Link spotted by Lola in the DT comments, from the BoE semi-official blog:
Specifically, whenever a bank makes a new loan to a non-bank customer X, it creates a new loan entry in the name of customer X on the asset side of its balance sheet, and it simultaneously creates a new and equal-sized deposit entry, also in the name of customer X, on the liability side of its balance sheet.
The bank therefore creates its own funding, deposits, through lending. It does so through a pure bookkeeping transaction that involves no real resources, and that acquires its economic significance through the fact that bank deposits are any modern economy’s generally accepted medium of exchange.
You see, there is no mention of 'capital' or 'reserves' or any other such woolly non-scientific concepts. People who talk about these things don't even realize that they can be used to describe both assets or liabilities, depending on the context. Those two words are more or less meaningless. Most people don't realize - or even refuse to accept when told - that a company's share capital is on the liabilities side, not the assets side.
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Anyways, those paragraphs remind me a bit of what I posted four years ago:
A far simpler way of explaining banking... is to remind people what happens when you go to the bank to take out a personal loan for (say) £10,000.
Assuming you pass the credit checks etc, the bank creates two accounts for you - a deposit account and a loan account, and it simultaneously credits £10,000 to the deposit account and debits £10,000 from the loan account. No coins and notes change hands, nobody had to deposit money first, nothing, the banks just 'splits the zero'.
This is just how it works. People like Positive Money have their hearts in the right place, but they refuse to accept that this is inevitable, banks will easily be able to circumvent any fancy rule they can dream up.
End of.
Debate Magazine
