Glenn Sullivan

To reply to Don Richards; Bank lending creates money, Beacon, March 7:

Referring to the 2014 article by economists from the Bank of England, I refer Mr Richards to a comment at the bottom of  page 16 comment in the article: “Just as  taking out a new loan creates money, the repayment of bank loans destroy money.”

The lent money comes back and the money supply returns to the same as it was before. However, the economist’s statements that money is created and then destroyed is a simplification.

When economists talk about “money” they really mean “value” most of the time.

As the amounts lent out increase in a growth economy, the velocity of the money in circulation will increase.

This is not from more money being created, it is from it going around faster.  

Faster circulating money increases the value effect in an economy.

When a bank gives out a loan, the amount the lending bank owes its original depositors remains unchanged, and yes, a new party receives a deposit, however, the funds held by the lender decrease and the funds held by the loanee increase.

In turn, the loanee funds will decrease as they apply the loan to an end user (eg, the seller of a house purchased).

The bank has exchanged its depositors’ funds for an IOU from the lender.

The money actually moves from the depositors’ funds into the lender’s bank account, and from there, to the end user of the loaned funds.

Banks no longer have to transfer currency to do this, they operate electronic accounts with each other.

No money is created by this process; it is merely moved around.

Glenn Sullivan