Think of all the money in the UK. Notes and coins are about 3 pence in every pound of it. The other 97 pence is numbers in bank accounts. No printing press made those numbers.
A bank agrees a loan
↓→
It types the amount into the account
↓→
New money exists
No vault opens. No saver goes without.
The numbers come from loans. When a bank agrees a loan, it types the amount into the borrower's account. That typing is new money. The bank did not take it from a saver first. The Bank of England, the bank above all the UK's banks, has said, in plain words, that this is how nearly all money is made.
Bank agrees a loan→Types the amount into the account→New money exists
You take out a £200,000 mortgage. Where did the £200,000 come from?
The government printed it.
Not yet. Printing makes notes and coins, and they are about 3% of the money in use. The rest is numbers in accounts, and no press touches those.
From other people's savings, lent on to you.
Not yet. That is the picture most people carry, and the Bank of England has said it is the wrong way round. A bank does not wait for someone to put money in before it lends. The loan comes first, and the loan puts the money in the account.
The bank created it by typing the amount into your account.
Right. No vault opened and no saver went without. The bank typed the loan into your account, and that typing made the money. Nearly every pound in every account began this way.
Loan agreed: money made→Spent and re-spent: money moves→Repaid: money unmade
The money lives until the loan is repaid. When you pay £500 off your mortgage, the bank takes £500 out of your account and £500 off what you owe. That £500 is gone. It is not stored anywhere. Lending makes money. Repaying unmakes it.
Put the life of a pound in order, from the moment it is made to the moment it is unmade.
Tap them in the order they happen, first to last. Each tap gets a number.
Right. A bank made the pound when it lent. A repayment deletes it. In between it only changes hands, and changing hands does not change how much money there is.
Creates money, destroys money, or only moves it?
One card at a time. Tap the pile it belongs to.
Card 1 of 6
A bank agrees a car loan
You pay a friend £50
You repay £500 of your mortgage
A company pays wages from its overdraft, spending more than its account holds
You move savings from one bank to another
A business pays off its loan early
A bank agrees a car loan → Creates money
Not yet. This creates money. The bank types the loan into the account, and pounds exist that did not exist before.
You pay a friend £50 → Only moves it
Not yet. This only moves money. The £50 leaves your account and lands in theirs. The total is unchanged.
You repay £500 of your mortgage → Destroys money
Not yet. This destroys money. The £500 goes back to the bank and is cancelled against the loan, so it stops existing.
A company pays wages from its overdraft, spending more than its account holds → Creates money
Not yet. This creates money. An overdraft is the bank letting you spend more than you have. That is a loan, and a bank lending is the one thing that makes new pounds.
You move savings from one bank to another → Only moves it
Not yet. This only moves money. The pounds change address, from one bank to another, and there are no more or fewer of them.
A business pays off its loan early → Destroys money
Not yet. This destroys money. Repaying a loan cancels the pounds the loan created, early or on time.
Loan agreed: money made→Spent and re-spent: money moves→Repaid: money unmade
Right. Only a bank lending creates money, and only a loan being repaid destroys it. An overdraft is a loan too. Everything else you do with money is a move from one account to another.
New loans this year£80bn
Loans repaid this year£70bn
Made-up numbers.
So the amount of money in a country can grow or shrink. New loans add to it. Repayments take from it. In a year when banks lend £80bn and £70bn is repaid, the country ends the year with £10bn more money than it started with.
Thirty dots is a country's money. Each filled dot is a loan somebody has not repaid yet. Change how lending compares with repaying this year.
14 of 30
loans not yet repaid
New loans against repayments: Far fewer new loans than repaid
More is repaid than lent. Money is being deleted faster than it is made. There is less of it in the country than a year ago.
17 of 30
loans not yet repaid
New loans against repayments: Fewer
Repayments are edging ahead of new loans. The amount of money shrinks a little.
20 of 30
loans not yet repaid
New loans against repayments: The same
Every pound repaid is matched by a pound lent. The amount of money stands still.
23 of 30
loans not yet repaid
New loans against repayments: More
New loans run ahead of repayments. The amount of money grows. Every extra dot is a loan someone has not repaid yet.
26 of 30
loans not yet repaid
New loans against repayments: Far more new loans than repaid
Banks are lending far faster than loans come back. The country has a lot more money than it did.
When does the amount of money in the country grow?
When banks lend more than is being repaid.
Right. Lending makes money and repaying unmakes it. So the total only grows when new loans outrun repayments. Nothing else adds a dot.
When people save more.
Not yet. Saving moves money from one account to another, or from spending to holding. Nothing is created. A dot changes owner.
When the government prints more notes.
Not yet. Notes are printed when people want more cash, and they are 3% of the money. Printing a note swaps a number in an account for a piece of paper. The total does not change.
Move the control.
New loans£120bn
Loans repaid£100bn
In one year banks make £120bn of new loans and £100bn of old loans are repaid. By how much did the country's money change?
£bn
Take what was repaid away from what was lent.
Right. Up by £20bn. Not the £120bn lent, because £100bn of pounds were deleted in the same year. Money grows by the gap between the two, and the gap can be below zero.
Banks lend more than is repaid→More pounds in the country→The pounds reach the shops
Lesson 1 said that when every price rises together, the money side of the swap changed. Now you know where extra money comes from. Nobody printed it. Banks lent it, and the borrowers spent it.
+10%Money in the country grew
vsvs
0%Goods for sale grew
How much each grew this year.
Business is good, banks lend freely, and every loan is spent. The shops have no more goods than before. What happens next?
Prices fall, because there is more money to go round.
Not yet. More money going round the same goods means each pound buys less, not more. The goods did not multiply. The pounds did.
Nothing. Bank money is not real money.
Not yet. Bank money is 97% of the money, and every pound of it spends exactly like a note. The shelves cannot tell the difference.
Prices rise everywhere. The new money meets the same shelves.
Right. There are more pounds and the same goods to buy, so each pound buys less. Nobody printed the extra pounds. Banks lent them, and that is where a good year's inflation often starts.
Lesson complete
Most money is a bank loan not yet repaid. Lending makes it and repaying unmakes it.