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Creation and destruction of bank credit money

March 18, 2017

It is well known and understood that the nation’s money supply overwhelmingly consists of deposits within bank accounts of an intangible entity known as bank credit money. This form of money is interchangeable with currency (coins and banknotes) on demand. It fluctuates according to economic circumstances, and its dynamic is one of continuous creation and destruction.

However there is a widespread belief that credit money is only created by commercial banks when they lend to their retail customers. The reality is that bank credit money is created and destroyed by a variety of routes. These include:

Credit money creation:

(1) Retail bank lending
(2) Bank spending into the real economy
(3) Bank purchase of assets from the non-bank private sector
(4) Government spending
(5) Government lending to the non-bank private sector
(6) Reserve Bank purchase of assets from the non-bank private sector

Credit money destruction:

(1) Repayment of bank retail loans (principal and interest)
(2) Any other payment to banks from the non-bank private sector
(2) Government sale of Treasury securities to the non-bank private sector
(3) Taxation receipts obtained from the non-bank private sector
(4) Bank sale of assets to the non-bank private sector
(5) Reserve Bank sale of assets to the non-bank private sector
(6) Repayment of government loans by the non-bank private sector

John Hermann

 

 

 

 

 

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