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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 positivebalance 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 purchasingpower through the process of making loans to individuals and businesses.
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