard for OECD banks.

The first accord is one in which they introduced miniminum reserve requirement of 8%, and then delineated these reserves into two different types (tier 1 and tier 2) with 4% required from each tier. For example, in tier 1 we do have the familiar and comforting cash reserves, which means actual money on hand to pay to depositors and capital paid for by the sale of bank equity. However, in tier 2 we start to move further away from our familiar notions of money, and start to include items such as subordinated debt, which is a kind of debt issued by the banks where the debt is at the bottom of the heap in payout (meaning the lender comes at the bottom of any claims in the event of bankruptcy). Already, we are starting to move away from our gold into the strong box, and gold out of the strong box model, as we are doing the something similar to replacing the gold with silver.

On top of this, we also have a problem in the way that the reserve requirements are calculated. Instead of the flat rate of 8% being applied evenly, meaning for every loan, there must be an 8% reserve, Basel I added a system of weighting to different types of lending, such that only certain kinds of loans required the full 8%. This makes the 8% figure entirely notional.

Examples of the weightings can be found below:
  • Sovereign debt held in domestic currency, all OECD debt, and all claims on OECD governments - 0%
  • Bank debt created by banks within the OECD, loans guaranteed by OECD governments, Short term non-OECD bank debt - 20%
  • Residential mortgages - 50%
  • Most other loans - 100%
What we have here is a situation in which the amount that needs to be held in reserve has changed to a variable amount, and that does mean a change in the money supply. In particular, as banks alter the shape of their portfolio, it is possible that the amount of money that is really available outside of the banking system will actually change. Furthermore, under these rules, we have a system in which it is possible to lend to governments with no need to hold reserves. They are given no risk whatsover. If we think back to the history of banking, going back to the medieval period, we had a situation in which governments would grant banking privelages in exchange for preferential terms. It all looks painfully familiar.....

Above all else, it is possible for banks to lend to government with no reserves whatsoever. This means that, in principle, a bank can loan to their government without any deposits whatsoever. This is blatant encouragement to lend to the government and it might be considered that it is no coincidence that the debt of many OECD governments continue to grow at a shocking pace. You may be unsuprised to find that the provision of this facility was not changed in Basel II, though the mechanism has changed...

Another interesting aspect of this new method of reserve calculation was that it saw OECD banks as being nearly risk free, and mortgages as relatively low risk. This is very interesting, as what we have is a group of experts who think that they know what future risks are. We can now see how completely wrong the regulators actually were, as many OECD banks are effectively bankrupt, and I would argue that the same applies to some governments (though this has yet to be proved unlike the banks). The most disturbing part of this is that the regulators implemented the rules to create a stable banking system, but it has resulted in the current chronic instability.

However, this miscalculation of risk was not the only damaging part of this new framework. The framework also led to the development of many of the instruments of the destruction of the banking system that we see today. I have detailed in the post on banking reform how the Bank of England accepts that Basel I led to the development of securitisation, and it is also detailed in a paper by Balin (2008).

Securitisation was a very handy way of being able to keep a low risk weighting whilst actually holding relatively risky debt. Another result of Basel I was that banks 'hid' their risks through 'off balance sheet' entities such as subsidiaries, which allowed them to maintain an appearance of having a low risk status whilst taking significant risks. As such, I will repeat this, just so everyone is clear on this. Basel I led directly to the boom in securitisation and off-balance sheet vehicles that has since destroyed the banking system.

Now we come to Basel II which attempted to rectify the faults of Basel I, and we will see that many of the changes encouraged the current crisis. A positive point was that they sought to stop the off-balance sheet chicanery. However, they also set up a system in which 'approved' ratings agencies would determine the risk weighting of the different kinds of loans.

Welcome to the world of AAA- rated CDOs carrying a 0% risk weighting, meaning that no reserves were needed whatsover for the risk in these instruments! I will not go into all of the details of the various weighting methods for different type of debts, as I am sure that you can grasp the idea that an AAA- CDO having a 0% risk weighting might well have been an incentive for the creation and expansion of such instruments of destruction, and that any system that allows this is problematic. Essentially, the problem is that the ratings agencies had no incentive to rate the risk accurately, as the people issuing the instruments paid, and they also were often incapable of understanding what they were rating.

However, this is not the only problem that was built into Basel II. They also devised a way of monitoring credit risk that encouraged the banks to measure their own credit risks. With the approval of regulators they were encouraged to model the risk on their own loan books, which is where another instrument of destruction was born - the 'rocket scientist' risk models. These were the risks models that predicted that the financial crisis could not happen. These gave them the confidence that all was well, and have rightly been subjected to lots of justified criticism ever since.

In addition to credit risk, we can add calculations for market risk (the now infamous Value at Risk models) and operational risk. I will not detail these as they the problems again were rooted in how the risks were modelled. What we are left with is a new method of calculation of reserves which still retains the 8% starting point, but equally turns this into a notional figure. The calculation is below:

Reserves = 0.08 * risk weighted assets + operational risk reserves + market risk reserves

There were other elements to Basel II such as a widening of the scope for regulatory oversight and other measures but, as in the case of the oversight, it seems that the basic problem is that the regulators were as clueless as the banks themselves in calculating and seeing risk. Their poor performance was no more than a reflection of the poor performance of the ratings agencies.

From this brief discussion, there are several key points that need to be made. The first of these is that FRB does not, of itself, lead to money creation. A change in the actual structure of reserves that are held can, however, change the money supply. If the portfolio of a bank includes lending to government, for example, they are left with more cash to lend to other sectors. In addition, if we think of the strong box of gold, the money supply can be altered by a decision not to lend the money. The money is still there, but not playing an 'active' role in the economy. However, this does not happen in practice.

The theory goes that, as banks become worried, they will stop lending and money will become 'inactive' in the economy. However, the reality is that the money does not become inactive, but instead will go into government bonds, or other 'safe' instruments. What happens is that the government gets yet more finance, and the banks still appear to have lending capacity because the lending makes no impact on their reserves. Remember, loans to AAA rated governments have 0% weighting as they are 'risk free', and therefore make no impact on reserve requirements. It therefore appears that banks are lending less as the lending to government makes no impact on their reserves.

We therefore have a situation at the moment where the banks are apparently 'hoarding' money. However, the more borrowing that governments undertake, the more the banks will lend. All the while, their reserve position is unchanged, giving the impression that they are not lending. Meanwhile the government suggests that the banks are hoarding, and they should therefore increase the money supply to encourage them to lend. The reality is that the money is pouring into government coffers, but that does not mean that the money supply is being reduced. As I have discussed in other posts, the government is merely a buffer to getting the new money into the 'real world' money supply. The government provides capital to the banks, then the banks lend to the government.

The government can not spend immediately, as it takes a while to allocate the money to projects. However, the created money has added to the money supply. It is just that it will take time before it appears in the wider economy. The key point here is that banks never leave money sitting on deposit doing nothing, except in the very, very short term. At present they are not lending into the wider economy as before, such that their reserve position suggests that they are reducing the amount of money in the economy by 'sitting' on deposits. However, they are not sitting on the deposits but moving money into government debt.

In addition to this, money is flowing out of the countries to return money according to demands of depositors overseas. Again, money is not disappearing but ending up in overseas reserves. This money might be 'inactive', but I can not be sure. Are the overseas depositors 'sitting' on the money? Again, I am not sure. However, I am sure that these demands for returns of deposits will represent an outflow of money from many economies, in particular the UK economy. In the case of the US, for the moment, the deposits are still flowing into funding of government debt. How long that can last is the big question....

Since I have been writing this blog I have relied on my sense of logic and rationality as a guide to what I write. I will freely confess that fractional reserve banking has been a great challenge. The challenge was that the explanations just did not make sense, clever as they may have appeared. In particular, it is a subject which many economists have given considerable thought to - but I can not help thinking that they have missed the point, in particular with the view of 'money creation'. I have offered a point of view that suggestst that they have misunderstood what they are seeing, and that they have mixed up balance sheet entries with money that actually reaches the economy. This is a long way from conventional economic theory.

(As such, keeping in mind the strong box holding gold, I recommend reading the references that I have provided, so that you can make up your own minds)

There is no doubt that the regulation of the banking system has made a situation in which the money available in the economy has changed, but this is about regulation, not FRB. The ability for the regulatory system to work has been built in government guarantees of the banking system, which has allowed us, as individuals, to pretend that the banks do not risk our money. After all....if all goes wrong the government will step in and save the banks....

We are now in the process of doing this - stepping in and saving the banks. The trouble is that, it is not the government saving the banks, it is us. This is the lie that governments keep telling us - that they are saving the banks and the financial system. I describe why this is a lie in detail in my last post.

The regulators - who are bankers, economists and politicians - have set up a system in which our banks were supposed to be free of risk, but instead created a system of systemic risk. We are all now paying the price of the wisdom of the regulators and 'experts'. It is all of us that are paying for the misguided regulation, but still there are calls that the same regulators that made the mess do is the mantra, but this call is driven by the same people that have taken our economies to destruction....

Even now, in the midst of the crisis, how many people understand how the reserve requirements actually work, and how these encouraged the problems? I would suggest - very, very few. In such circumstances it is easy to redirect blame on the banks, on 'greedy bankers', but they have just foolishly responded to the incentives and limitations imposed by regulation. We hear considerable chatter about deregulation as the cause of the crisis, but it was actually the regulation, and the distortions of behaviour resultant from the regulation, that caused the crisis.

We can add in to this mix, that many economists have failed to connect the real world with banking balance sheets. FRB appears to be a perfect example, where economists look at balance sheets, rather than the money that flows to real people and business in the economy.

My intention when starting this post was also to discuss the role of central banks in FRB, but I am afraid that this will have to be delayed for the moment, as this post is already far longer than I intended. In particular, the central banks do create money, and also have some significant impacts on the role of FRB. Their role in the economy, as I will discuss at another time, is entirely negative. In a later post I will discuss the central banks, and will refute the conspiracy theorists, whilst pointing out the problems with central banks.

Note 1: Apologies for a long post, but there was no way to get the message over without some kind of detail. As always, comments are welcome. In particular, as I am contradicting so much economic theory I welcome economists to comment (no equations, please, just clear explanations).

Samples of Reading...

Balin, J (2008), Basel I Basel II, and Emerging Markets: A Nontechnical Analysis

Block, W & Garschina, KM 1996, 'Hayek, business cycles and fractional reserve banking: Continuing the de-homogenization process', The Review of Austrian Economics, vol. 9, no. 1, pp. 77-94

Bordo, MD 1990, 'The Lender of Last Resort: Alternative Views and Historical Experience', Economic Review, vol. 47, no. 2, pp. 18–29.

Bordo, MD & Redish, A, 'Why Did the Bank of Canada Emerge in 1935?'

Carlos, DA 1985, 'GOOD-BYE FINANCIAL REPRESSION, HELLO FINANCIAL CRASH', Journal of Development Economics, vol. 19, pp. 1-24.

Cochran, JP, Call, ST & Glahe, FR 1999, 'Credit creation or financial intermediation?: Fractional-reserve banking in a growing economy', Quarterly Journal of Austrian Economics, vol. 2, no. 3, pp. 53-64.

de Soto, JH 1995, 'A critical analysis of central banks and fractional-reserve free banking from the Austrian school perspective', The Review of Austrian Economics, vol. 8, no. 2, pp. 25-38.

de Soto, JH 1998, 'A critical note on fractional-reserve free banking', Quarterly Journal of Austrian Economics, vol. 1, no. 4, pp. 25-49.

Klein, B 1974, 'The Competitive Supply of Money', Journal of Money, Credit and Banking, vol. 6, no. 4, pp. 423-53.

Phillips, RJ & Jerome Levy Economics, I 1995, Narrow Banking Reconsidered: The Functional Approach to Financial Reform, Bard College, Jerome Levy Economics Institute.

Rajan, RG, Center for Research in Security, P & University of, C 1998, 'The Past and Future of Commercial Banking Viewed through an Incomplete Contract Lens', Journal of Money, Credit & Banking, vol. 30, no. 3.

Selgin, G 1994, 'On Ensuring the Acceptability of a New Fiat Money', JOURNAL OF MONEY CREDIT AND BANKING, vol. 26, pp. 808-.

Selgin, G 2000, 'Should We Let Banks Create Money?' INDEPENDENT REVIEW-OAKLAND-, vol. 5, no. 1, pp. 93-100.

Selgin, GA & White, LH 1987, 'THE EVOLUTION OF A FREE BANKING SYSTEM', Economic Inquiry, vol. 25, no. 3, pp. 439-57.

Tobin, J 1964, 'Commercial Banks as Creators of" money"'.

There are plenty more references. I have also skipped the conspiracy theorist references, as you can find these easily online. Some references are also a little incomplete, which I will admit is resultant from being a little tired (a poor excuse). However, you should be able to find them.

Note 1: I have never seen any anti-semitism explicitly expressed in any of the conspiracy theories, but there does sometimes appear to be a sub-text running underneath. I have no reason for sensitivity to such issues, approached the conspiracy theory with an open mind, but could not help but notice this. Still, nothing is explicit, so it could be that there is no such intention and I have imagined this. I am not sure why I would though....


  1. A quick note. I do not blame the current crisis entirely on Basel, as factors such as the wall of money entering the Western economies is a factor, along with idiocy within the banking system.

    It is a confluence of factors, but the regulation offers a significant contribution....

  2. You make a trivial error in your claim that FRB does not 'create' money.

    While the gold does not increase, the IOUs representing the gold do increase. Observing that the IOUs are also used as money, your error should be obvious.

    Your other claims that there is there is nothing inherently wrong with FRB so long as the risk of FRB is made clear to the depositor are OK.

  3. Wow, I thought I wrote long posts. ;)

    I like the way you have gone into so much depth here. It reminds me of old-fashioned BBC programming. I mean that vaguely as a compliment.

    I agree some of the 'problem' comes with people believing there can be such a thing as 100% security and yet at the same time a return for their money. People, the money has to go somewhere and do something to generate a return...

    That's not to say plenty of individuals/systems didn't make idiotic or hubristic decisions that we're paying for now, of course.

  4. I am not sure what the discussion of IOUs was for, since what banks give when they are giving credit is money, perfectly interchangeable with every other money in the economy. The banks holds IOUs, but they are not part of the part of the primary economy, that is, the part of the economy not entirely contained inside the financial system.

    And the fact is that you can have person A with £10 deposit, person B take £9 credit, and deposit it immediately, or, more likely, have it deposited automatically. At this point there are £19 of money in the system. And the majority of economy these days does not follow "gold in the strongbox" model, since you can spend money without ever withdrawing it, by moving it between accounts in the same bank. Which means that in the very real sense both creditor and depositor can operate with their money without the bank losing solvency.

    When looking in the long term the money may not have been created, because it is being balanced by debt. But in the short term, it is. It is just that we seem to have run out of the short term, and, unlike Lord Keynes, we are not dead. Not that FRB is a mayor factor in the current crisis anyway, but it doesn't help.

  5. Anonymous:

    I think you will find that I do not make a trivial error. In the example I gave, the IOU could be used as unit of exchange. The IOUs in the banking system can not be used without altering the bank's ratio of reserves. In short, there is nothing the bank can do with the IOUs, meaning that they are not a unit of exchange. They have not created money.

    No money is created.


    I think you have been reading too many economics text books, and I mean that as a compliment. There is a fundamental confusion here. For example, if we see Northern Rock, there was a bank run. If they were creating the money that they were lending, then this would not have happened.

    If I deposit £10, and the bank lends £9, then 'yes' I can still take out my £10. The reason is that people do not want to all take out their money at the same time, so the bank has on hand enough money to make the transaction. The reserves deal with day to day deposits.

    As for the argument about having two accounts in the same bank... You just have two strong boxes in the same bank. One is the big box where people keep their long term store of gold, and the other is the little box for day to day spending money.....

    If you think about it - it does not matter whether we are moving a piece of paper in and out of a strong box, or a coin, or whether we are moving electronic notes. It is all exactly the same thing - units of currency. How those units of currency are accounted for has not changed.

    The rules on reserves may have changed, but the same process of accounting for the money has not. Just as in medieval times you have a basic system where you have an IOU to the depositor for the full amount of the deposit and his balance is unchanged despite the fact the gold changer has lent out 90% of his gold coins.

    Just as in medieval times the bank has lent the money but still claim it is in the depositor's account. The basic book keeping principle behind this has not changed.

    Just as we could never magic gold into being, it is not possible to magic money into being (excepting the central banks - but I will discuss this another time).

    I have to admit, it does appear that many economists actually do think that banks create money. However, the more I have thought about this, the more absurd the notion becomes. As I said, the book keeping and methods of fractional reserve banking have not changed.....but we know that it was never possible to magic gold into being.

    I have shown in my example that the money that actually reaches the real world never exceeds the amount that was deposited, and that in reality the amount lent out is always less than the amount deposited.

    Just because it is electronic or paper currency makes no difference to the method or the system. Deposits are treated in exactly the same way as gold coins were.

    I am genuinely puzzled that so many economists have got it so wrong. I am also more than a little worried that they all have models that do not correspond to the real world.

  6. Very nicely explained.

    This means that, in principle, a bank can loan to their government without any deposits whatsoever

    I think this should say reserves and not deposits.

  7. A minor note: you seem to have two "Note 1" in your post.

    I fear that at this point we are arguing semantics... that is: my point is that banks allow multiple people to use the same currency unit as if they had exclusive rights to them. I claim that as long as money-mediated exchanges occur between those particular set people this functions exactly the same as if money had been created, as long as not too many people actually assert their exclusive ownership by withdrawing their money from the bank.

    One might claim that this doesn't, in fact, constitute money creation, but that really depends what one means by "money" and "creation". Still, this is not a fundamental problem, so it is probably not worth arguing... there is still a lot in your posts I agree with.

  8. Digital gold currency such as e-gold, GoldMoney, Pecunix are all backed by gold bullion. No fractions, the accounts are by weight so you KNOW how much value is in the account at all times. Paper is poverty. Private digital gold currency is the future.

  9. People that say that FRB creates money are fundamentally saying that as soon as money is put in a bank the amount of money is doubled; the account holder has the money AND the bank has the money.
    The account holder does not have the money they have a promise of money. As money is the promise of goods or services and the bank account is a promise of money it appears that you have doubled money. But only the person with the physical money can make good on the promise of goods or labour.

  10. Very good post Mark. I don't think I understand FRB any more but your post has good food for thought. I am still chewing over your comment about what is and isn't money - a lot of transactions these days are made entirely electronicslly, through chains - deposit => loan => redeposit => wire transfer=> reciept => deposit... leading directly to work amd the exchange of valuable physical goods but all without becoming physical cash. Is this e-money really always a ringfenced part of of the very first deposit, or has it been 'created' by the banks? Still confused.

  11. JohnPaul: Thank you for your correction. Ideally I would change the post, but I make a principle of the blog never to change entries (though I cheat a little if I see an error immediately after publishing). Hopefully people will get as far as your comment and correction.

    In your second comment it sounds like you have grasped the essence of it. I was worried about the clarity of my explanation, so that is very encouraging.

    Ramarren: Likewise, thank you regarding the notes error.

    pocmloc: I hope that, once I add in central banks to the picture, all will be clear with regards to your key question. A future post will cover this.

  12. Cynicus,

    This is an excellent post -- you seem to be right on the money. I do not think you contradict economic theory nearly as much as you seem to think you do, at least Austrian economic theory.

    It's true that banks don't really "create" money, they just lend it out. And this isn't a problem until the rare case when lots of people try to withdraw their demand deposits at once.

    However, the basic idea behind Austrian business cycle theory is that people's behaviour is affected not by how much money there actually is, but by how much it seems like there is. When banks lend out 80% of the demand deposits, that makes it seem like there is 400% (don't trust my math) more money actually circulating. Which is fine, because each dollar will simply buy 1/5 as much goods as it used to, no problem.

    The problem comes when the amount of money available for borrowing changes. If predicting profits is difficult when the value of money is relatively stable, it's virtually impossible when it changes.

    To see why, you have to look at time preferences. The whole concept of interest rates is based on the idea that something good in the future is even better today. If I get $100 in a year, I can spend it anytime I want starting then. If I get it now, I have exactly the same option, plus I can spend it anytime this year as well. That extra value is my personal interest rate. If I estimate that it's worth $10 to me, then I will consider $90 now and $100 in one year to be roughly equal. So, I would want $10 interest if I loaned someone $90 for a year, giving an interest rate of roughly 11%.

    The more savings people have, the less they tend to charge in interest. On the market for loans, if you are getting a low interest rate, that is a market signal that this is a time of plenty. A high interest rate signals that either times are hard or people think they will be.

    Now, when entrepreneurs get the "good times" signal, this tells them that it's ok to venture out, take risks, and start businesses that might take a while to pay off. It's easy to borrow money, which is basically the same thing. If not, they tend to hold back and maybe stick with their day job producing things that are already proven to be desired by consumers.

    Entrepreneurs (and existing businesses) are vitally dependent on interest rates to estimate how to allocate resources, whether toward risky long-term projects or safer short-term ones. Of course, they make mistakes all the time, and businesses fail.

    So you probably see what's going on here. When the circulation of IOU's, which work just like money, increases, this drives down interest rates and encourages a certain kind of investment. Normally, this would only happen because people had saved up lots of goods and in general could afford to reallocate some resources. But when it happens only as a change in the money supply, resources get allocated away from real consumer demand and into crazy startups, or real estate bubbles, or whatever. People think they're rich because they have more IOUs, when the amount of actual goods hasn't necessarily increased.

    And reality inevitable bites, eventually. The lie is revealed, and that's the state we're in today.

    So, I mean, maybe I've misunderstood you, or the Austrian school, but I don't think you really disagree that much at all.

  13. Hi, Mark. I have to admit that I'm going to have to re-read this several times before I understand it.

    My initial thoughts are that it seems to be saying that FRB doesn't "create" money permanently, but does temporarily, balanced by a future debt (and then unbalanced by an interest payment) - which is how I thought it worked. Where I am confused is how the "It's all common sense just like private IOUs" stuff transmutes into the 'official' world of centrally-controlled interest rates, inflation and money supply. How and why do we need Adam Smith's invisible hand to be regulated with a committee-determined BoE interest rate? (For simpletons like me, in your future post on central banks, an explanation of exactly what the BoE interest rate means would be very useful too).

    Thanks for a very interesting post that will keep me occupied for days!

  14. So government is the problem, both on the regulatory side and the borrowing side. The solution then is quite simple - restore sound FRB principles when banks lend to governments?

  15. First, no idea why you insist that the credit money is not money. Not all transactions have to involve the bank - a lot of commerce happens without involving the bank. You can endorse a check to someone, for example.

    Second, just think about the effect of changing reserve ratios of banks as was done recently all over the world and tell me that it was NOT done to increase money supply.

    Now, just try and understand that the operating reserve ratio of a bank changes during its operation even if the "official prescribed minimum" ratio remains constant. Now, can you see the money being created?

    Also, note that the "minimum reserve ratio" requirements are intended to prevent a bank from creating too much credit-money.

    (The problem with too much credit money, esp. when the money is redeemable for something physical such as gold, is that it highly increases risks of insolvency during bank runs. Even if the money is not explicitly redeemable, the reserves of the Federal Reserve represent securities and other assets, so an analog to a bank run is possible.)

    I honestly hope that this comment was useful to you.

    Though not directly related to FRB, the Federal Reserve is the other main mechanism for changing money supply. The Fed is only needed when we have govt-supported FRB, and not really essential in a free market. Would just like to point it out since we are talking about money creation here.

    If you still don't see the point, try looking up the definitions of M1, M2, MZM, etc. to see what economists (and common people) think of as money.

    Hope this comment was helpful.

  16. Yes, central banks really DO create money. this is normally taught in any undergraduate economics degree.

  17. Hello Cynicus,
    I've been following your blog for several months now and have to congratulate you on the accuracy of many of your predictions. The only important way in which I would disagree is this; If the result of a global economic collapse would most probably be mass unemployment, hunger, international tension and ultimately (?) a possible World war, surely it is worth spending any amount of money to avoid this.World war 3 would be the ultimate in expense and would probably cost the GDP of the entire world along with our modern civilisation.Anything is better than that !! Best regards,John

  18. Ref : Money Creation, FRB

    I am not saying you are right or wrong - i have a problem at gettin my head around it.

    The most common quote is from "modern money mechanics" published by the federal reserve bank of chicargo.

    "If business is active, the banks with excess reserves
    probably will have opportunities to loan the $9,000. Of
    course, they do not really pay out loans from the money
    they receive as deposits. If they did this, no additional
    money would be created. What they do when they make
    loans is to accept promissory notes in exchange for credits
    to the borrowers' transaction accounts. Loans (assets)
    and deposits (liabilities) both rise by $9,000. Reserves are
    unchanged by the loan transactions. But the deposit credits
    constitute new additions to the total deposits of the
    banking system."

    I would apprecate your comments on this.

  19. Wonder if Cynicus would comment on this from Karl Denninger:

    Ben Bernanke's neoclassical monetary theories have been proved incorrect. He has doubled base money in the last few months. Under neoclassical monetary theory this should have immediately produced inflation as the increase in base money would have spurred an increase in credit money (cash and credit are not the same thing, although they spend the same.) However, neoclassical monetary theory relies on a false premise - that the existence of additional base money causes the creation of credit - that is, the monetary tail wags the credit dog. In fact it is the other way around - credit is the dog and the tail cannot wag the dog. When worthy borrowers refuse to take out additional loans and unworthy borrowers cannot borrow additional base money has no effect, because each dollar of credit money must be matched by a dollar of debt. No new debt issue, no credit money expansion. Debt cannot expand because the carrying capacity for it in the economy has been reached, ergo absent Weimar-quantity printing of raw cash (on the order of $20 trillion dollars!) deflation cannot be halted until the bad debt is forced from the system. This excess came about because of knowingly unsustainable leverage - that is, credit-to-money ratios. Unfortunately until the total leverage in the system is reduced to sustainable levels there is nothing that can be done to halt demand destruction and economic contraction. Transferring leverage from the private sector to the government cannot change this outcome. In an economic system where most monetary exchange is in fact credit deleveraging always produces deflation which cannot be halted until leverage ratios return to sane and sustainable levels economy-wide.

    I would have expected monetary inflation - but then I began following his blog about two years ago, and his contributors sparked off a very good debate. After a few months he went from the inflation assumption to certain deflation.

  20. I like others are finding it hard to get my head around this FRB as far as money creation for the expandion of credit.However we need to wait for the next post to reveal all.

  21. CE, you almost convinced me, but there is something wrong in your interpretation of FRB.
    I’ll try to explain it but I am obliged to introduce in the equation the role of Central Banks because IF what they say in the link you quoted ( is true, i.e.: “Banks keep checking deposits at the Fed and these deposits constitute their reserves, on which they can and do pyramid ten times the amount in checkbook money”, it’s crucial to the matter.

    So, starting from your example: “When I enter into bank A and deposit £100, the bank effectively writes me an IOU for the £100. The bank then takes my money and lends £80 to bank B, who writes an IOU to bank A for £80. That bank then lends £64 to a consumer, who writes an IOU to bank B”.

    Here’s how I would put it it, instead, using the US$, the Federal Reserve as in the Austrian economists’ example and only one bank:

    When I enter into bank A and deposit $100, the bank effectively gives me an IOU for the $100. The bank then gives the $100 to the Federal Reserve.
    For that deposit, the Fed gives $1000 to bank A i.e. ten times the amount – see above.
    Bank A then lends $900 to 9 consumers who write $100 IOUs to the bank.
    So, now bank A has his FRB of $100 plus 9 IOU of $100 each.
    It still owes $900 to the Fed but if the economy goes well the bank will get its $900 back (plus substantial interest, of course) without problems.

    Moreover, I notice that bank A, instead of waiting for the consumers to reimburse their IOUs can also sell them as prime or SUBPRIME loans repackaged into attractive-looking investment vehicles and securities. This would have effectively created $900 out of $100… as long as the Ponzi scheme works and until the house of cards collapses.

    Again, that is how I see it. Perhaps I am wrong.

    Phil in Cyprus

  22. I see a weak point in the example I just wrote.
    Actually, it’s not bank A’s FRB that creates money. Only Central Banks do it by allowing banks to borrow money from them at a ratio bigger than the deposit (1 to 10 for the Fed).

    So the real Fractional Reserve Banking in my example is the $100 deposited by “bank A” IN the Federal Reserve.

    Phil in Cyprus

  23. On Posted on 1/30/2009 debt free fiat currency-a solution to deflation and inflation.
    Is a good explanation on course and efect of FRB.
    posted by Gregory K.solderberg

  24. Thanks for your blog which I find genuinely interesting…and this despite the economic jargon which is not always accessible to a non economist.

    I still can’t get my head around this same issue of whether there is money creation or not.

    As far as I can understand it there are probably two ways of appreciating the nature of fractional reserve banking.

    The one you appear to focus on, in which a fraction of a deposit is kept as a reserve in the bank and where the remainder is lent agrees with your conclusion that in fact no money is being generated. As a deposit of 10, means eg a fraction of 1 as a reserve and 9 being lent. This 9 when deposited in another bank is then turned into a fraction of 0.9 as a reserve and 8.1 being lent…and so on until the all initial 10 end up distributed as a reserve across various banks.

    However, there is also that alternative view that the money deposited represents The fraction of what a bank is then allowed to base its lending on. Which, it appears is the current practice and which conclusions are in my opinion in contrast with your findings. In this case, 10 are deposited and the bank keeps this deposit intact as a reserve and allows itself to lend eg 9 times that amount, therefore 90, which when itself deposited in another bank will be kept as a reserve and 9 times that amount become available for lending (810), which whenever deposited in another bank is kept as a reserve of the 7290 that can now be lent…and so on.

    Innocently I believed that this was what economists were referring to when discussing leverage and de-leverage processes. Nonetheless, it is widely visible in many economic news that the freeing of a percentage of own capital in a bank or the recapitalisation of a bank would allow that bank to lend whatever times that amount. Based on this evidence I tended to agree that it is the later view which better represented the system we are in.

    In itself, I do not believe that this system could be seen as a conspiracy, because guarantees are generally required as collateral to the money being generated. In this instance, the state would only be relying in the banking system to translate into money the “real” value generated within the society.

    (Discounting inflation) What theories addressing this matter appear to argue is that by generating 100% of the money and charging interest on top of that money feeds the coercive nature of capital accumulation. As in this case 100% of that money plus that interest money would need be available in the society, leaving a gap which could not be satisfied. It is in this impossibility that some argue that the system is flawed, as to satisfy the need to find that extra interest would always leave someone with the incapacity to meet their own 100% needs.

    Maybe therefore the need for permanent economic growth, as a mean to minimise this effect.

    I also guess that this is contrary to what Marx argued (that capitalism would generate its own final crisis and collapse) and would actually imply that crisis are an essential part of the markets, whereby the flawed nature of the system suggests that whenever repayment time is “called” a part of the society would always be left dispossessed of their assets or guarantees.

    I would be grateful if you could find the time to correct or comment any part of this comment. In the meantime, congratulations for the great service and insights that your blog provides.

  25. The Ascent of Money by Niall Ferguson discusses at length the root of the anti-semitism you sense in the conspiracy theories.

  26. The Ascent of Money by Niall Ferguson discusses at length the ant-semitism you sense in the conspiracy theories.

  27. Let me use your example to show you how FRB actually DOES MAKE MONEY:

    "There still remains the idea that it is somehow 'wrong' that a bank can take £100, promise to return the money on demand, and yet still lend £90 of that money."

    This where you get it wrong. As the bank has to save your £10 and they can lend the £90 for the average consumer, in need of money, it doesn't mean that they are going to lend it as £90. Here is what they do:

    For example a person wants to borrow £90 from the bank. They split the original £90 into £81 and £9, the £9 representing the ammount they lend away and the £81 they can lend away in the future. Now as they give away the £90 to the customer they are left with £19 (your £10 + £9 that they just lent) and in addition £81 which is approximately £800 of lendable money. So basically, yes they give away more money than they have.

    The ratios differ depending on the country and monetary system, but that is the basic idea. I think the ratio in UK for example is a bit lower than 9:1, but the principle is the same.

    I recommend you to watch a document called "money as a debt", which can be found for example from google video if my explanation doesn't make sense to you.

  28. Let me use your example to show you how FRB actually DOES MAKE MONEY:

    "There still remains the idea that it is somehow 'wrong' that a bank can take £100, promise to return the money on demand, and yet still lend £90 of that money."

    This where you get it wrong. As the bank has to save your £10 and they can lend the £90 for the average consumer, in need of money, it doesn't mean that they are going to lend it as £90. Here is what they do:

    For example a person wants to borrow £90 from the bank. They split the original £90 into £81 and £9, the £9 representing the ammount they lend away and the £81 they can lend away in the future. Now as they give away the £90 to the customer they are left with £19 (your £10 + £9 that they just lent) and in addition £81 which is approximately £800 of lendable money. So basically, yes they give away more money than they have.

    The ratios differ depending on the country and monetary system, but that is the basic idea. I think the ratio in UK for example is a bit lower than 9:1, but the principle is the same.

    I recommend you to watch a document called "money as a debt", which can be found for example from google video if my explanation doesn't make sense to you.

  29. When economists talk about creating money through the use of fractional reserve banking, they are not referring to making the economy more wealthy than before, but rather to making the economy more liquid. It does not matter that, as per your example, gold is simply being shifted around into different strongboxes, because more medium of exchange is created without creating more wealth. It is missing the point of fractional reserve banking to state that money is not created. Money is created in the form of medium of exchange. This creation of liquidity in the economy is as important an aspect as the creation of more wealth because it adds to the functioning of the market systems of the economy as a whole.

  30. A 6,000 word post! Very few people will read a post that long. I could cut dozens of paragraphs out of the above post without any loss of meaning at all. I’ve come across innumerable articles on fractional reserve with a hundred times as much information in a tenth the space.

    You attempt to argue that fractional reserve does not create money (in the para starting "When I enter into bank A . . . "). I cannot see anything resembling a coherent reason to back the latter claim so it’s a bit difficult to argue with the claim! Although you do say that sundry economists cannot see that “recording money does not mean the creation of money”. Who are these economists? I’ve never come across any economist making the latter bizarre claim.


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