Moneycreation

I hesitate to intervene in an argument, but neither of your correspondents seem fully to understand how money works.

While I agree with Colin Mcallister (Letters, 4 January) that Malcolm Parkin got several facts wrong in his letter of 3 January, Mr Parkin was correct to say that commercial banks create money out of thin air. However, Mr Parkin’s latest riposte of 6 January has muddied the deep waters of economics when he suggests banks re-lend the same money over and over again – in fact, they create new money every time they make a loan.

The following is a direct quote from the Bank of England (Quarterly Bulletin 2014 Q1 - money-creation-in-themodern-economy): “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 is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”

This directly contradicts Mr Parkin in rather straightforward terms.

By the way, if the central bank (Bank of England) did not print money, which it certainly does by way of Quantitative Easing, the national debt would be £435 billion higher.

GEORGE S GORDON Belmont Road, Juniper Green,

Edinburgh