Your editorial (“Guarding the stability of SA’s financial system”, June 23) makes the appropriate comment that “the [SA Reserve] Bank wants [the banks] to be doing more lending to oil the wheels of the economy” — exactly what banks should be doing.
But it then goes on to claim that “the money banks lend is depositors’ money — the nation’s savings”. This is misleading. An article by Bank of England staff noted that “one common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them ... Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money”.
Money is simply created by the bank using a computer keyboard — it doesn’t come from anywhere. The loans banks make, create the deposits borrowers use to make the purchases for which the loans were sought. There is no “crowding out”. The deposit thus made is new money created by the bank. The money disappears from the economy when the loan is paid off by the borrower.
Likewise, government does not “have” or “not have” money. It is the body responsible for issuing the currency and government spending via its bank, the SA Reserve Bank. Some of the money spent by government disappears from the economy when taxes are paid, the rest becomes the financial asset of the private sector.
Howard Pearce
Via email
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