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Money Expansion in the Modern Economy

2023-04-02

Recently, there has been news about several bank failures, such as Silicon Valley Bank and Credit Suisse. As a result, I suddenly became interested in how banks and money operate. I happened to come across a 2014 article by the Bank of England (the UK’s central bank). I felt it was written quite well, so I spent some time reading it.

• Money Creation in the Modern Economy

There is probably no point in spending time summarizing the content of the article here. Although it is a relatively technical article and might be a bit of a headache to read, with tools like ChatGPT, these issues no longer exist.

The content included in this article covers:

• A case study: Using a balance sheet to analyze the impact of taking out a mortgage on the economy and money, and why it is said that money is created by commercial banks when lending and destroyed when loans are repaid;
• Several negative feedback mechanisms that prevent the infinite expansion of money;
• 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 instead become creators of money themselves;
• What Quantitative Easing (QE) is, and why QE is not simply printing money.

Finally, there is an appendix explaining the meaning of money supply terms such as M0/M1/M2/….

In short, in this era of looming storms and widespread panic, if you are baffled by the various terminologies in economic news, this article is very much worth reading.

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