Green magic

I thank Colin Mcallister for his critique of my description of how the banking system works (Letters, 4 January). The former governor of the Bank of England, Mervyn King, once described their methods as “alchemy”.

Mr Mcallister is wrong to say banks do not create the money supply from thin air. This basic truth was recognised in 1934 by Robert Hemphill, Credit Manager of the Federal Reserve Bank in the USA, and also by the National Economic Foundation in the UK. They do this by fractional reserve banking, which means they lend the same money several times, making a small retention – the fractional reserve – each time. their unique accounting method allows this, as they also treat each loan, which is a liability until repaid, as an asset. This balances their books, and allows them to re-lend the loan “asset” over and over again. Try that in any other business and you would get arrested.

Common sense says the National Debt cannot have been financed by deposits from people or organisations who would have been deprived of the use of that money. There has never been that amount of money available. MALCOLM PARKIN Gamekeepers Road Kinnesswood, Kinross