NEF-Southampton-Positive-Money-ICB-Submission

APPENDIX 1: How We Got Here – The 1844 Bank Charter Act
Prior to 1844, commercial banks were allowed to print their own pound sterling bank notes, while coins could
only be created by the state. Over Gme, banks started to issue (print) and lend out so many bank notes that
they caused significant inflaGon and destabilised the enGre economy.
In response, the government of Robert Peel passed the 1844 Bank Charter Act, which made it illegal for
anyone other than the Bank of England to print pound sterling bank notes. In theory, this should have
returned control over the money supply of the naGon back to the state.
Number Money (Bank Deposits)
However, the 1844 Bank Charter Act did not make it illegal for banks to create ‘bank deposits’ -­‐ the numbers
in your bank account, and in the bank accounts of any ciGzen or company in the country. With the rise of the
digital age, these bank deposits are now the primary means of payment, used in 99.91% of transacGons. 20
The banks are able to create bank deposits through the accounGng process that they use to make loans.
Rather than taking money from a saver and lending it to a borrower (as per the common understanding of
banking), they simply write new numbers into the bank account of a borrower -­‐ effecGvely creaGng new
money. Their only constraint in this process is the need to have a small pool of central bank money at the
Bank of England, but as more in-­‐depth briefings can explain, in pracGce this does not act as a constraint upon
the lending of banks.
Without seeing the process in acGon, it can be a liOle hard to believe. A comprehensive and fully referenced
explanaGon of this money creaGon process is available from PosiGve Money but below are a few quotes
‘straight from the horse’s mouth’ which confirm this amazing fact:
“...by far the largest role in creaGng broad money is played by the banking sector... when banks make
loans they create addiGonal deposits for those that have borrowed the money.”
-­‐ Bank of England Quarterly BulleGn, 2007 Q3
“Subject only but crucially to confidence in their soundness, banks extend credit by simply increasing
the borrowing customer’s current account, which can be paid away to wherever the borrower wants by
the bank ‘wriGng a cheque on itself’. That is, banks extend credit by creaGng money.”
-­‐ Paul Tucker, Deputy Governor of the Bank of England and member of the Monetary Policy CommiOee
"... changes in the money stock primarily reflect developments in bank lending as new deposits are
created."
-­‐ Bank of England Quarterly BulleGn 2007 Q3, p378
"...the banking sector plays such an important role in the creaGon of money. Changes in the terms for
deposits will affect the demand for money, while changes in the terms for loans will affect the amount
20 Bank of England Payment Systems Oversight Report: h:p://www.bankofengland.co.uk/publicaAons/psor/
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