It’s official! Economics students are being misinformed, says Bank of England

WRITTEN BY GRAHAM HODGSON (GUEST AUTHOR) ON MARCH 13, 2014.

Since at least the 1960s, central bankers have, in their ones and twos, been quietly airing the message through ill-reported speeches and evidence to official committees that money is created by private banks when they make loans. But in their pronouncements targeted at the general public they have persisted in reiterating the fictions promoted by economics textbooks about relending deposits and reserve requirements and the money multiplier.

Now the Bank of England, in its 320th year, has officially acknowledged that the tosh that is taught to economics students the world over is indeed tosh. Banks don’t relend deposits. Deposits are liabilities that languish on banks’ books, not assets that can be lent out. There is no money multiplier that permits policy makers to determine how much money is to be made available to the economy by dictating reserve requirements. Central banks cannot even reliably stimulate lending for production to promote economic renewal by flooding the system with reserves, since reserves cannot be lent out and deposits created by measures such as quantitative easing may be used to pay off debt rather than to invest in production.

The sneering naysayers who persistently attacked Positive Money over the first two or three years of our campaign can now be roundly trounced by this official corroboration (if, indeed, there are any still remaining to be trounced).

But the Bank does still insist that money is an IOU. That is certainly the case with deposit money, where bank deposits are only records of the banks’ acknowledged obligations to depositors to settle the payments we wish to make by calling on their own reserves. So bank deposits are banks’ IOUs to us. But the Bank of England claims that reserves also are IOUs of the Bank to the commercial banks. Yet it is not at all clear what it is that the Bank has undertaken to do for or on behalf of the banks to which its reserves bear testimony, other than to return to the banks the collateral they were required to submit in order to acquire the reserves in the first place. And finally, they state that banknotes are IOUs of the Bank to us, on the spurious grounds that if we come across an obsolete and withdrawn £20 note in our change (who gets £20 notes in their change?) we can insist that the Bank supply us with a crisp new up-to-date £20 note in its place. So what’s that an IOU of? Another £20 note in 10 years’ time?

We don’t believe that central bank money is an IOU of the central bank. Rather it’s a token acknowledging on our behalf our joint commitment to make goods and services available for sale to any holder of central bank money. Central bank money, sovereign money, is not a debt, it’s not an IOU, it’s a token of our shared commitment to each other as citizens of a sovereign state.

Link: http://www.positivemoney.org/2014/03/official-economics-students-misinformed-says-bank-england/