How is money really made by banks? – Banking 101 (Part 3 of 6)

Before we start looking at how money is really
created, we need to have a quick look at what types of money we actually use in the economy.
There’s actually three types of money that we use in the economy. As a member of the
public, you will only have ever used two of them. The simplest form is cash — the £5, £10,
£20 and £50 bank notes and the metal coins that most of us will have in our wallets at
any point in time. As you probably know, only the government, via the Royal Mint and the
Bank of England, is allowed to create these. If you try to make your own at home, pretty
soon you’ll get the police kicking down your door at 2 in the morning. Now imagine that you need to pay your rent,
and your landlord has an account with a different bank to you. When you log into your internet
banking and make the payment to your landlord, your bank has to send some money to your landlord’s
bank to ‘settle’ and complete the transaction. Of course, the banks don’t want to make
these payments to each other in physical cash because carrying all this money around is
dangerous, even if they use protected security vans and guards with bullet vests and helmets. So instead, they use a type of electronic
money, which is called ‘central bank reserves’. Remember that name because we’ll be using
it a lot in this video. Central bank reserves are effectively an electronic
version of cash, and banks use these electronic central bank reserves to make payments to
each other. The central bank reserves are created by the Bank of England — we’ll
cover how later on — and they can only be ‘stored’ in accounts that the big banks
have with the Bank of England. To get one of these bank accounts at the Bank
of England, you have to be a bank. So as members of the public, we can’t get our hands on
any central bank reserves. We just have to use the physical cash. So the first two types of money are 1) Cash
and 2) Central Bank Reserves. Remember that central bank reserves are like an electronic
version of cash that only the banks can use to make payments between themselves. The third type of money is a type of money
that isn’t created by the Bank of England, the Royal Mint or any other part of government.
This third type of money is the type of money that’s in your bank account right now. This money is just numbers in a computer system. Bankers and economists refer to this type
of money with jargon such as ‘bank deposits’ ‘demand deposits’, ‘sight deposits’
or ‘bank credit’. These terms all mean pretty much the same thing and are used interchangeably.
They might also be referred to as bank liabilities — this is the accounting term, because this
money is a liability of the bank to you i.e. it’s what the bank needs to repay you at
some point in the future. Now in a legal sense, the numbers in your
account aren’t really money at all. But despite that, they serve exactly the same
purpose as the £10 and £20 notes that you might hold in your wallet. It’s this type of electronic, bank-deposit
money that now makes up over 97% of all the money used in the UK economy. Less than 3%
of the money supply is cash created by the government. And all this electronic bank-money is created
by the banks, as we’ll explain now. The Balloon Model Let’s revisit the multiplier model that
we saw in the last video. Remember that it describes the money system as having a base
of ‘base money’. In the simplified version, the ‘base’ is made up of cash. In reality,
it’s not just cash in this base — it’s also the electronic central bank reserves
that banks keep in their accounts at the Bank of England. But it’s true that this base
is made up of money — either cash or electronic — that was created by either the Bank of
England or the Royal Mint. Now let’s look at the top of the pyramid.
The rest of the pyramid is made up of the third type of money — the electronic bank-created
money. So the pyramid is split up into a base of government-created money, and a tower of
bank-created money at the top. Remember that we said this pyramid, in theory,
is limited by the reserve ratio? Well, there is no reserve ratio, and there hasn’t been
for years. This means that the total amount of money
in the economy isn’t really limited. It can keep expanding without coming to a point
at the top. So the pyramid is actually the wrong shape
to describe the money system. In reality its closer to a balloon of bank-created
money, wrapped around a smaller balloon of base money. In this case, the base money is
the electronic central bank reserves and cash. As we’ll see in this video, the Bank of
England has relatively little control over the total size of the balloon of bank-created
money. They can’t really control how much money
is in the economy, even if they claim to be able to. The outer balloon of bank created money could
expand out of control and the Bank of England wouldn’t be able to stop it — at least
not within the current monetary system. We saw this happen before the crisis. In 2006,
the outer balloon of bank-created money was 80 times bigger than the inner balloon of
base money. The multiplier wasn’t 10 times, like the textbook models suggest: it was actually
80 times! And then when banks panicked during the crisis
and refused to lend, the Bank of England pumped a load of extra base money into the inner
balloon, through the scheme known as Quantitative Easing. But this didn’t lead to a massive
increase in the size of the outer balloon. Right now the outer balloon — the amount
of bank-created money — is only 14 times bigger than the inner balloon. This shows
that there is no real connection between the amount of central bank reserves — or base
money — and how much money that the banks are able to create. WHAT DETERMINES THE AMOUNT OF MONEY IN THE
ECONOMY? So what actually affects the ratio between
bank-created money in the outer balloon and government-created cash and central bank reserves
in the inner balloon? What determines how much money is created for the economy? The research that we have done suggests that
the amount of money that banks can create is not determined by reserve ratios, or by
regulation, or by the control of the Bank of England. The reality is that the total amount of money
depends on the confidence of banks. If they’re feeling confident, banks will create new money
by lending more. And when they’re scared, they limit their lending, which limits the
creation of money. So the size of the outer balloon really depends
on the confidence and incentives of the banks. Or to put it another way, the amount of money
in the economy depends on the mood swings of bankers. Given that the amount of money in the economy
can determine the health of the economy, does it sound like a good idea to have such an
important thing decided by the mood swings of bankers? Probably not! EXACTLY HOW BANKS CREATE MONEY OUT OF NOTHING OK, back to the numbers in your bank account.
These numbers are all created by banks. The vast majority of these numbers were created
when somebody took out a loan from a bank. Let’s see how this happens. A customer, who we’ll call Robert, walks
into a Barclays Bank and asks to borrow £10,000 for home improvements. Barclays runs a quick
automated credit check and decides that the customer can be relied on to keep up repayments
on the loan. The customer signs a loan contract promising
to repay the £10,000, plus the interest, over the next 4 years, according to an agreed
monthly schedule. This loan contract is a legal contract that
binds the customer to make repayments to the bank. This means that it is a legal contract
that is considered to be worth £10,000 (plus the interest). Because it’s an asset, Barclays can record
the loan on its balance sheet. Now if you haven’t come across a balance
sheet before, don’t worry — it’s pretty simple. There’s two parts to a balance sheet. One
half records all the things that the bank owns — this could be money, other financial
products like bonds and derivatives, bank buildings, computers, and most importantly,
the loans it has made. How can you own a loan? Well, if someone signs
a contract promising to pay you money, then that contract is worth something. It’s considered
an asset of the bank. In the case of Robert, the contract that he
signs promising to pay the bank £10,000, plus interest, over the next few years, is
worth at least £10,000 to the bank, and therefore it’s an asset to the bank. So the bank puts an extra £10,000 on its
balance sheet, like this: BARCLAYS BANK BALANCE SHEET (Step 1) (Left side) Assets
(What the borrowers owe to bank + bank’s money)
Loan to Robert: +£10,000 Now what about the other half of the balance
sheet? The other half of the balance is what’s
called the Liabilities. This is a record of everything the bank owes to other people.
On this side, you’ll find a record of money that the bank has borrowed from other banks
or large pension funds. You’ll also find all the customers accounts, because — if
you remember — the balance of your account is just a number showing what the bank promises
to pay you when you ask for your money back. When Robert signed the contract promising
to pay the bank £10,000, plus interest, over the next 10 years, he did it because he wanted
some money from the bank. So the bank creates a new account for Robert, which is linked
to his debit card, and just types £10,000 into their computer records. This £10,000
is a liability from the bank to Robert, and it shows up on the other half of the balance
sheet. (Right side) Liabilities
(What the bank owes to the depositors + bank’s net worth)
Robert’s new account: £10,000 Now when Robert goes to the cash machine to
check his balance, he’ll see £10,000 which he didn’t have before. All the bank has done to create this new money
is type some numbers into an account. It hasn’t reduced the balance of anyone else’s account,
and it hasn’t taken any money from some pensioners and moved it into Robert’s account. So the process of creating commercial bank
money — that’s the money that the general public use — is as simple as: 1. a customer signing a loan contract and
2. the bank typing numbers into a new account set up for that customer This new bank-created money represents new
spending power — or money – in the economy. Robert can now go and spend his money anywhere
in the economy, using his debit card, cheque book, internet banking transfers, or even
by taking the cash out of the ATM. INTER-BANK SETTLEMENT: ONE PAYMENT But there’s a small complication. What happens
if Robert goes and spends the new bank-created money with a shop that has a bank account
with a different bank, say Lloyds? If this happens, then Lloyds will want to
see £10,000 of real money from Barclays. Barclays would then need to transfer £10,000
of central bank reserves to Lloyds to settle the transaction. Note that from the point
of view of Lloyds, receiving a transfer of £10,000 in central bank reserves into its
account at the Bank of England is just as good as Barclays pulling up in a truck and
dropping off £10,000 in cash, although it’s much more convenient for the banks to have
the electronic central bank reserves than to have to carry around all that cash. This process of banks making payments between
themselves is called inter-bank settlement, and it’s really important to understand
it, because it’s crucial to the way that banks have been able to gain control of the
entire money supply. First, let’s look at the simplest example
of inter-bank settlement, with just two banks and two customers. Robert, when he receives his loan, goes straight
to a DIY store and spends £10,000 on everything he needs. He gets to the checkout and pays
using his visa debit card. Here’s a simplified version of what happens behind the scenes: First, the DIY Store’s debit card machine
automatically contacts Visa and say “Please charge £10,000 to this card number: xxxxxx”. Visa’s computer systems then dial up Barclay’s
computer systems and say “Robert’s trying to spend £10,000 on his debit card. Is that
ok?” Barclays’ computer system checks the balance of the account and says “Yes”.
Barclays computer system then reduces the balance of Robert’s account by £10,000. Now, Visa’s computer system contacts the
Lloyds, and says “I’m sending you £10,000 for the DIY Store’s account”. Lloyds then
updates the balance of the DIY Store by £10,000. However, importantly, when the owners of the
DIY store log into their internet banking, they see two figures. One says “Account
balance”, and the other says “Available now”. For the next couple of days after
Robert has come into the shop, the Account balance will be £10,000 higher than the Available
Now balance. The £10,000 that Robert spend isn’t available to the DIY Store for them
to spend just yet. Why? Well, behind the scenes, Barclays needs to
settle with Lloyds. When Lloyds gets the message that someone has spent £10,000 in the DIY
store, it updates their account balance, and then calls Barclays to say “Send me the
money…”. Barclays could settle with Lloyds by delivering
the £10,000 in cash, but in reality this is just a hassle for both banks. They’d
have to find somewhere to store all the cash, and a van with security to transport it. So
instead, Barclays will settle by making a £10,000 transfer from its reserve account
at the Bank of England, to Lloyds reserve account at the Bank of England. Once Lloyds gets the £10,000 in its account
at the Bank of England, then it will update the Available Balance in the DIY Store’s
account. INTER-BANK SETTLEMENT: MULTIPLE PAYMENTS Now, this was a simple example that involved
just one payment between two bank customers (Robert and the DIY store). Only two banks
are involved. But in the UK right now there’s around 50
million people with bank accounts. Some of these people make more than one electronic
payment a day. And they bank with over 50 different banks. In fact, every day over 60 million transactions
are made between bank accounts in the UK, through a number of different payments systems
including Visa, Mastercard, direct debit and online bank transfers. If banks had to go through the whole hassle
in the example with Robert every time someone bought a sandwich from a supermarket using
their debit card, it would get very messy very quickly. But there’s a clever way of simplifying
the whole thing massively. It’s called multi-lateral net settlement. When you have a lot of individuals and businesses
all making payments to each other, that’s a lot of money flowing between the different
banks. So what the banks do, especially with systems
like BACS (which manages direct debits and the type of bank transfers that you make via
internet banking), is this: First, they put all the payments into a big computer database
first without actually moving any real money — cash or central bank reserve — about. Then, at the end of the day, or every few
hours, they run a process to cancel out all as many of the payment flows as possible. For example, imagine a customer at Lloyds
sends his rent – £350 — to his landlord’s account at Barclays. But on the same day,
a customer at Barclays sends his own rent – £400 — to his landlord, who happens to
be at Lloyds. The two payments almost cancel each other out, so after cancelling out — or
‘netting’ in the official jargon — the only money that really needs to be moved is
£50 from Barclays to Lloyds. Because there are millions of payments being
cancelled out by this system, the amounts that actually need to be transferred between
the banks at the end of the day are usually just a tiny fraction of the total value of
the payments made. This is why, even though in 2007 RBS customers
had nearly £700 billion in its customers accounts, RBS itself only had £17bn that
it could actually use to make payments on behalf of those customers. This £17bn was
more than enough for the total netted payments that it would need to make at the end of each
day. FRACTIONAL RESERVE BANKING This netting out effect means that a bank
only needs to have a very small amount of available money compared to the total amount
that they owe to customers at any particular time. They know that any payments they make
to other banks are likely to be cancelled out by payments coming back to it. On some days, the banks customers will spend
more than they receive, and at the end of the day the bank must pay some of its money
across to other banks to settle these payments. But on other days, customers will receive
more — in salaries and other income — that they pay out, and the bank will end up receiving
money from other banks at the end of the day. Over time, the total amount of money needed
by the bank doesn’t change much. The only time that they would actually need all the
money that they owe to their customers is if customers were to panic and ask for all
their money back at the same time. This is what happened to Northern Rock in the UK and
Wachovia in the US, and it can destroy a bank very quickly. This process is what gave rise to the term
‘fractional reserve banking’, because banks only keep enough money to repay a fraction
of their customers at any time. RESERVE ACCOUNTS & REAL-TIME GROSS SETTLEMENT We’ve talked about the central bank reserves
that banks keep in their accounts at the Bank of England. These ‘reserve accounts’ don’t
store cash — just electronic central bank reserves. It’s important to appreciate that, although
central bank reserves are created by the Bank of England, they’re still just numbers in
a computer system. These numbers are just stored on a file very similar to an Excel
spreadsheet, and we could create a billion of them in the time it takes to type out 1,000,000,000. The £150 billion of central bank reserves
are no more tangible than the numbers on this screen, and in fact, the entire record of
balances of the central bank reserves scheme will take up less space on the Bank of England’s
computer hard drive than the average song on an MP3 player! Now the computer system that records all these
central bank reserves is referred to the Bank of England as the Real Time Gross Settlement
Processor — or RTGS Processor. Now real-time gross settlement isn’t as
complicated as it sounds. Settlement simply means that it’s a system
that banks can use to settle their payments to each other — in other words, it’s a
way for them to transfer money to each other. ‘Real-time gross settlement’ means that
any payment instruction sent to the computer system is processed immediately. If a payment
of £100,000 is sent to the system, £100,000 will be transferred automatically. This is
in contrast to multi-lateral net settlement that we discussed just before, in which all
the payments are queued up, cancelled out against each other, and only the final net
difference is transferred. When a payment is put through the RTGS processor
it’s considered to be final. It’s also considered to be risk-free: If one bank owes
money to another bank, there’s always a small chance that it won’t be able to pay
the other bank. But once the money has arrived in the central bank reseve account, then the
deal is finished, because holding central bank reserves is just like holding cash — it’s
the safest asset you can have. So at the end of the day, the multi-lateral
net settlement payment systems will cancel out all the smaller payments between different
banks, and then they’ll tell the Real Time Gross Settlement Processor how much the net
differences owed between the banks should be. The RTGS system will then transfer the
central bank reserves from the banks that owe money to the banks that are owed money. RECAP So, let’s recap everything we’ve covered
so far, before we look into what actually determines how much money the banks can create. We’ve seen that the textbook model of money
creation suggests that there’s a base of central-bank or government created money,
on top of which the commercial banks can blow up the total money supply by re-lending the
same money over and over again. We saw that this model is actually completely
inaccurate. There’s no natural limit to how big the money supply can grow, so it’s
actually better to think about this as two balloons rather than a pyramid. We saw that banks can create money by simply
typing numbers into a customers’ account when they make a loan. When you sign the contract
the bank gets an asset that balances out the new liability they create when they type numbers
into your account. When a customer spends the money the bank
has just created, and those payments go to customers of other banks, then the other banks
will call the bank that created the money and ask for them to settle in central bank
reserves. But before this happens, payment systems like BACS and Visa debit will cancel
out the payments against each other, so that only the net difference at the end of day
has to be ‘settled’ i.e. transferred between the banks. This netting out significantly reduces how
much money banks really need to keep at any particular time. In a few minutes, we’ll see what actually
limits how much money the banks can create. But first, it’s worth asking whether the
numbers that banks create can really be considered money…

97 thoughts on “How is money really made by banks? – Banking 101 (Part 3 of 6)

  1. What money IS, or what is might be? This video is not incorrect. I am not sold on the Positive Money plan for the UK, but that is not what this video says. Don't assume too much. I'm very aware of alternative views in this area. To say that money currently isn't debt is to deny the facts… unless you have a real rebuttal?

  2. It may be, but you certainly don't have a monopoly on the truth here "buddy". Too bad too, since I would consider what you actually have to say sans the attitude. I am leery of zealotry and extremism in general. "Usury" was outlawed by the Catholic church for a thousand years, so I don't think that issue alone is the real problem. I do understand that P =/= P + I, but actual solutions should be presented.. and actual criticisms should be made here, not simply chest beating and flag waiving

  3. Even a cursory study of your MPE plan is beyond common sense. I could go through it line by line if you'd like. Amazing how "advanced" the Objectivist philosophy has expanded itself. Honestly, it really does sound like the future Catholicism that you advocate, without the deity stuff of course. Frightening actually, to think that your maniacal plan should come to rule the earth. Ayn Rand turned "asshole" into an entire philosophy. Hide in your castle and claim morality.

  4. I would start with the function of an Oblate Spheroid… which describes the turd that is MPE. And that really IS the issue I have with it… the function of currency. Premise #1 of your "perfect plan" is just stupid. Citizenship is voluntary. The function of money is what? That's where you fail.

  5. The Bank of England and the treasury are nationally owned, by the people. They have the power to create money and in fact do create a small portion of the total money supply in the form of physical cash and coin (less than 3%). They could create all the money they need to fund the government and yet they borrow money at interest from the banksters, and THAT is the real tragedy here.

  6. 1. No sovereign government should ever BORROW money.
    2. No one must be allowed to CREATE new money except an independent branch of the government responsible to the people. The absolute worst case scenario is to put this power in the hands of private corporations responsible to their shareholders (as it is now).
    3. New money entering the economy must be spent into existence on productive things! Last resort for creating new money is to LEND cash to banks for the banks to then lend out.

  7. This was an EXCEPTIONAL presentation.
    I didn't fully understand the inter bank settlement and RTGS as the justification for Fractional Reserve Banking. That makes MUCH more sense!
    Excited for part 4.

  8. Well, I went to his website and I will return there for study, but at first glace I found this: "Social Security" could be (desirably) eliminated by making savings mandatory …" Privatization of pensions and other social welfare objectives is not in my interest, nor in the interest of the general population. Still, I will look past that issue for more substantial ideas.

  9. This is Bill Still's argument (Secret of Oz) which has merit. Progressives should consider monetary reform more closely. Many of these MR initiatives (including Positive Money) have a distinct conservative view of government…. which is fine, but a progressive view is really what's necessary IMO

  10. This is an excellent video which clearly explains the exact process on which our entire economy depends. Positive Money and New Economics Foundation are the ONLY organisations to have actually researched every single legal document in the UK to establish the facts in these videos – they are totally and completely irrefutable.
    There is however one minor typo I should point out to the editors – at 09:07: the phrase "commercial bank money" – commercial is spelt wrong. That aside, fantastic video.

  11. Sovereign government does in effect not borrow money! Please take that in. Take your time, really. Compromising your freedom and independence makes you unworthy of it. Please take your time to take that in also.

  12. Maybe you guys should set up reserve ratios then, wouldn't that help contain the cash being created. In fact, more control over the growth of money would occur even if banks create and lend first without obtaining any real cash because they still have to fulfill their ratios eventually.

  13. Money is what ever parliament say's it is. That is why it is a fiat currency. Money is what ever is dictated by law. Money is what ever the government will accept in taxes and the law courts accept in fines.

  14. Agreed.
    There are 2 crimes the banks commit.
    1) The local bank steals the principal an * alleged borrower * creates before the book entry, pretending, then, to loan principal only as if it was the banks principal to loan out in the beginning.

    2) As a result the bank, then, steals a further sum of principal by charged interest on what is a * falsified debt * only as if the bank gave up or risked consideration of its own commensurable or equal to the *alleged loan* or debt it falsifies to itself

  15. The group is called Mathematically perfected Economy who can challenge the banks & political betrayers by united peoples mandate which is a constitutional amendment for absolute consensual representation in any nation, dictating law with a proof of solution that no one can disprove, not even these charlatans from positive money who evade MPE intending instead to preserve exploitation. google the mandate " perfectedeconomy [dot] org " & my blog " Australia for mathematically perfected economy " .

  16. Private Geldschöpfung macht die Seigniorage zum Tribut und den Staat zur Kolonie.
    "Governors and Company" geb.1600, privatisiert 1694 Bank of England, 1803 (1. Governeur) Bank of France, 1913 die FED.
    1914 startet "Governors and Company" den 100-Jahre-Krieg gegen die Staaten Europas.
    We dont like EU rape Europe. EU = United-Monkey-Money-Colony.

    There are 13 or 7 stripes -like the 1600 born EIC- on the USA flag?
    listen "Governors and Company", listen to Abe Lincoln: "Give them the Green back!"

  17. The word bank was said so much It doesn't sound right anymore :/ The banks who owe money to the central bank, bank on the fact that other banks owe money to that bank, bank, BANK BANKA!>£eqwflv]flo h3b

  18. The banking system is truly more complex than simply paying for something the same way as we all do. This fascinating discussion should help more people to understand just how the banks pay each other, and make money from their transactions.

  19. There still is reserve ratios in most countries in the world ranging from 1% to 30%.
    In most banks in the US it is still 10%

  20. shit when this guy speaks for more tan 3 secs i cant understand shit…fucking accent… i dont know how this guys reproduce. women most hate this way of speaking so unmanly..
    damn all this guys most spend 5 years mínimum in Texas for a change..

  21. bounds. when people buy bonds there is no reserve. so now that investors are scared the banks has more control because people more money into banks and buy less bonds and paid down debt.

  22. que impide que en una corrida bancaria el banco solo imprima de la nada dinero para saldar sus deudas y en el caso de balance entre bancos ,la misma situacion si un banco le debe a otro solo tiene que imprimir mas dinero..ya por ultimo no es fraccional por que guarde una fraccion de lo depositado es fraccional por que usan un coeficiente para que la masa monetaria no crezca hasta el infinito

  23. hold on, so there's no reserve ratio? I'm pretty sure there is. My lecturer told me that before the financial crisis UK banks had a reserve ratio of 2%

  24. @mikedd56 It's not trying to make it seem like we should all be so alarmed because it's done electronically, it's saying we should be alarmed because A) This is how the system actually works and this is not taught in universities and B) That the BANKS have the majority of the control over the flow of money in the system and NOT the government. Electronic banking is fantastic, but the point is that banks utilise this to create non exsistent money that unsettles the economy.

  25. Not really "the mood of bankers", it is self-regulated as any industry. If we lend too much, people can't repay and we bakers loose money (returns), if we lend too little we do not have enough returns. So all the bankers are trying to find a sweet spot 🙂

  26. Technically not true because your assets have to equal Liabilities + Stockholders equity. We bankers can't just create money out of the air. We move assets from the Cash line into the Loans to customers line in a journal entry. So yea, it is not a specific persons money, but it does come out of the same pot.

  27. Oh jeez, electronic money is just numbers, yes, and paper money is just paper. It is still a medium of exchange weather it is seashells, paper or ones and zeroes.

  28. Few comments.
    Minute 4.55 – Why banks start panic? Panic isn't good. Banks always should be 100% stable.
    Minute 6.55 – Why Robert have to pay interest rate? This isn't good.(This is major mistake in system). My proposition is – cancel intrest rate for any kind of credit. That simplyfy the system. Banks don't have to earn money this way, becouse they can create almost unlimited amount digital money. Just manipulating in databases.(Add zero on account in decimal, or in low level in hexadecimal change values of bytes from 00000000 to FFFFFFFF.)
     Bank as a company should have account in own banking system to create money to pay wages for his own employee and maintain. Bank in this system never can be bankrupt.
    Do you understand?
    Greetz for All and peace on the world.

  29. At 5.50, only partly. It also depends on the demand for credit from businesses and consumers. The reasons QE has not resulted in a lot of inflation or money creation post GFC has been mainly that there has been limited demand for credit, not a lack of supply/willingness of banks to lend.

  30. Ps also there is a difference between "demand" in the economy and money. The extension of credit by banks boosts aggregate demand, but does not add to the money stock in net terms, as the loan needs to be funded by a depositor, which is a sort or "anti money" that contras the credit creation. If depositors ask for their money back, the bank needs to call in loans to repay depositors, and the multipier goes into reverse.

  31. there is something wrong in this explanation! Why havent you shown roberts interests+10000 punds as an asset on the balance sheet?

  32. What about the value of the assets they call collateral? These can always be seized by force. So the banker's special relationship with military and police constitutes the true base of the money.

  33. Make the LIE Big, make it simple, keep saying it & Eventually they will believe it. AH.
    “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.
     “The End of Democracy & the Defeat of the American Revolution will occur when Government Falls into the hands of the Lending institutions & Moneyed Corporations.” -Thomas Jefferson.
    "Once a nation parts with the control of its currency & credit, it matters not who makes the nations laws. Usury will wreck any nation. Until the control of the issue of currency & credit is restored to government & recognized as its most sacred responsibility, all talk of sovereignty of parliament & of democracy, is idle & futile." ~ William Lyon Mackenzie King. (1874-1950) Prime Minister of Canada (1935–1948)
    History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance. -James Madison.
    If congress has the right under the Constitution to issue paper money, it was given them to use themselves, not to be delegated to individuals or corporations. -Andrew Jackson
    The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of  consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity. -Abraham  Lincoln
    “The death of Lincoln was a disaster. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilization.” Otto von Bismark (1815-1898), German Chancellor
    Issue of currency should be lodged with the government and be protected from domination by Wall Street. We are opposed to…provisions [which] would place our currency and credit system in private hands. – Theodore Roosevelt
    “…the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical-(destructive) to their interests.” Rothschild Brothers, 1863.
    “The modern banking system manufactures money out of nothing. The process is, perhaps, the most astounding piece of sleight of hand that was ever invented.” Major L L B Angus.
    “Independently of its misdeeds, the mere power, — the bare existence of such a power, — is a thing irreconcilable with the nature and spirit of our institutions.” Nicolas Trist – secretary to President Andrew Jackson
    For those unfamiliar with the BIS – it is the central bankers’ bank. It is above all governments, is exempt from the laws of its host country – Switzerland, and its regulations, are adopted among its 53 member Central banks, become in effect part of the banking law of those nations without legislative approval (such as that of the US Congress). Yet they effect the economies of those member nations and that of the world, as we are still experiencing, a’ la Japan. The BIS is in most respects, when combined with the IMF (International Monetary Fund) and World Bank, “a Worldwide version of the US Federal Reserve System.”
    “Money is much too serious a matter to be left to the Central Bankers.”–Milton Friedman
    I sincerely believe that banking institutions are more dangerous to our liberties than standing armies. The issuing power should be taken from the banks and restored to the people to whom it properly belongs. Thomas Jefferson.
    If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. Thomas Jefferson.
    “Whosoever controls the Money in any country Is the Absolute Master of All Industry & Commerce… When you realize the Entire System is Easily Controlled by a Few Men, you will Realize How Periods of Inflation & Depression Originate.” (Through Manipulation). James Garfield.

  34. Utterly false.
    Deposits are loans, not money.
    No more then you claimed a loan to your friend, with an exchange of an IOU, turns the IOU into money, no more than a loan to the bank and it giving you an IOU (a deposit account) becomes money.

    You contradict your first video with your third. Utter crackpottery.

    The banking system absolutely does not look at these IOU's (deposits) as the same as money.

    When a bank transfers a deposit between themselves, they are transferring liabilities (the deposit) in exchange for MONEY. No less then you sell my IOU to another party for the face value of the IOU. Nothing has changed. There is an IOU, and money exchanged.

    Sorry, guys, you promote the same crackpottery as you dismissed in your previous videos.

  35. Power has always been concentrated in th few in any large society, I think it's better in the hands of hard working bankers than in corrupt politicians or in the past Nobility.

  36. "Where does the money that is to be paid towards interest on the Loan come from?"

    Where does the money come from that pays your rent?
    The repays your car loan?
    The pays for your food?

    You EARN the money to pay for these things. Interest is a cost, like food is a cost.

    Money is EXCHANGED – you exchange your labor for money from your employer, which then you use to pay your costs. Food sellers use your money to pay their costs, and their suppliers use that money to pay for their costs.

    Say's Law:
    Products buy products.
    Producers buy from other producers.

    If I lend you $100, how will you pay it back?
    You go earn $100.
    If the amount was $110, how will you pay it back?
    You go earn $110.

    The amount repaid is not relevant to the need to earn. If the extra $10 was interest, that does not suddenly make your ability to earn vacant. You merely need to work a bit longer and earn a bit more money from your labor. Instead of working 10 hours @$10/hr, you work 11 hours.

  37. Strange logic here. When paying your rent you use your electronic bank account. There you have "CENTRAL BANK RESERVES" a kind of electronic cash. But to have CENTRAL BANK RESERVES you need to be a bank and have an account at the Bank Of England. So in this case you MUST be a bank with an account at the BoE in order to pay your rent. CHECK THIS IN THE FIRST 2 (TWO) MINUTES OF THE EXPLANATION !!!
    At 0:45 your electronic money is "CENTRAL BANK RESERVES" and at 2:12 the same money in your electronic bank account is… "DEPOSITS".
    At 02:50 "cash is created by the government" WRONG !!! The government sponsors the bankers by printing notes certifying the agreement called "money".

    Pfff I 'm done here, got to stop. Too much Bravo Sierra. The producer of this non-sense needs a thorough re-schooling on money.

  38. There are two sides to every loan created by a banker. The lender and the borrower. To say imply that it's only the banker that is controlling the amount of newly created loans is a bit misleading. The banker needs a borrower.

  39. Regarding the statement around 5:10, doesn't the multiplier only determine the outer boundary of how much money can be created in the economy? Just because the central bank expands with its reserves doesn't mean banks must lend more.

  40. 3:43: Awesome video, but one error in a detail at 3:43 : The base money is not created by the government but by the central bank. And the central bank is NOT an entity of the government, but independent (at least officially/legally)!!

    More precisely, both the private banks' electronic bank deposites at the central bank as well as the cash generation is controlled by the central bank. The coin (royal mint) is maybe indeed created by the government for historical reasons, but that is a neglibible fraction of the overall base money.

  41. Surely the Interest Rate set by the Bank of England is the fundamental influencing factor in the "mood of the banks", therefore the Commercial banks are not in control of the money in the economy in the way described in this video? Maybe I've missed something, but this article seems to backup my assertion :

  42. If banks don't lend you their own money but instead just create it out of nothing then why do they care if you default on the loan?

  43. Yeah money is created like that so what…? money is just a social contract money it self is nothing by virtual agreement, we use fiat money because we wont be barting around trading producst and services for another products or services… so if you work as clown for kids party will you go to the supermarket and made a little show to the cashier to pay for the grocery?

  44. This video somehow costantly makes you think that electronic money are somehow worse than physical money. But they are not :D. "It is easy in computer to create billions" well Mint can just make one coin and write it worth 100Billion as easy. There is no difference. Money in current economy are not covered by any physical thing, electronic or "paper"

  45. You're using the word "money" really loosely here. Once you properly define "money", you discover that banks do not create "money" out of thin air.. When a customer deposits $100 and the bank lends $90 out of that, you don't magically have $190 in total "money", you still just have $100. It doesn't matter that the first customer thinks he has $100 in his account, in reality he only has $10 left in there, and cannot spend the entire $100 until the second customer pays back his loan. The total amount of "money" in the economy is not dependent on what number shows up in your checking account when you log in online, that's just how much the bank owes you. Total "money" in the economy is what there's actually there to spend, in this case, $100 the entire time.

  46. the money that the bank types in Robert account when he makes a loan could not possible be just numbers,. because Robert might spend that money and the bank should send the money to other banks. And it cannot send money that don't exist. This is miss – information. The money are already in the system. There is a limit to how much money the banks loan to people and is determined by deposits and banks equity.

  47. Can someone with some actual knowledge on the subject answer this question for me? We are told that the reason the government cannot print its way out of debt is because it would cause runaway inflation. My question is – who regulates this? Meaning, if they were to print billions, who would know when the population is so large that the average person would not even know that the government doubled or tripled its printing output?

    I can imagine a small town where they trade with gold and someone (such as Mansa Musa) comes through and spends so much gold that the average person sees an increase in gold in his town and everyone has more spending power then the value of gold goes down. But on a global scale (or at least in the US or UK), who would even notice? Thank you to anyone who can explain this to me.

  48. This is somewhat true, for people who are denying this. This is why in Economics there is M0/M1 money supply or an M4 money supply. M4 money supply includes money created by banks by issuing loans. This is usually 5-6 times the amount of M0 or M1 money.

  49. Well no, the bank of england could have much control if there would not be the fractional reserve system.
    And there would be even more control if the bank accoutns would not be just a credit to the bank and if if would be a treated as a criminal undertaking if hte bank lends money from the accont holders without asking.

    So state, central banks and banks in that form and with that support for each other are the problem.

  50. If central bank reserves are created by the Bank of England, how come they are used by commercial banks to make payments to each other? Who do they belong to? I'm in the dark.

  51. Hi Positive Money team,

    This is a great video but I have a question if you don't mind – 12:25 we talk about Barclays, in order to confirm the transfer of owing $10k to Lloyds, places funds into the reserve account operating under the BOE. Does this mean that these banks have so called "proxy" reserve accounts held by the BOE in order to confirm transactions during the day? I mean, does LLoyds have access to Barclays reserve account details at BOE to show that they have in fact paid the $10k owing? Therefore, Lloyds are comfortable with this and can wait for X days to have the transfer to the Lloyds bank eventually? Am I understanding this correctly?

  52. See in old times of England All bank Printed thier Banknotes and Bank of england Printed Bank of England Notes (Central bank notes) Cash was the Gold and silver
    Bank of england Notes = Central bank reserves
    Cash = Gold and silver
    Bank Liabilities = Banknotes

  53. Please explain where central bank reserves come from? If I'm a new high street bank that just opened up, please help visualise my central bank account?

  54. Yes, the total amount of money can keep expanding without limit when there is no reserve ratio. But that's exactly what the money multiplier model says: if the reserve ratio is zero, the multiplier is infinite. So… how does all this contradict the money multiplier model?

  55. I would only add that moodswings of bankers are not that simple. Their confidence in loaning is based on their relationship with their clients. For instance, if their clients (people, govts, businesses, etc) have taken on too much debt, those clients may be more inclined to save. The banker in this case may want (mood) to loan out more funds, but can't find enough clients to increase the amount of loans. They can lower interest rates to try and create more loans, but there are limits. Therefore, money creation is based more on the relationship between bankers/credit lenders and their clients, not moods.

  56. Excellent! I'm one of the many that have just begun to realize what a sham this whole banking system is, after sitting comfortably for 30 years of adult life my main frustration is, why wasn't I told about this earlier!

  57. Money is a hierahcical system designed to keep people under the control of those who create it. If we dispensed with this idea and everyone on the planet got paid the same amount then this world as a society would work in a much better more balanced way. The main problem here is that we have been programmed into believing this lie since we were young and so we perpetuate it down through society internationally. We are all money junkies!? I'm up for breaking this destructive addiction the question is (and this is the bit where people become scared) who else is????

  58. So the point of the video is that banks can basically loan as much as they would like provided the net sum of payouts to other bannks do not exceed the total central bank reserves. But how do the banks get their central bank reserves and cash in the first place? That is not explained in the video.

  59. Is that why balance sheets are not show in the public register of companies? Only balance sheets from companies that are NOT banks are being shown.

  60. Its not the gold its the devaluation of your piece of paper which just get printed by state bank the more you print money the more devaluation you have

    Now a days, money don't even get printed instead it gets born just by typing in computer

    And this typing power is in the hand of local banks not even in the hands of state bank

    Why local banks create money ???

    well! local bank create money to give

    loan/credit to general public

    (consider credit /loan as money you are taking from your future and using it in present )

    It's like time traveling of your money from your future to present so the more money do time traveling (from future to present) the more devaluation you will have in your currency

    credit money is the 97% of total money(look how much we have brought from future to present ) in this world .which means 97% is all loan money in economy and 3% are real currency note. The real currency note act as glass and credit act as water so if u want to use credit (drink water)bank pour liquid (credit)

    in glass(real note) and use this glass(real note) again and again to serve you water(credit)

    Credit is created by banks simply by typing few numbers as 100,000$ in computer.the more loan u take the more devaluation you have in your currency.blame banking loaning system.

    moreover (interest)make it worse for you to pay it back

  61. because the loan contract is considered an asset to the bank it can type money in the persons account… what?

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