Monetary Creation in the Modern Economy

Recently, there have been several news reports of bank failures, such as Silicon Valley Bank and Credit Suisse. Consequently, I suddenly developed some interest in how banks and currency operate. Coincidentally, I came across an article from the Bank of England (the central bank of the United Kingdom) in 2014 titled: Money Creation in the Modern Economy. It seemed well-written, so I decided to spend some time reading it.

It may not be very meaningful to spend time summarizing the content of the article. Although it is quite specialized, and reading it might cause some headaches, with tools like ChatGPT, such problems no longer exist.

The article includes:

• A case study: analyzing the impact of borrowing to buy a house on the economy and currency using a balance sheet, and why it is said that money is created by commercial banks when loans are lend and destroyed when they are repaid;
• Several negative feedback regulatory mechanisms to prevent unlimited currency creation;
• Why the money multiplier theory is incorrect;
• Why commercial banks in the modern economy are no longer intermediaries that take depositors' money to lend out, but have become creators of currency themselves;
• What is quantitative easing, and why it is not simply printing money.

Finally, there is an appendix explaining the meaning of terms like M0/M1/M2 in the money supply.

In summary, in this age of impending uncertainty and anxiety, if one finds oneself bewildered by the various terms in economic news, this article is definitely worth reading.