Thursday, 26 August 2010

Destruction of bank credit

We have examined the creation of bank credit in exchange for a promise to repay. For completeness, we should briefly look at the destruction of bank credit.

We have already seen some situations where bank credit is destroyed. Mr Smith's bank credit was destroyed when he paid a cheque to Mrs Jones or Mrs Apricot. However, in each case, the same amount of bank credit was created in the recipient's bank account, so the total bank credit in the system is unchanged.

Bank credit is also destroyed when cash is withdrawn, and in that case the total amount of bank credit does decrease. It will increase again if the money is subsequently paid into a bank account.

Finally, bank credit is also destroyed when a loan is finally repayed. The bank credit is reduced by the amount of the loan, and the corresponding promissory note is destroyed too.

1 comment:

  1. I've watched Money as Debt and read all your posts to this blog so far and I have a question:

    As the banks make loans(+. -), charge interest(+), charge fees(+), make investments(+), pay employees(-), pay suppliers(-), pay interest(-), write-off bad (unsecured) debts(-), etc. they balance their rates and charges to ensure that they can cover costs and losses and still make a profit.

    As bank credit gets transferred around between the banks and cheques/debits/etc. are all balanced up at the end of the day, since they are still making a profit their accounts at the Bank of England (deposits) will steadily grow - even if on a particular day it might go down and on other days it goes up, overall it has a general upwards trend.

    Once their account balances in the Bank of England have grown, does that mean that what was previously bank credit (on the commercial banks' books) is now actual money (in their Bank of England accounts)?