Creation of electronic money and legal tender

The request was partially successful.

Simon: of the Elder family

Dear Sir or Madam,

I am informed by HM Treasury that yourselves are best placed to answer the following questions.

1)What is the mechanism by which electronic money comes into being?

2)How is electronic money released into circulation?

3)What precisely constitutes the demand for the amount of money(including electronic and bank money)that is created.

4)Who authorizes the release of electronic money into circulation?

5)Is legal tender money, to an equivalent value, created when electronic money is created?

Simon: of the Elder family WITHOUT PREJUDICE, i.e. all Natural
Inalienable Rights Reserved.

Enquiries, Bank of England

We acknowledge receipt of your e-mail dated 23 April (our ref FF 22991).

We will reply in due course.

If you have any queries please contact the Bank's Public Information and Enquiries Group on 020 7601 4878.

Public Information and Enquiries Group
Bank of England

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Simon: of the Elder family

Dear Enquiries,

You are now overdue in answering my request, which you should have responded to by 22nd May 2009, and you are now actually breaking the law. I will allow you up to the 30th May to give satisfactory answers, or it will have to become an internal review.

Yours sincerely, without ill will, vexation or frivolity and without prejudice.
Simon: of the Elder family

Enquiries, Bank of England

Dear Mr Elder

Firstly, I would like to explain that the Freedom of Information Act 2000
('FoI Act') provides right of access (subject to the provisions of the
Act) to recorded information held by public bodies as defined by the Act.
I can confirm that the Bank is defined as a public body for the purposes
of the FoI Act and that we will respond to specific requests for recorded
information that we hold. However, your request appears to seek
explanation of the creation of electronic money and legal tender.
Consequently, in this letter we have sought to provide answers to the
questions you raise.

1. What is the mechanism by which electronic money comes into being?

The creation or withdrawal of electronic money occurs routinely in Bank of
England transactions with commercial banks in the implementation of
monetary policy. Electronic money is the deposit balances held by the
banks on their reserve accounts at the Bank of England. These reserves
can rise or fall when the banks enter financial transactions with the Bank
of England. Electronic money is created when the banks sell assets to the
Bank of England and receive reserves from the Bank in return; if the
banks buy assets from the Bank of England, the amount of electronic money
(reserves balances) falls.

2. How is electronic money released into circulation?

A distinction needs to be made between central bank money and commercial
bank money. Electronic central bank money does not circulate with
businesses or the general public. It is used to make payments between
banks with reserve accounts at the Bank of England. But when the Bank of
England pays money to a pension fund or insurance company for example it
passes central bank money to the pension fund*s bank which then credits
the pension fund*s account with new commercial bank money. How far or
widely new commercial bank money circulates around the economy depends on
what the recipient (e.g. the pension fund) decides to do with it. If it
spends it on goods and services or other financial assets, the original
deposit is credited elsewhere in the economy, for example to bank accounts
of retailers and manufacturers. As and when these deposits are in turn
spent, this commercial bank money circulates further through the economy.

3. What precisely constitutes the demand for the amount of money

(including electronic and bank money) that is created?

Much of the demand for money stems from the need to fund transactions.
But money is also held as part of a portfolio of assets. So changes in
overall wealth can affect the demand for money. Technological innovations
that make it easier to use higher-yielding deposits in transactions could
also make holding those types of money more attractive. More details on
the determinants of the demand for money can be found in an article in the
Bank*s Quarterly Bulletin at
[1]www.bankofengland.co.uk/publications/quarterlybulletin/qb070302.pdf

If the Bank of England buys assets from the (non-bank) private sector, it
injects money into the economy that is intended to make households and
firms hold excess money balances that could lead to higher demand for
goods and services and other assets, pushing future inflation back up
towards the Government*s 2% target.

4. Who authorizes the release of electronic money into circulation?

The Bank creates electronic money when it undertakes a whole range of
transactions with the banks and others * for example in its open market
operations, and as part of the asset purchase programme. The precise
implementation of monetary policy is determined by the senior management
of the Bank.

Earlier this year, on 19 January 2009, the Chancellor announced a package
of measures designed to reinforce the stability of the financial system *
see [2]www.hm-treasury.gov.uk/press_05_09.htm. The measures included the
creation of a new Asset Purchase Facility (APF) to be run by the Bank of
England.

In a letter to the Governor published on 5 March, the Chancellor
authorised the Bank*s Monetary Policy Committee (MPC) to use the Asset
Purchase Facility as an additional tool to meet the inflation target.
This allowed the Bank to use the facility to make purchases of assets
financed from that point by the issuance of central bank reserves.

The Chancellor authorised the APF to purchase up to £150 billion of
assets. Within total purchases of £150 billion, up to £50 billion may be
purchases of private sector assets, with the remainder made up of gilts*
purchases * see [3]www.hm-treasury.gov.uk/d/chxletter_boe050309.pdf.
Within those broad limits set by the Chancellor, the speed and scale of
asset purchases are for the Bank*s Monetary Policy Committee to decide.
The MPC remains independent from Government in formulating monetary
policy.

At its meeting on 4 and 5 March, the MPC voted that the APF should
initially make asset purchases of £75 billion financed by the creation of
central bank reserves. Subsequently, at its meeting on 6 and 7 May, the
Committee decided to finance a further £50 billion of asset purchases by
the creation of central bank reserves, implying a total of £125 billion
of such purchases.

The minutes of the MPC meeting on 4 and 5 March are available at:
[4]www.bankofengland.co.uk/publications/minutes/mpc/pdf/2009/mpc0903.pdf;
the minutes for the meeting are 6 and 7 May are at:

[5]www.bankofengland.co.uk/publications/minutes/mpc/pdf/2009/mpc0905.pdf

5. Is legal tender money, to an equivalent value, created when electronic
money is created?

Legal tender is not created when electronic money is created. But *legal
tender* has a very narrow technical meaning in relation to the settlement
of a debt with bank notes. In ordinary everyday transactions, it has very
little practical application. It means that if a debtor pays in legal
tender the exact amount he or she owes under the terms of a contract, he
or she has a good defence in law, if they are subsequently sued for
non-payment of the debt.

The relevant legislation governing the term *legal tender* is:

· Currency and Banknotes Act 1954, section 1(2)

· Coinage Act 1971, as amended by the Currency Act 1983.

Yours sincerely

Stuart Allen

Deputy Secretary of the Bank

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Simon: of the Elder family left an annotation ()

Dear Stuart,

Firstly, I would like to respond to your comment, and I quote,
"I can confirm that the Bank is defined as a public body for the purposes of the FoI Act and that we will respond to specific requests for recorded information that we hold" If you would prefer, I could reword these questions to request figures and statistics, but I thought that would be taking up more of your valuable time. Please let me know if this is really how you would like future questions to be raised?

Thank you very much for your response and explanations. It would be good if you could clarify further and in lay terms, and explain a few things which I think you may have missed or overlooked. I will address the points to which I am referring as clearly as I am able below.

In question 1) What precisely ,in lay terms, are these assets you speak of, which are bought and sold between yourselves and the commercial banks?

also regarding question 1) In a speech made by Paul Tucker from the Bank of England and included in the bank's Quarterly bulletin for 2008 he states "banks extend credit by simply increasing the borrowing customer's current account" and "banks extend credit by creating money". So are not the general public playing a part in the mechanism of electronic money creation, because of the necessity of their credit application/promissory notes?

this also applies to question 2) Where you have avoided mentioning that "banks extend credit by simply increasing the borrowing customer's current account" and have implied that the only ways electronic money comes into circulation with the general public is via central bank payments to pension schemes and insurance companies. So here is an opportunity for you to give me some actual figures which you should hold:-

How much electronic money was created in the last financial year, as a direct result of members of the general public applying for loans and mortgages?

To be fair, I haven't fully read thorough the links that you posted yet, so I will allow that there may be some precision in your answer to 3) So watch this space.

In question 5) You point out that "Legal tender is not created when electronic money is created." Could you therefore clarify a) is electronic money legal tender? and b) are paper notes and coins created to a sufficient quantity to allow for the repayment of any debt, including interest being charged?

Yours sincerely, without ill will, vexation or frivolity and
without prejudice. Simon: of the Elder family

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