Mervyn King: How Do Banks Create Money

Posted by admin on Thursday, October 22, 2015

Mervyn King Money Quote confirming something that John Kenneth Galfbraith called so simple the mind is repelled, with something so important a deeper mystery seems only decent. Mervyn King Governor of the Bank of England said:(PDF page 3, paragraph 3)
 

 

“When banks extend loans to their customers, they create money by crediting their customers’ accounts” — Mervyn King

 
 

 

In this quote, Mervyn King (a former Governor of the Bank of England) is describing how the modern banking system operates in terms of money creation. When a bank approves a loan or line of credit for a customer, it does not actually lend out existing money it has on deposit. Rather, the bank simply adds the loan amount as a positive balance to the customer’s account.

In this way, new money is created through the act of extending credit. King’s statement highlights how private banks play a major role in money supply expansion through their lending activities. The quote provides insight into how the banking sector has the ability to generate new funds brought into circulation as purchasing power through the process of making loans to individuals and businesses.