Nearly all the money in the country was created by a bank agreeing to lend it. That is not a figure of speech.
You take out a £200,000 mortgage. Where did the £200,000 come from?
Not quite.Printing makes notes and coins, and they are a sliver of the money in use. The rest is numbers in accounts, and no press touches those.
Not quite.That is the picture most people carry, and the Bank of England has said in plain words that it is the wrong way round. Banks do not wait for a deposit to lend; the loan creates the deposit.
Yes.No vault was opened and no saver went without. The loan and the deposit are the same entry, made at the same moment. This is how nearly all money is made.
What share of all the money in the UK is notes and coins?
Commit to one. Nothing is scored — this is here so you have a number in your head before you see the real one.
Notes and coins3%
Bank deposits97%
About 3%.The rest is numbers in bank accounts, and nearly every one of those numbers was created the moment a bank agreed a loan. The Bank of England's own name for this is money creation in the modern economy.
Put the life of a pound in order, from the moment it is made to the moment it is unmade.
Yes.The pound was born in a ledger and dies in one. Everything in between is it changing hands, and none of that changes how much of it there is.
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
Far fewer new loans than repaidMore is repaid than lent. Money is being deleted faster than it is made, and there is less of it in the country.
17 of 30 · loans not yet repaid
FewerRepayments are edging ahead of new loans. The stock of money shrinks a little.
20 of 30 · loans not yet repaid
The sameEvery pound repaid is matched by a pound lent. The amount of money stands still.
23 of 30 · loans not yet repaid
MoreNew loans run ahead of repayments. The stock of money grows: every extra dot is a loan someone has not repaid yet.
26 of 30 · loans not yet repaid
Far more new loans than repaidBanks are lending far faster than loans come back. This is what money growth looks like from the inside.
When does the amount of money in the country grow?
Yes.Lending makes it and repaying unmakes it, so the stock only grows when the first outruns the second. No other lever adds a dot.
Not quite.Saving moves a deposit from one account to another, or from spending to holding. Nothing is created; a dot changes owner.
Not quite.Notes are printed to meet demand for cash and they are 3% of the money. Printing more swaps deposits for paper; it does not add to the total.
Move the control to see what changes.
Creates money, destroys money, or only moves it?
A bank agrees a car loan
You pay a friend £50
You repay £500 of your mortgage
A company draws on its overdraft to pay wages
You move savings from one bank to another
A business pays off its loan early
Loan agreed: money made→Spent and re-spent: money moves→Repaid: money unmade
Yes.Only a bank lending creates, and only a loan being repaid destroys. Everything you do with money that is not a loan is a move.
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
Yes.Up by £20bn. Not the £120bn lent, because £100bn of pounds were deleted in the same year. Money growth is the gap between the two, and it can be negative.
Most money is a bank loan that has not been repaid yet. Lending makes it; repaying unmakes it. No printing press is involved.
Money in circulation10%
Goods for sale0%
How much each grew this year.
In a boom, banks lend freely and every loan is spent. The shops have no more goods than before. Using the first lesson's chain, what happens next?
Yes.More pounds chasing the same goods, and now you know where the extra pounds came from. Nobody printed them. Banks lent them.
Not quite.More money going round the same goods means each pound buys less, not more. The goods did not multiply. The pounds did.
Not quite.It is 97% of the money, and every pound of it spends exactly like a note. The shelves cannot tell the difference.
Lesson complete
Most money is a bank loan not yet repaid: lending makes it, repaying unmakes it.