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140428 Mike "Money in the bank - is it really there"

Page history last edited by Peter Verity 6 years, 5 months ago


Date  28/04/2014 Presenter Mike
Time    Secretaries Peter
Location  Quaker Meeting House  Type of meeting Talk


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19 people



Money in the bank - is it really there?

presenter: Mike Black


After a brief introduction to his background, Mike gave us a clearly illustrated talk about the 4 types of money in use in today's economy -

  • coins
  • notes
  • current accounts
  • banks' reserves at bank of England 


He then illustrated how new money (current accounts) is created when banks make loans, and destroyed when loans are repaid.

Mike said that his talk is an "explanation" rather than a "criticism": although he agrees with Positive Money that the system needs changing, he deliberately didn't cover that but presented some of the concepts and language needed to understand monetary reform.


His talk was based on one he gave in 2011 to the Bromsgrove Conference, which you can watch here > http://jgstrust.org.uk/videos/

The slides of his presentation can be downloaded here > 140428 Money in the bank - is it really there.doc


Questions and discussion 

[Note: some of these questions are also answered in the FAQ section of the Positive Money website http://www.positivemoney.org/faqs/


1. Although debt-based money is sometimes presented as a 'zero-sum game' it isn't!

The "money" created has an economic effect (stimulating growth), but the "debt" created has a separate effect. The debt is an asset to the bank which is a source of income, and can be traded. The holders of the money and the holders of the debt are different people.


2. What causes banks to crash?

Their assets are the debts of borrowers, and those assets can shrink when people default or due to the fluctuations caused by speculation. If they do not hold enough capital, they can become bankrupt and have to stop trading. Note the difference between being illiquid (assets can't be liquidated short-term) and being insolvent (liabilities exceed assets).


3. How did QE work? Was the money given to the banks?

Not really. It allowed banks to hold more reserves and solved a liquidity crisis, but rescuing the banks required a mixture of government bail-outs and partial nationalisation. The government effectively bought a lot of bad debt which has been transferred to taxpayers.


4. How does borrowing work in the Positive Money system?

Money can still be borrowed from commercial banks, but banks can only lend money which has already been saved. This is banking the way most people think it already works.


5. Is this a move away from "fractional reserve banking"?

Positive Money think that "fractional reserve banking" is a poor description of the current system because it implies some controlling relationship between lending and reserves. In practice, banks can create almost unlimited quantities of credit, the loans come first and reserves are created later.

The expression loses all meaning in the Positive Money proposals because there will be no "reserves", just "electronic money"


6. The banks have been reluctant to lend to SMEs (small to medium enterprises). Why would that be any different after reform?

This was a difficult question to answer! Suggestions include

- there will be more debt-free money in circulation

- under the PM proposals savers will decide which sector to save in. They might prefer to save in housing-related schemes which could reduce the amount available to SMEs and put up interest rates, but that becomes public responsibility rather than driven by banks' profit

- the German economy is much less dependent on debt - there SMEs rely mainly on equity (shares) and retained earnings

- [another answer not given at the meeting - lending to SMEs is considered risky during recessions, but the whole economy will be more stable under PM so lending risk will be lower]

[Also - see this from PM :  there-will-be-no-shortage-of-money]


7. Would reform allow smaller banks to operate?

Yes, especially banks offering transaction accounts; these would be inherently safer businesses, and so require far less regulation. Historically, many banks started off local.


8. Rising house prices have been blamed on banks' preference for mortgage lending. Why would that be any different?

- Household debt would be lower, so might reduce the reliance on mortgages

- the PM proposals do not rule out the possibility of some sort of nationalisation or central bank intervention in the financing of housing


9. Is there a risk of hyper-inflation?

Sovereign money can be created without risk of inflation as long as there is unemployment. There is no recognition of a "non-inflationary rate of employment" as suggested by the monetarists. PM think that new money should be spent first in the real economy.


10. How will changing the system change banking ethics?

- there will be less ability to gamble because banks can't create money

- if banks behave unethically and go bust there will be no need for a "bail-out", because the payments system will not be part of the banks' balance sheet, so is not at risk.



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