Hi Jim - in the table above (Base Money 3rd column) you say: "Central Bank Reserves are deposits commercial banks hold at the central bank. Base Money does not include commercial bank money"
I would have thought that "commercial bank money" is the money the bank uses for its own operations, which is held in its reserve account. In other words it has one reserve account which combines transactions for itself as well as its customers.
Am I misunderstanding what you mean by "commercial bank money" or do banks have two accounts with the CB, one for their own purposes and one for customers and inter-bank movements?
Hi Paul, Thanks. What I've written is unclear: base money includes the physical cash that commercial banks hold - the money that customers can get it out of the hole in the wall or over the counter. I should have written that 'it does not include digital balances in current accounts and savings accounts - or indeed any digital account that is not central bank reserves': 'commercial bank money' wasn't an appropriate description. I will amend it. In fact, probably clearer if I leave out what it doesn't include. Thanks for flagging it up. Much appreciated. Jim
The reserve balances are for payments clearing operations. Banks never use that for any other purpose (so I believe), and they could not if they tried, unless the CB permits them, the accounts are administered on the Central Bank spreadsheet. The bank may adjust the balance *between* reserves and say bonds, for interest income purposes. If the bank makes some investments it uses demand accounts, not reserve accounts. (In most countries. But you could fact-check this.)
Thanks Bijou - this is what I’ve been wondering, how do the banks handle their own affairs, eg pay salaries, or where does the interest, fees & charges we pay them end up, if not reserves?
With experience of solicitors’ accounting and their “office” & “client” bank accounts, I did wonder if they maintained accounts separate to reserves. You mention “demand accounts” is this how they work, and are they held at the BoE?
I'd need to look into this further to give you a definitive answer. However, here is my current understanding. Expenses, salaries, rent, utilities, and other overheads are held in accounts within the bank itself (not the reserve account). Similarly, earnings: interest, fees, and charges go into accounts they hold at the bank itself (not reserve accounts). Profits go to dividends, bank’s capital reserves and money to grow the business. The expert in this area is economist Steven Hail who runs the Modern Money Lab at Torrens University. I was on Steven's course: that's where I got my basics of this banking related info. But, I'm writing this from memory - so I'd need do some research to confirm. One of the interesting things I remember from the course is that although when a bank make a loan they are creating an asset (i.e, creating money) - by the time the loan has been paid off and the customer has paid the interest on that loan: unless that interest amount is paid out in dividends: the entire process results in a net reduction of money within the private sector. The size of that reduction is the total interest paid by the customer who got the loan. The banks asset no longer exists - of course - because it's been reduced to zero once the customer pays it off. Jim
This is all related to the idea that only the government creates 'net' new money into the non-government sector. Bank loans create money but then that money is destroyed as the loan is paid off. So, the money supply goes up and down depending on whether people/businesses are inclined to invest to grow their businesses: but over time each of those bank loans gets paid off: there's not net additional money being put into the economy.
In my rather long-winded reply to Peter I think a point I did not mention worth consideration is how the relationship between state chartered banks and the central bank is so tight that Warren Mosler is quite correct to say the banks are "agents of the state". All the accounts are just scorepoints, and the Central Bank/Government regulations are what determine bank liquidity and solvency. Just because a bank has an account 'in the red' does not *need* to mean it cannot make a payment.
So it is not necessary for banks to have all these separate accounts. They *could* (be permitted to) use the Reserve accounts to make their own commercial payments, it is just a software issue, and a regulatory/statutory issue. One could say that it does make much sense to have all the separate accounts, but on the other hand separating out accounts can make sense conceptually and might make regulation easier. Think of it as an extra software layer. Computer Programming analogy: If you are programming an entire system from just a single class, I think the whole point of OOP becomes a bit pointless, you are really just doing functional programming with one big class. So you do not need the class. You have classes or modules to separate out responsibilities. It is not that they are necessary, it's just it makes conceptualization a lot easier.
With this understanding purely financial crises are just inapplicable, or should be made so! It's government policy that creates financial crises. (The recent Silicon Valley Bank debacle was a good example.) But few people, and no journalists, were writing about it is such, except Mosler (from what I recall). Instead a lot of unnecessary FUD was spread.
The full answer is that it depends on the regulations for the country of concern. I'm not an expert, but I think a generic sort of structure would be (to be fact-checked!):
Commercial banks typically use multiple types of accounts for their various operations and transactions. So while Reserve accounts at the central bank are indeed used for interbank payments and clearing operations, banks also maintain other accounts for their day-to-day commercial transactions. For their own business transactions, commercial banks generally use demand deposit accounts, similar to those they offer to their customers. These accounts could be:
* Business Transaction Accounts: These are used for everyday banking needs, such as paying bills, receiving payments, and managing cash flow
* Business Current Accounts: These accounts are designed for daily cash management and often come with features like online banking, overdraft facilities, and multi-currency management.
* Business Everyday Accounts: These accounts are suitable for managing income and expenses, often with a set monthly fee and various transaction capabilities.
These accounts allow banks to manage their own operational expenses, receive income from services, and conduct transactions with other businesses.
It's probably important to note that while these accounts are similar to those offered to business customers, banks may have specialized internal systems and accounts tailored to their specific needs and regulatory requirements. The exact structure and naming of these accounts can vary between different banks and financial systems.
Thanks again, that makes a lot of sense. It would be interesting to know whether the demand deposit accounts banks maintain are internal or additional facilities with the Bank of England.
Yes. One thing I'm fairly confident about is that they cannot be "fully internal" i.e., cannot be Private-private. ;-) They'd have to be visible to the Central Bank, under penalty of accounting fraud I think.
Agreed - being from an accounting background it would go against first principles to allow any business/bank to maintain its own internal banking function.
Hi Jim - in the table above (Base Money 3rd column) you say: "Central Bank Reserves are deposits commercial banks hold at the central bank. Base Money does not include commercial bank money"
I would have thought that "commercial bank money" is the money the bank uses for its own operations, which is held in its reserve account. In other words it has one reserve account which combines transactions for itself as well as its customers.
Am I misunderstanding what you mean by "commercial bank money" or do banks have two accounts with the CB, one for their own purposes and one for customers and inter-bank movements?
Hi Paul, Thanks. What I've written is unclear: base money includes the physical cash that commercial banks hold - the money that customers can get it out of the hole in the wall or over the counter. I should have written that 'it does not include digital balances in current accounts and savings accounts - or indeed any digital account that is not central bank reserves': 'commercial bank money' wasn't an appropriate description. I will amend it. In fact, probably clearer if I leave out what it doesn't include. Thanks for flagging it up. Much appreciated. Jim
Great thanks Jim.
The reserve balances are for payments clearing operations. Banks never use that for any other purpose (so I believe), and they could not if they tried, unless the CB permits them, the accounts are administered on the Central Bank spreadsheet. The bank may adjust the balance *between* reserves and say bonds, for interest income purposes. If the bank makes some investments it uses demand accounts, not reserve accounts. (In most countries. But you could fact-check this.)
Thanks Bijou. I cover the basics in my article about base money: https://mmt101.substack.com/p/understanding-base-money-the-money
Thanks Bijou - this is what I’ve been wondering, how do the banks handle their own affairs, eg pay salaries, or where does the interest, fees & charges we pay them end up, if not reserves?
With experience of solicitors’ accounting and their “office” & “client” bank accounts, I did wonder if they maintained accounts separate to reserves. You mention “demand accounts” is this how they work, and are they held at the BoE?
I'd need to look into this further to give you a definitive answer. However, here is my current understanding. Expenses, salaries, rent, utilities, and other overheads are held in accounts within the bank itself (not the reserve account). Similarly, earnings: interest, fees, and charges go into accounts they hold at the bank itself (not reserve accounts). Profits go to dividends, bank’s capital reserves and money to grow the business. The expert in this area is economist Steven Hail who runs the Modern Money Lab at Torrens University. I was on Steven's course: that's where I got my basics of this banking related info. But, I'm writing this from memory - so I'd need do some research to confirm. One of the interesting things I remember from the course is that although when a bank make a loan they are creating an asset (i.e, creating money) - by the time the loan has been paid off and the customer has paid the interest on that loan: unless that interest amount is paid out in dividends: the entire process results in a net reduction of money within the private sector. The size of that reduction is the total interest paid by the customer who got the loan. The banks asset no longer exists - of course - because it's been reduced to zero once the customer pays it off. Jim
This is all related to the idea that only the government creates 'net' new money into the non-government sector. Bank loans create money but then that money is destroyed as the loan is paid off. So, the money supply goes up and down depending on whether people/businesses are inclined to invest to grow their businesses: but over time each of those bank loans gets paid off: there's not net additional money being put into the economy.
In my rather long-winded reply to Peter I think a point I did not mention worth consideration is how the relationship between state chartered banks and the central bank is so tight that Warren Mosler is quite correct to say the banks are "agents of the state". All the accounts are just scorepoints, and the Central Bank/Government regulations are what determine bank liquidity and solvency. Just because a bank has an account 'in the red' does not *need* to mean it cannot make a payment.
So it is not necessary for banks to have all these separate accounts. They *could* (be permitted to) use the Reserve accounts to make their own commercial payments, it is just a software issue, and a regulatory/statutory issue. One could say that it does make much sense to have all the separate accounts, but on the other hand separating out accounts can make sense conceptually and might make regulation easier. Think of it as an extra software layer. Computer Programming analogy: If you are programming an entire system from just a single class, I think the whole point of OOP becomes a bit pointless, you are really just doing functional programming with one big class. So you do not need the class. You have classes or modules to separate out responsibilities. It is not that they are necessary, it's just it makes conceptualization a lot easier.
With this understanding purely financial crises are just inapplicable, or should be made so! It's government policy that creates financial crises. (The recent Silicon Valley Bank debacle was a good example.) But few people, and no journalists, were writing about it is such, except Mosler (from what I recall). Instead a lot of unnecessary FUD was spread.
The full answer is that it depends on the regulations for the country of concern. I'm not an expert, but I think a generic sort of structure would be (to be fact-checked!):
Commercial banks typically use multiple types of accounts for their various operations and transactions. So while Reserve accounts at the central bank are indeed used for interbank payments and clearing operations, banks also maintain other accounts for their day-to-day commercial transactions. For their own business transactions, commercial banks generally use demand deposit accounts, similar to those they offer to their customers. These accounts could be:
* Business Transaction Accounts: These are used for everyday banking needs, such as paying bills, receiving payments, and managing cash flow
* Business Current Accounts: These accounts are designed for daily cash management and often come with features like online banking, overdraft facilities, and multi-currency management.
* Business Everyday Accounts: These accounts are suitable for managing income and expenses, often with a set monthly fee and various transaction capabilities.
These accounts allow banks to manage their own operational expenses, receive income from services, and conduct transactions with other businesses.
It's probably important to note that while these accounts are similar to those offered to business customers, banks may have specialized internal systems and accounts tailored to their specific needs and regulatory requirements. The exact structure and naming of these accounts can vary between different banks and financial systems.
Thanks again, that makes a lot of sense. It would be interesting to know whether the demand deposit accounts banks maintain are internal or additional facilities with the Bank of England.
Yes. One thing I'm fairly confident about is that they cannot be "fully internal" i.e., cannot be Private-private. ;-) They'd have to be visible to the Central Bank, under penalty of accounting fraud I think.
Agreed - being from an accounting background it would go against first principles to allow any business/bank to maintain its own internal banking function.