The Bank of England Debunks the Money Multiplier

Regular readers will be more than familiar with the debunking of the money multiplier and the concept that banks don’t lend out reserves or deposits (see here here), but it’s nice to see it catching on in places more important than this lowly blog.  A new research report out of the Bank of England debunks the money multplier in one of the best overall presentations of the concept that I’ve seen.   And much of it sounds like stuff I could have written (in fact, I’ve stated almost all of these points at times during the last 5 years).  I won’t go into too much detail, but here are a few highlights:

• the majority of money in the modern economy is created by commercial banks making loans.
• Money creation in practice differs from some popular misconceptions — banks do not act simply
as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’
central bank money to create new loans and deposits.
• The amount of money created in the economy ultimately depends on the monetary policy of the
central bank. In normal times, this is carried out by setting interest rates. The central bank can
also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

They also do a good bit of explaining on QE and its operations.  I personally think they overstate the case with regards to how the central bank “ultimately” determines the amount of money created, but I think they’re trying to emphasize the fact that the Central Bank is the regulator and price setter of reserves.  But don’t mistake this for the BOE implying that the Central Bank controls loan creation directly.  I might have said it a bit differently, but their point is totally consistent with Monetary Realism’s views.

You can read the full report here.  I highly recommend it.

Some related work:


Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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1 Comment on "The Bank of England Debunks the Money Multiplier"

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joe bongiovanni
3 years 4 months ago

These two efforts by BoE help to clarify an evolving discussion about our endogenous money system, what it does and does not do.
I believe their positions have been drawn out by the publication of “Modernizing Money” by Dyson and Jackson of PositiveMoneyUK.
These are money system realities that have been eminently available to any reader of the Fed publication “Modern Money Mechanics” which pretty much covers every significant point by the BoE here.
It’s exactly how the endogenous money system works…….. or doesn’t work in a balance sheet recession.
The IMF has found that we cannot have prosperity without real wealth and income redistribution.
The conundrum present today is how to increase the ‘circulating media’ without increasing debt.
But it is arithmetically impossible to redistribute wealth when all money must be created as a debt, issued by the one-percent, to the interest-paying Restofus.
The Endogenous money endgame is imminent.
Who is working on an exit strategy?