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The money created by a central bank is never destroyed. This fact can be ascertained by looking at the money supply figures which always rise.
Money supply
If money were being destroyed then money supply would be coming down atleast at some point. This would also mean that price levels would come down, but (general) price levels never come down.
As far as the creation of credit out of the deposits of people is concerned , it is the magic of fractional reserve banking system, which works very much like a ponzi scheme, given the backing of the central bank. If a reserve requirement is 10% then any deposit creates 1/(10%) i.e. 10 times the amount of credit.
This is destroyed only when the amount is taken back from the bank and put under the mattress, as long as it stays in a bank it will be available for the credit.
How is the money created destroyed?
Hello,
I am realizing my masters thesis on the creation of money. I need your help in finding an answer that I have now been seeking for days.
Can somebody prove me the destruction of the money created by banks?
It is said "everywhere" that the money created by banks through credit is destroyed when this credit is paid back. But I can't find a proof of this affirmation anywhere.
This seems absurd to me for the following reasons:
If the capital of the loan is destroyed then:
1.Why does the financial system panic when people don't pay back their debts? The loss should be limited to the interest of refinancing which is a small cost.
2. In the context of the economic crises why ask the States, companies and individuals to repay a capital that is suppose to disappear? Do institutions like watching economies being destroyed? I think not!
3. How do you explain that the money deposited in Bank B serves as central bank money when this money has been created by Bank A? Don't tell me because it's refinanced at the central bank; this case is very rare.
4. How do you explain that the loss of capital in a titrized debt can be deducted from taxes? Banks deduct a capital that would have been destroyed anyway! Not logical.
Finally I use to read the economic ( French ) press everyday and I have never heard of the consequences of money destruction. In the crisis that we are living, if the destruction of money were true, I believe the banks would have asked at least temporarily an end to money destruction in order to save themselves and stabilize the system.
I thank you in advance for your answers
Ps: First time here
I am realizing my masters thesis on the creation of money. I need your help in finding an answer that I have now been seeking for days.
Can somebody prove me the destruction of the money created by banks?
It is said "everywhere" that the money created by banks through credit is destroyed when this credit is paid back. But I can't find a proof of this affirmation anywhere.
This seems absurd to me for the following reasons:
If the capital of the loan is destroyed then:
1.Why does the financial system panic when people don't pay back their debts? The loss should be limited to the interest of refinancing which is a small cost.
2. In the context of the economic crises why ask the States, companies and individuals to repay a capital that is suppose to disappear? Do institutions like watching economies being destroyed? I think not!
3. How do you explain that the money deposited in Bank B serves as central bank money when this money has been created by Bank A? Don't tell me because it's refinanced at the central bank; this case is very rare.
4. How do you explain that the loss of capital in a titrized debt can be deducted from taxes? Banks deduct a capital that would have been destroyed anyway! Not logical.
Finally I use to read the economic ( French ) press everyday and I have never heard of the consequences of money destruction. In the crisis that we are living, if the destruction of money were true, I believe the banks would have asked at least temporarily an end to money destruction in order to save themselves and stabilize the system.
I thank you in advance for your answers
Ps: First time here
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4 Answers
A non performing loan (interest payments are not being paid) is a loan that will hardly be repaid.
Real capital is a piece of real wealth (a factory, a house).
A loan is a debt contract, it is not (real) capital.
Bank money means bank deposits.
Deposits are ‘created’ with loans and ‘destroyed’ with repayment.
'Creation' and 'destruction' are better described as ‘increases’ and ‘decreases’ in deposits held by the non-bank private sector.
What you call ‘money destruction’ is precisely what banks want to happen: Banks welcome their clients-borrowers repaying loans!
The money created by a central bank is never destroyed. This fact can be ascertained by looking at the money supply figures which always rise.
Money supply
If money were being destroyed then money supply would be coming down atleast at some point. This would also mean that price levels would come down, but (general) price levels never come down.
As far as the creation of credit out of the deposits of people is concerned , it is the magic of fractional reserve banking system, which works very much like a ponzi scheme, given the backing of the central bank. If a reserve requirement is 10% then any deposit creates 1/(10%) i.e. 10 times the amount of credit.
This is destroyed only when the amount is taken back from the bank and put under the mattress, as long as it stays in a bank it will be available for the credit.
So 90% of that money you have in savings is also at that car dealership as payment for that automobile. So now 190% of the money you deposited is in existence. That is phenomenon that you are asking about, credit creating money.
Furthermore, the car dealership pays part of that money as expenses and keeps part of it as profit. It deposits the money in the bank and its employees deposit their paychecks in the bank. So 90% of that portion of the money is also replicated.
So if the banks are required to only keep 10% of their deposits on hand, then the money supply is multiplied by ten. The money supply is multiplied by the reciprocal of the portion of money that banks are required to keep on hand.
Here's a link for you: https://en.wikipedia.org/
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