Oooh, dearie me:
What is overlooked is that one sector did a gargantuan amount of manufacturing during this period. The big international banks manufactured money, using very simple raw materials. All they needed were computers and borrowers. Every time they made a loan, the banks simply typed the amount they were lending into their computer system, transferred it to their victim\’s account, and charged interest for the privilege.
No, no, it doesn\’t work this way, it really doesn\’t.
How did this outrageous scam ever get started? The pressure group, Positive Money, explains it well. The Bank Charter Act, of 1844, removed from banks their licence to print money. The Bank of England printed the money, and the banks bought it. The state retained the seigniorage – the difference between the cost of creating the physical currency and its face value.
That is true, that is what seigniorage is, the difference between the value of a £5 note and the paper and ink that went into making it.
Now, only 3% of the \”money\” in Britain is cash from the Bank of England. The rest is electronic, created by the banks, simply by virtue of the fact that the Bank Charter Act didn\’t foretell the advent of computer-screen credit, and no one stepped in to arrest its development. Positive Money campaigns for the establishment of electronic seigniorage, which would establish a nice little earner for the state. Obviously, this responsibility could not be placed in the hands of politicians. Positive Money suggests that the Monetary Policy Committee could take on this function, gauging the release of currency to the rate of inflation – including house-price inflation. Frankly, the fact that the banks had been gifted with the closest thing to alchemy that humanity has ever contrived, and still managed to screw it up, suggests that a state institution could do no worse than they on this matter.
No, banks do not create money. The banking system as a whole creates credit. But individual banks do not create money. They just don\’t.
BTW, this idea of creating money at just the right rate for the economy: Milton Friedman would be proud. This is the essence of monetarism after all.
Now, how to show that banks do not in fact just create money?
Well, if they did then Northern Rock would not have gone bust, would it?
Recall what they were doing. Lending out money as mortgages. John and Sue (yes, terribly heterosexist of me) wanted that little ex-council in Newcastle. Rock lends them the money to buy it. Where does Rock get that money from? Just print it on their own little computer system? Well, if they did, then Rock wouldn\’t, couldn\’t have gone bust.
What Rock actually did was write that cheque, make that transfer, which bought the house for John and Sue. Then, by the end of the day (and yes, all banks balance their books every day) Rock would go and borrow that money from somewhere else. Maybe someone had deposited money in their account at Rock. But more often than not they would go and borrow it from another bank. On the interbank markets. Rock\’s books balance, they\’ve an asset, that mortgage that John and Sue owe them, they\’ve a liability, that same amount owed out to the interbank market.
Rock would then save up some thousands of these mortgages and when they had enough would issue a bond. This would replace the liability to the interbank market with the bond itself as a liability. The advantage being that the bond would be for 10-15 years, Rock has now matched the maturity of its assets and liabilities (sure, the mortgage might be for 25 years, but the average life of the pool will be shorter, refinancings, people moving etc).
So, what happened to Rock? Well, they were issuing mortgages, piling them up to issue more bonds, when the interbank markets decided no more money for you you Northern Twats. Can\’t have country boys making it in The City type stuff. At which point they went bust. Because at the end of the day they could not balance their books. They could not renew that interbank lending which was financing the mortgages they had already issued.
Think through this for a moment. If Northern Rock could just print money on its own computers then could they have gone bust in this manner?
No, clearly not.
Did Northern Rock go bust in this manner?
Yes, clearly so.
Therefore, Northern Rock could not print money on its own computers.
Death of the Positive Money thesis.
We can take this further but I wouldn\’t want to tire the loons\’ brains too much. The very existence of the interbank market shows that banks cannot just print money. The existence of bank bonds, of bank borrowings, shows that they have to go and get the money they are lending from somewhere else.
Thus it cannot be true that banks just print the money they lend.
Repeat after me: the banking system creates credit, yes. Banks do not print money, no.