This is NOT an April Fool’s prank. Indeed, the Bank of England wants you to understand that when it comes to money creation, everything you “know” is wrong (cross-posted at The Air Standard)…
In its recent press release, the BoE takes great pains to point out that the way money is really created is: 1) the opposite of what most (almost all) people believe, which is that banks lend deposits or excess reserves or pre-existing money—none of that is true—and 2) contrary to, indeed, the “reverse” of what “some economics textbooks” say.
The BoE wants to be clear about this, then, and get us all on the same page, and that page is that banks make up money out of thin air and “lend” it to you, which is an absurdity and an insult on its face. The BoE wants to be sure you understand that banks are “loaning” you made-up money that they do not have because somehow, you got the damn-fool notion that they loan out deposits instead of funny money. Oh, you probably got that notion from one of those dreadful textbooks in your government school. Pish posh, old chap, that was a bloody lot of nonsense, stories for boys and all. Pip pip cheerio and all that rot.
The info from the BoE applies to all banks, including those in the United States
And we should add here that although this press release comes from the Bank of England, the statements it makes about money creation apply to all commercial banks in modern economies, including the United States. Indeed, the press release references material from former Federal Reserve chair Ben Bernanke, a publication from the Minneapolis Fed, and a 1963 article written by the late James Tobin, a Yale economics professor. Just making that clear for those who might wish to dismiss these mind-boggling statements as being exclusive to the Bank of England.
So here is a choice quote from the press release regarding point 1) above, which is that while most people believe that banks lend out deposits, they are wrong:
“One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.”
So it is both “common” and a “misconception” that banks lend out “the deposits that savers place with them.” I’ll say it again—the central bank itself says that banks do not lend out deposits. That’s not my opinion, it’s not conjecture, it’s not made up. Banks do not lend money that existed prior to your asking to “borrow” it. The press release explains:
“Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money.”
Economics textbooks as mind control devices
But why does the idea that banks lend out deposits exist since that’s not actually what happens at all? Could it be because of those inaccurate textbooks floating around out there? That brings us to point 2) above, regarding what the textbooks got wrong (oopsie!). From the press release:
“This article explains how, rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.(3)”
So the BoE would have us believe that the textbooks somehow, inexplicably got it wrong regarding money creation. Yet those textbooks were used to teach people that banks lend deposits, which of course explains how people came to have the “misconception” (the bank’s words, not mine) that banks lend out deposits. However, the fact that banks do not lend out deposits has never been hidden, exactly. It just hasn’t been taught to you. Or me. It wasn’t hidden because footnote (3) in the above quote notes that:
“There is a long literature that does recognise the ‘endogenous’ nature of money creation in practice. See, for example, Moore (1988), Howells (1995) and Palley (1996).”
So in their academic tomes that generally only they read—the insiders, the ones really in the know—they’re quite honest about what is here called “endogenous’ money, which is just a fancy way of saying “the bank makes up money out of thin air.” Meanwhile, in the dumbed-down versions that they write for the consumption of us common folk, they, um…fudge a little bit. Or a lot. Whatever. Long story short, they make you think that banks lend deposits. That’s where you got that idea—that you now know isn’t true, right?
And after all, what’s best kind of mind control? The kind that doesn’t seem like mind control at all. Your kindly old professor “taught” you the textbook version of money creation while the people who wrote the damn textbooks—or who taught the people who wrote the textbooks—knew very well the textbook version was poppycock. After all, there is a “long literature” on the subject—that they wrote. Ah well, it always helps them to get to you early. Get in your mind. Make your mind their enforcer of their untruths. The big lie always seems to work best, as ol’ Adolf put so accurately (and he would know):
“…in the big lie there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily; and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie, since they themselves often tell small lies in little matters but would be ashamed to resort to large-scale falsehoods. It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and will continue to think that there may be some other explanation. For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact which is known to all expert liars in this world and to all who conspire together in the art of lying. These people know only too well how to use falsehood for the basest purposes. (Mein Kampf, p. 134)”
So the message from the BoE? Don’t be a dupe from all that propaganda we fed you that duped you. I also can’t help but detect a hint of “Oh yeah, sucker—we got you good all this time! You completely fell for it!” And now it’s all “But seriously dude, we were just screwing with you about lending out deposits. That’s always been BS, dude. You mad, bro?”