The Big Mystique

William Davies

  • The Courage to Act: A Memoir of a Crisis and Its Aftermath by Ben Bernanke
    Norton, 624 pp, £27.99, October 2015, ISBN 978 0 393 24721 3
  • The End of Alchemy: Money, Banking, and the Future of the Global Economy by Mervyn King
    Little Brown, 448 pp, £25.00, March, ISBN 978 0 349 14067 4

Early in 2014, the Bank of England put out a quarterly bulletin entitled ‘Money Creation in the Modern Economy’ which put to bed one of the most persistent – and false – claims in the history of economics. According to orthodox economists as far back as Adam Smith, money originates in the need to exchange one good for another. I have produced more bread than I need, you have produced more clothing than you need, and we need some simple instrument by means of which to swap one for the other. Products and services different in kind can all be rendered comparable and tradable, once they are assigned a monetary price. Money is on this view first and foremost a means of exchange, and banks are like warehouses, storing and distributing it. If anything goes wrong with money, it’s almost certainly the fault of the state for borrowing and printing too much of it, which causes inflation. All this is what Mervyn King, governor of the Bank of England between 2003 and 2013, refers to as the ‘traditional’ theory of money. But ‘Money Creation in the Modern Economy’ explained that money can be created out of thin air, which is exactly what happens every time a bank makes a loan. Banks don’t wait for a customer to drop £100 into their savings account before lending it to someone else. When they lend £100 they add the figure to the borrower’s account while simultaneously recording it as an asset on their own balance sheet. Banks aren’t warehouses; they are more like alchemists.

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