Money creation in the modern economy

Mr Carnihan made this Freedom of Information request to Bank of England

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The request was successful.

Dear Bank of England,

The video on YouTube featuring Ryland Thomas is very informative, thank you.

For reference it is this one: https://www.youtube.com/watch?v=CvRAqR2p...

As a result of watching it, I would like to know the following:

I have tried to make this as quick and easy for you to answer as possible because I respect you may get a lot of questions to answer in any given day.

1.
Private banks do not lend money that is already in existence.

(This is not to say that they could not lend people pre-existing money if they chose to, assuming that they had the reserves in its vaults to do so.)

Is this correct?

2.
The money the bank lends comes into existence when, for example, I sign a loan agreement with the bank and they transfer it to me.

As Ryland Thomas says in the video, "loans create deposits, not the other way around."

What I think this means is this: I sign a contract with the bank then the bank enters a figure into their electronic ledger equivalent to the amount specified in the contract.
So, if for example I wanted to borrow £100,000, it will show that amount in the contract and the bank will then open their electronic ledger and enter the figure 100,000 into it.

Then, they electronically transfer that number to my online bank account. When I log into my bank account I will then see it has been credited with 100,000.

Is this correct?

3.
The only legal tender in the UK is notes and coins issued by the Bank of England and Royal Mint.

Since there is no such thing as "electronic" or "digital" Sterling this means that the 100,000 the bank transferred to my account is not legal tender. It is just a number entered in their electronic ledger that they transferred to my online bank account.

If I draw it out of the cash point, at that point, it would become legal tender. If I chose to leave it in my bank account, I could use it to pay for goods and services online, but this would not be illegal given what your website says here, as long as the people concerned are happy to trade with me using this "electronic credit" aka "money": http://edu.bankofengland.co.uk/knowledge...

Is this correct?

4.
When the bank creates that entry in their ledger, no equivalent amount is created in coins or notes by the Bank of England or the Royal Mint.

Is that correct?

5.
Since the private banks are licensed to create money by the Bank of England (BoE), they must be telling the BoE how many loans they issue and their value.

Is that correct?

7.
By what mechanism do the private banks inform the BoE of how many loans they have issued and their value?

8.
Does the Bank of England, effectively do the same thing when it creates "digital money" for use in its programme of quantitative easing? As described here: http://edu.bankofengland.co.uk/knowledge...

What I mean is that the BoE does not need notes and coins to buy or sell anything e.g. bonds and gilts. Instead, like the private banks, it enters the number representing the amount of "money" it wants into its ledger, then uses it to buy and sell bonds and gilts or whatever else it is instructed or permitted to. The ledger used for QE is called the Asset Purchase Facility.

Is that correct?

Thanks in advance,

Mr Carnihan

Enquiries, Bank of England

Dear Mr Carnihan

We acknowledge receipt of your email dated 25 September below (our ref V 228835).

We will respond in due course.

Information Access Team, Communications Directorate
Bank of England | Threadneedle Street | London EC2R 8AH | +44 20 3461 4878
[Bank of England request email]

Enquiries, Bank of England

1 Attachment

Dear Mr Carnihan

Please find attached a response to your email of 25 September below.

Yours sincerely

Information Access Team, Communications Directorate
Bank of England | Threadneedle Street | London EC2R 8AH | +44 20 3461 4878
[Bank of England request email]

Dear Jackie,

I very much appreciate your reply, especially since it strictly speaking seems to have fallen outside of the FOI remit. You are kind to have taken the time to reply.

I have a couple of questions in response to your replies if I may:

Re question 8

A.
Why would the Bank of England need to settle up with the commercial bank? Do you mean that the BoE is, in effect, the APF's bank? So the APF isn't able to transfer the money itself, the BoE has to do it. Is that correct?

B.
Could the BoE be instructed, for instance by the Chancellor (as was the case with QE), to fund the APF such that it could buy any kind of asset? I mean, to buy anything stipulated by the Chancellor as being desirable for the economy, not just gilts or bonds. If not, would a different fund need to be set up to buy non financial assets?

Thanks in advamce for your help with these.

Yours sincerely,

Mr Carnihan

Enquiries, Bank of England

Dear Mr Carnihan

We acknowledge receipt of your email dated 20 October below (our ref V 228835).

We will respond in due course.

Information Access Team, Communications Directorate
Bank of England | Threadneedle Street | London EC2R 8AH | +44 20 3461 4878
[Bank of England request email]

Enquiries, Bank of England

1 Attachment

Dear Mr Carnihan

Please find attached a response to your email of 19 October below.

Yours sincerely

Information Access Team, Communications Directorate
Bank of England | Threadneedle Street | London EC2R 8AH | +44 20 3461 4878
[Bank of England request email]