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BankofEnglandResearchPaperonEndogenousMoney

// Social Democracyforthe 21st Century: A Post KeynesianPerspective

A very interesting research paper called “Money Creation in the Modern Economy” has recently been published in the Bank of England’s QuarterlyBulletin (2014 Q1). This paper is notable for its endorsement of endogenous money theory and its citations of Post Keynesian literature.

You can get the research paper and a shorter topical article here:

MichaelMcLeay, Amar Radia andRylandThomas, “MoneyCreationintheModernEconomy,” QuarterlyBulletin 2014 Q1

There are also good videos on the same subject, which I post below.

But here are some crucial passages from the paper:

“In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks.” (p. 14).

“… in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England.” (p. 25).

Michael McLeay, Amar Radia and Ryland Thomas, “Money Creation in the Modern Economy,” Quarterly Bulletin 2014 Q1
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf

That is entirely correct, and one could add that even “depositing” cash in your bank account also expands the money supply, because your demand deposit increases while the actual cash is transferred to become part of the bank’s reserves (so new broad money is created).

There is already some good discussion of the paper here:

Steve Keen, “The BoE’s Sharp Shock to Monetary Illusions,” Business Spectator, 18 March.

Philip Pilkington, “A New Era of Central Banking?,” Fixing the Economists, March 13, 2014.

Philip Pilkington, “Bank of England Endorses Post-Keynesian Endogenous Money Theory,” Fixing the Economists, March 12, 2014.

David Graeber, “The Truth is Out: Money is just an IOU, and the Banks are Rolling in it,” Guardian, 18 March 2014.

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