Chapter 40 - Quotes on How Loans are Made

Sir Mervyn King, Governor of the Bank of England 2012

"When banks extend loans to their customers, they create money by crediting their customers' accounts."

[Sir Mervyn King, Governor of the Bank of England 2003-2013 (Speech)]

Secretary Of The Treasury 1959

"When a bank makes a loan, it simply adds to the borrower's deposit account by the amount of the loan. It does not take this money from anyone else's deposit; it was not previously paid in to the bank by anyone. It's new money, created by the bank for the use of the borrower."

[Robert B. Anderson, Secretary of the Treasury under Eisenhower]

Lord Adair Turner 2012

"The banking system can thus create credit and create spending power - a reality not well captured by many apparently common sense descriptions of the functions which banks perform. Banks, it is often said, take deposits from savers (for instance households) and lend it to borrowers (for instance businesses) But in fact they don't just allocate pre-existing savings; collectively they create both credit AND the deposit money which appears to finance that credit. Thus banks can create credit and private money."

[Lord Adair Turner, who was the chairman of the UK Financial Services Authority in a speech. 2012-11-02]

Ellen Brown 2007

"The vast bulk of the money supply, however, is created when commercial banks make loans. They do this by double-entry bookkeeping: the sum of the borrower's promissory note is simply credited as a deposit to the borrower's account and offset with a matching liability on the bank's side of its books. Money creation is now a private affair in most other countries as well. Even where the central bank is technically state-owned, as in the United Kingdom and Canada, the central bank creates only the paper currency of the nation, leaving most of the money supply to be created by commercial banks as compound-interest-bearing loans."

[ Behind The Drums Of War With Iran: Nuclear Weapons Or Compound Interest? by Ellen Brown 2007]

Positive Money 2013

"The money that banks create isn't the paper money that bears the logo of the government-owned Bank of England. It's the electronic deposit money that flashes up on the screen when you check your balance at an ATM. Right now, this money (bank deposits) makes up over 97% of all the money in the economy. Only 3% of money is still in that old-fashioned form of real cash that you can touch.

Banks can create money through the accounting they use when they make loans. The numbers that you see when you check your account balance are just accounting entries in the banks' computers. These numbers are a 'liability' or IOU from your bank to you. But by using your debit card or internet banking, you can spend these IOUs as though they were the same as £10 notes. By creating these electronic IOUs, banks can effectively create a substitute for money."


Bank of England 2014

"Where does money come from? In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower's bank account, thereby creating new money. This description of how money is created differs from the story found in some economics textbooks."

Bank of England 2014

"In the modern economy, bank deposits are often the default type of money. Most people now receive payment of their salary in bank deposits rather than currency. And rather than swapping those deposits back into currency, many consumers use them as a store of value and, increasingly, as the medium of exchange.

For example, when a consumer pays a shop by debit card, the banking sector reduces the amount it owes to that consumer - the consumer's deposits are reduced - while increasing the amount it owes to the shop - the shop's deposits are increased. The consumer has used the deposits directly as the medium of exchange without having to convert them into currency."

[Bank of England: Money in the modern economy: an introduction]

Joseph Huber 2013

"The most important restriction is that all banks expand their balance sheet roughly in step so that outflows and inflows among banks are just about offsetting each other. Otherwise those banks that were individually extending too much credit too quickly would run a liquidity risk-possibly even a solvency risk-when, just as to obtain liquidity, they would have to take up too much debt or sell too many assets. In the long run, though, this does not impair the banking industry's ability to get what they want."

[Modern Money Theory and New Currency Theory.]