Tuesday, 19 August 2014

Money is destroyed when loans are repaid

Money is destroyed when loans are repaid:

From the Bank of England’s 2014 Q1 Quarterly Bulletin:
“Just as taking out a new loan creates money, the repayment of bank loans destroys money. For example, suppose a consumer has spent money in the supermarket throughout the month by using a credit card. Each purchase made using the credit card will have increased the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet. … If the consumer were then to pay their credit card bill in full at the end of the month, its bank would reduce the amount of deposits in the consumer’s account by the value of the credit card bill, thus destroying all of the newly created money.
“Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.” (McLeay, Thomas, & Radia, Money creation in the modern economy, page 3)

No comments:

Post a Comment