The Value of Everything: Making and Taking in the Global Economy

by Mariana Mazzucato

They also had to overlook the fact that money appears from nowhere when firms or households invest more than their savings, and borrow the difference. When a bank makes you a loan, say for a mortgage, it does not hand over cash. It credits your account with the amount of the mortgage. Instantly, money is created. But at the same time the bank has also created a liability on itself (the new deposits in your account), and banks must ensure they have sufficient reserves or cash (both forms of central bank money) to meet requests by you for payments to other banks or cash withdrawals. They must also hold capital in reserve in case loans are not repaid, in order to prevent insolvency. Both of these create constraints on bank lending and mean that banks generally refrain from lending to people and firms that do not fulfil certain criteria such as creditworthiness or expected profitability. Money creation also occurs when you pay for dinner with a credit or debit card. As a matter of fact, only about 3 per cent of the money in the UK economy is cash (or what is sometimes called fiat money, i.e. any legal tender backed by government). Banks create all the rest. It wasn’t until after the 2008 crisis that the Bank of England admitted that ‘loans create deposits’, and not vice versa.18