Can’t We Just Print More Money? By Rupal Patel and Jack Meaning. Cornerston Press for the Bank of England. 2022. £14.99.
This is a very readable exposition of economics as taught in schools and universities and should help students pass their exams. However, the authors are likely to regret having used the terms ‘miracle process’ (p. 191) and ‘out of nothing’ (p.171) in relation to banks. This will be pounced on by currency cranks and used to claim the authority of the Bank of England for their mistaken theories.
Even as described by the authors, there is nothing magical about how banks operate. If you define a bank loan as money (as they do), then when a bank makes a loan it will be, by definition, ‘creating money’. But it doesn’t follow that they are doing this ‘out of thin air’ (p. 192). Only the government or its central bank can do that as ‘fiat money’.
When a bank makes a loan it typically opens a bank account in the name of the borrower and credits it with an amount equal to the loan. Before it is spent the money doesn’t have to be covered. But as soon as the borrower begins to spend it the bank will need to have or get money to transfer to the bank account of the person or business the borrower bought from.
Every day, money is flowing into and out of a bank, in as new depositors, payments to existing customers like wages, repayment of loans, etc and out as cash withdrawals, customers paying bills through direct debits or buying things with their debit card and borrowers spending their loan, etc. At the end of the day (literally) what banks owe each is ‘cleared’. If after this a bank finds its payments out exceed its payments in it has to cover this either by borrowing from the money market or running down its reserves at the Bank of England. So, loans when spent do have to be covered in the end one way or another.
When a bank makes a loan it is not creating anything out of thin air. It is transferring money that might not be spent otherwise to others who will spend it. This will have an economic effect by circulating money more but it is not creating money from nothing. Banks are intermediaries whose primary income is derived from borrowing at one or no rate of interest and re-lending it at a higher rate. After paying the costs of running their business (wages, buildings, computer systems) what is left is their profit.
The authors contradict themselves on this point. In chapter 7 they criticise as outdated the view that ‘banks take in deposits from a pool of savings that people want to put away and then they find ways to distribute those savings around the economy. They are simply intermediaries’ (pp 169-70). In the next chapter they say that banks ‘match borrowers to savers. Banks act as middlemen between people who want to save money and people who want money to spend’ (p. 188). They got it right the second time, especially when they add: ‘Banks’ most crucial role is funnelling money to where it can be most productive – and so stimulating the economy, while also making a profit for themselves’ (p.190). But they spoil this by adding ‘they cause more money to circulate in the system’ whereas the correct formulation is that ‘they cause money to circulate more in the system’.
Anyway, why can’t ‘we’ just print more money? The authors’ reply is more or less right.
‘Banks want to be able to make a profit, and that places a limit on how much money they create [how much they lend]’ (p.170).
Banks are in competition with each other both to attract new deposits and to make loans. As a result, as another Bank of England publication explains:
‘…if a bank continued to attract new borrowers and increase lending by reducing mortgage rates, and sought to attract new deposits by increasing the rates it was paying on its customers’ deposits, it might soon find it unprofitable to keep expanding its lending. Competition for loans and deposits, and the desire to make a profit, therefore limit money creation by banks’ (‘Money Creation in the modern economy’).
As to fiat money:
‘If central banks were to continue to print more and more without limit, the result would be too much inflation, with prices rising uncomfortably fast and eroding the value of the newly printed money at too fast a rate’ (p. 257).
Adam Buick
No comments:
Post a Comment