#4 The Bank of England exposes the illusion of bank "credit-lending"
New evidence from the Old Lady herself in the "City of London". (~12 minute read)
I’m holding back my planned third bank loan “deconstruction” article. Instead I’ve got important evidence for you from Threadneedle Street. The evidence comes from three economists in the Monetary Analysis Directorate of the Bank of England [BoE], who published two articles in one of the bank’s Quarterly Bulletins back in 20141 (see image below).
Their shorter article2 introduces the longer, more detailed one3 I’m particularly interested in. The articles focus on the UK banking system but, as the authours say, “the issues discussed are equally relevant to most economies.”4 Basically, the two items of interest describe how banks in general execute “credit-lending”, which the BoE calls “money creation”.
As you’ll see, these experts not only reveal an important truth, but also contradict themselves and, in the process, disclose one of banking’s most ancient secrets.
The Evidence (in front of the curtain)
HOW banks “lend credit” (or “create money”)
How banks “create money” is described on page 16 of that Bulletin [top rectangle], and the authours add a very curious explanation lower down on the same page [bottom rectangle].
[WARNING: Trojan mind-worm ahead!]
Here is their description of “credit-lending”, a.k.a. “money-creation”:
“Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. …”5
Only the last sentence of the original is in boldface, highlighting the “banks create money” meme, which is like a magician’s dramatic, right-hand gesture, a misdirection to distract you from the left-hand term “bank deposit(s)” which is not highlighted at all and, though it appears twice, blends quietly into the word-scape, drawing no attention to itself, and sails through almost unnoticed, as does another important word, “credits”.
And that shows how easily a master-magician can deceive you.
A Trojan mind-worm has now embedded itself in your subconscious leaving you unaware of the falsehoods that term “bank deposit(s)” conceals.
More on that shortly. But first, the Good News.
The Curtain slips (revealing a secret)
Why banks CAN’T lend “credit” a.k.a. “bank deposits”
Having slipped this Trojan mind-worm into the article about ten times up to this point, the authours made the fortuitous (for us) mistake of explaining it, as follows [bottom rectangle]:
“Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out.”6 [italics are original; my bold added]
That 31-word explanation, reveals a centuries-old banking secret - something a professional magician would never normally do - so I thank them for that, not only because what they say is perfectly true, but also because it provides valuable evidence and creates the perfect opportunity to shine a bright light on criminal aspects of “credit-lending” by banks, viz., false accounting and magical deception.
Spotting the ‘tiger’ in the ‘dry grass’.
Spotting the evidence (the ‘tiger’) here is difficult because it’s obscured by (i) a sleight-of-hand manoeuvre and (ii) a self-contradiction (the ‘dry grass’), so I need to enhance the focus for you, forensically.
1. Notice the “sleight-of-hand” manoeuvre
Re-read the sentence beginning “Instead …” in Item 1, which describes what the bank does to make a new loan:
“… it credits their bank account [not with a ‘credit-item’ but] with a bank deposit …”.
A very slick word-transition - from “credits” to “bank deposit” has occurred here, and appears nowhere else. In fact, this is the clue which exposes the riddle of bank lending. From here on, whenever you see the term “bank deposit” (the mind-worm) you can replace it with its accounting description, “credit item”, which in this case always produces a credit-balance. You’ll see why that last statement is true shortly, after I expose a self-contradiction.
2. Now see the “self-contradiction”
Your focus will sharpen further if I paraphrase two parts of this article to bring two relevant elements closer together.7 First, I shorten the first sentence of Item 1 to read:
“Commercial banks create … bank deposits, by making new loans”.
Then, I shorten Item 2 (and ignore its plural-singular mismatch):
“ Bank deposits … are [sic] a liability of the bank, not an asset that could be lent out”.
Can you see the self-contradiction now?
Item 1 says creating a bank deposit makes a loan … but Item 2 says the same bank deposit can’t be lent out (like an asset).
Excuse me?!! Say that again! Certainly.
Even though a bank deposit can’t be lent out (like an asset) [Item 2]… creating a bank deposit makes a new loan [Item 1].
So, which of these two Items is true and which is false? Obviously, they can’t both be correct as they contradict each other.
If it “can’t be lent out” (because it’s a liability … not an asset, (per Item 2), how can it be lent out (as a new loan), which is what banks do, according to Item 1?
If your head is spinning slightly at this point, that’s OK. That’s the purpose of this mind-worm. Trying to understand a self-contradiction naturally tends to disorient. But don’t give up here. If you stop thinking now, the magician wins the game and you are at his mercy. You’ve accepted the illusion as real, and will now be easily convinced that the magician CAN do the impossible, which we know he can’t.
The illusion - shattered
The implication that a “bank deposit CAN be lent out and, at the same time, CANNOT be lent out” is clearly a self-contradiction, and any confusion you felt above was the result of that fact. This is an illusion and it will disappear if you can work out which of these opposite claims is true. If we prove only one of them can be true, then the other MUST be false. This is where my six RULES of accounting come in handy.
We can now start connecting some dots.
In Item 2, the BoE experts correctly identify the “thing” which “creates new loans” (whatever they might call it) as a bank liability.
Item 2 also confirms another foundational truth: that a liability cannot be dealt with the way an asset can be; these categories are irreconcilable opposites, as distinct as left and right.
If you’ve remembered my RULE 3 you will associate a bank liability with a bank liability account and know it will ALWAYS have a credit-balance. ALL bank liabilities are recorded, as credit-balances.
On the other hand, bank assets (which “can be lent out”), are on the opposite side of the balance sheet, where ALL bank assets are recorded as debit-balances.
Any competent accountant will agree with the BoE on this point: while a bank OWNS its assets (and CAN lend them out), it OWES its liabilities to others (and, logically, CAN’T lend them out). Every liability is already an obligation owed to the creditor on that particular account. In the case of a “new loan”, that creditor is a depositing bank customer.
As the BoE economists state [Item 2], the reason why a “bank deposit … can’t be lent out” is simply because it’s the bank’s liability.
That’s the same as saying it’s the customer’s asset.8
Which means the customer already OWNS the credit-balance in that liability account, as creditor.
And the bank clearly can’t lend a customer something he already OWNS.
Dissecting the “mind-worm”
The reason why the self-contradiction in this article causes you to doubt your own thinking process is because the mind-worm “bank deposit” conveys doubly-false meanings.
Firstly, so-called “bank deposits” are not actually deposits, per se, but the accounting result caused by someone making a deposit, which always creates a “credit-balance” in the bank’s liability account.
Secondly, the “thing deposited”, which caused the bank to create the credit-balance, was not deposited “by the bank”.
In the case of a “credit-loan” the deposit consists of a signed promise-to-pay a large principal sum of $XXX plus interest at Y% over ZZ years, and is made by the customer.
It is this “customer’s promise” which causes the credit-balance to appear in the bank’s liability account.
And there you see the entrails of this Trojan mind-worm.
Even though this BoE article correctly refers to the crediting of something to the customer’s account in their “new loan making” process [see Item 1], both the description [Item 1] and subsequent explanation [Item 2] of how that happens conceal the nature of that “credit-item” by calling is a “bank deposit”.
Fortunately, in this instance, their correct explanation of what a “bank deposit” is in Item 2 unwittingly exposes how the fraud has been concealed, viz., by implanting the inaccurate and misleading Trojan mind-worm, “bank deposit”, to displace the true and accurate accounting description, “credit-balance in the bank’s liability account”.
Using this Trojan (which appears about 48 times) instead of the more accurate accounting term, “credit-balance” (which never appears) distracts you from the simple accounting truth: that credit-balances ARE ALWAYS bank liabilities which can’t be lent out.
If you have followed these dots, you will now agree that:
A so-called “loan” of credit cannot be a loan.
Welcome to the Great Awakening
So while it’s TRUE that a banker creates a “credit-balance” when he SAYS he is “making a new ‘loan’”, the thing he is making cannot BE a ‘loan’.
To say a bank “loan of credit” is not a loan, may be a shock to most readers. But all I can say in response is, “Welcome to the Great Awakening”.
If you BELIEVE what the banker SAYS, you have fallen for a “magic trick”. You probably also BELIEVE a lady has really been sawn in half by the stage magician and her two halves rejoined again.
The world-at-large must soon awaken to the simple truth that (i) ladies cannot be sawn into two pieces and then rejoined, and (ii) that nobody can lend their own liability; you can only lend an asset.
And that’s not me talking; that’s coming from the Monetary Analysis Directorate of the Bank of England!
See the secret; Shatter the illusion!
To emphasize the mind-bending illogic woven into the fabric of these articles and help it stick in your mind, I’ll put it in the mouth of an over-confident banker:
Banker: “Of course we can’t do what we just did! It’s impossible! (sotto voce) But we’ll do it again tomorrow unless you stop us”.
When my hypothetical banker says, “We can’t …”, he means, “We are not allowed - legally or under accounting rules - to …”.
Banks never “deposit” anything [except interest]
Here’s another hint: Disregarding ‘interest payments’, it’s an axiomatic truth that, no matter how an amount of credit appears in a bank’s liability account with your name on it, it will NOT have appeared as the result of the bank “depositing” anything belonging to them (i.e. reducing their bank assets)9.
If it’s not an interest payment, it will have appeared in your account because YOU (or one of your debtors) DEPOSITED something which the bank accepts as having a VALUE, measured in terms of MONEY, which is equal to that amount of credit.
So, every credit-balance in every customer account, whether arising from a deposit of cash, of a cheque, or of a so-called “loan agreement”, belongs to that customer, as Creditor.
For a bank to pretend otherwise is a false pretence … a con. I’d even go so far as to call it fraudulent taking of a customer’s credit-balance by the bank, with the premeditated intention of “lending” it back to him, knowing that the customer already owned it.
There will be time enough for lots of very deep discussion about whether a “credit-balance” is or is not a “form of” money later, but that is not the question at issue here: the present question is whether a bank can lend any credit, which it can rightly create, knowing it is always a bank liability.
So, is a “Credit-Loan” a Debt or Not?
My short answer is, “No, it is NOT a debt owed to the bank, but the principal must still be repaid”.
And my answer to your next question is, “Yes, my answer is not a self-contradiction.”
And that is enough for you to chew on for now. Explaining why a credit-loan is NOT a debt, and describing the consequences of that fact, could be my next task.
Feel free to jump in here with thoughtful comments and tough questions.
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The Bank of England Quarterly Bulleting Q1 2014 can be found at Money creation in the modern economy | Bank of England. Use the first orange button to download the PDF.
McLeay, M., Radia, A., & Thomas, R., “Money in the modern economy: an introduction”; Bank of England Quarterly Bulletin, 2014, Volume 54 No. 1, pp.4-9.
idem., “Money creation in the modern economy”; Bank of England Quarterly Bulletin, 2014, Volume 54 No. 1, pp.14-22
McLeay, et.al., op.cit., p.5
McLeay, et.al., op.cit., p.16
Idem.
If you think my paraphrasing is unfair or doesn’t convey the meaning the authours intended, please comment below. I’m not trying to distort their meaning, but to highlight the essential elements of their longer text so they can be easily distinguished.
Every bank account will be viewed differently by the parties it relates to. A customer will see a credit-balance in “his account” as “his asset”. The bank will see the same credit-balance in the same account as “its liability” and the account as a liability account.
We’ll get to “interest” eventually in this series. We’ll then remove its disguise, to reveal “usury”.
Just read your article. Nicely done. I wonder if you have seen the "debate" on youTube here https://www.youtube.com/watch?v=HLVHbY66ioA with Richard Werner who deals with the same fraud. He says the banks are in the business of purchasing securities from the public (a loan contract) - no deposits, no transfers just money from thin air. I am writing on the same subject over at Alternatives Exist. Keep em coming!
I really enjoyed your article and the clear explanation……excellent!