Time to rewrite textbook chapters on money

2 Aug, 2020 at 13:53 | Posted in Economics | 1 Comment

This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers.es514f00bfAnd 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. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money.

M. McLeay et al. / Bank of England’s Monetary Analysis Directorate

1 Comment

  1. C. H. Douglas was making this point in 1936, yet textbooks have yet to be rewritten. See “Dictatorship by Taxation: A speech delivered in the Ulster Hall, Belfast, on
    Tuesday, November 24, 1936”:
    .
    >>> […] the facts are not in dispute in any responsible circles. The Encyclopaedia Britannica in its article on money, volume 15, states, “Banks lend by creating credit. They create the means of payment out of nothing”; or, as the Chairman of the Midland Bank puts it, “The amount of money in circulation varies only with the action of the banks.” <<<
    .

    Click to access DictatorshipByTaxation.pdf


    .
    Douglas was ahead of his time. Even Keynes noted in Chapter 23 of the General Theory:
    .
    "Major Douglas is entitled to claim, as against some of his orthodox adversaries, that he at least has not been wholly oblivious of the outstanding problem of our economic system."


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