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HOW BANKS INDIVIDUALLY CREATE MONEY OUT OF NOTHING: Secrets of Money Creation Revealed - Richard A. Werner (2014) · SECRETS OF SUCCESS & WEALTH: Hidden Laws of Money, Power & Success

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Speaker 1: Can banks individually create money out of nothing? The Theories
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Speaker 1: and the Empirical Evidence, Richard A. Werner Center for Banking,
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Speaker 1: Finance and Sustainable Development, University of Southampton, United Kingdom, Abstract.
0:17
Speaker 1: This paper presents the first empirical evidence in the history
0:20
Speaker 1: of banking on the question of whether banks can create
0:23
Speaker 1: money out of nothing. The banking crisis has revived interest
0:27
Speaker 1: in this issue, but it had remained unsettled. Three hypotheses
0:31
Speaker 1: are recognized in the literature. According to the financial intermediation
0:36
Speaker 1: theory of banking, banks are merely intermediaries like other non
0:39
Speaker 1: bank financial institutions, collecting deposits that are then lent out.
0:44
Speaker 1: According to the fractional reserve theory of banking, individual banks
0:48
Speaker 1: are mere financial intermediaries that cannot create money, but collectively
0:52
Speaker 1: they end up creating money through systemic interaction. A third
0:56
Speaker 1: theory maintains that each individual bank has the power to
0:59
Speaker 1: create money one out of nothing, and does so when
1:01
Speaker 1: it extends credit, the credit creation theory of banking. The
1:06
Speaker 1: question which of the theories is correct has far reaching
1:08
Speaker 1: implications for research and policy. Surprisingly, despite the long standing controversy,
1:14
Speaker 1: until now, no empirical study has tested the theories. This is
1:19
Speaker 1: the contribution of the present paper. An empirical test is
1:23
Speaker 1: conducted whereby money is borrowed from a cooperating bank while
1:27
Speaker 1: its internal records are being monitored to establish whether, in
1:30
Speaker 1: the process of making the loan available to the borrower,
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Speaker 1: the bank transfers these funds from other accounts within or
1:36
Speaker 1: outside the bank, or whether they are newly created. This
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Speaker 1: study establishes for the first time empirically that banks individually
1:43
Speaker 1: create money out of nothing. The money supply is created
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Speaker 1: as ferry dust produced by the bank's individually out of
1:50
Speaker 1: thin air. The choice of a measure of value, of
1:54
Speaker 1: a monetary system, of currency, and credit legislation all are
1:58
Speaker 1: in the hands of society, and natural conditions are relatively unimportant. Here, then,
2:05
Speaker 1: the decision makers in society have the opportunity to directly
2:08
Speaker 1: demonstrate and test their economic wisdom or folly. History shows
2:13
Speaker 1: that the latter has often prevailed Wisel, nineteen twenty two
2:19
Speaker 1: one introduction. Since the American and European banking crisis of
2:24
Speaker 1: two thousand seven to eight, the role of banks in
2:26
Speaker 1: the economy has increasingly attracted interest within and outside the
2:30
Speaker 1: disciplines of banking, finance, and economics. This interest is well justified.
2:36
Speaker 1: Thanks to the crisis, awareness has risen that the most
2:39
Speaker 1: widely used macroeconomic models and finance theories did not provide
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Speaker 1: an adequate description of crucial features of our economies and
2:45
Speaker 1: financial systems, and most notably failed to include banks. These
2:51
Speaker 1: bank less dominant theories are likely to have influenced bank
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Speaker 1: regulators and may thus have contributed to suboptimal bank regulation.
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Speaker 1: Systemic issues emanating from the banking sector are impossible to
3:01
Speaker 1: detect in economic models that do not include banks, or
3:04
Speaker 1: in finance models that are based on individual representative financial
3:08
Speaker 1: institutions without embedding these appropriately into macroeconomic models. Consequently, many
3:15
Speaker 1: researchers have since been directing their efforts at incorporating banks
3:18
Speaker 1: or banking sectors in economic models. This is a positive development,
3:23
Speaker 1: and the European Conferences on Banking and the Economy ECOBATE
3:27
Speaker 1: are contributing to this task, showcased in this second special
3:30
Speaker 1: issue on ECOBATE twenty thirteen, held on March sixth, twenty
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Speaker 1: thirteen in Winchester Guildhall and organized by the University of
3:38
Speaker 1: Southampton Center for Banking, Finance and Sustainable Development. As the
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Speaker 1: work in this area remains highly diverse. This article aims
3:47
Speaker 1: to contribute to a better understanding of crucial features of banks,
3:50
Speaker 1: which would facilitate their suitable incorporation in economic models. Researchers
3:56
Speaker 1: need to know which aspects of bank activity are essential,
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Speaker 1: including in important characteristics that may distinguish banks from non
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Speaker 1: bank financial institutions. In other words, researchers need to know
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Speaker 1: whether banks are unique in crucial aspects, and if so why.
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Speaker 1: In this paper, the question of their potential ability to
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Speaker 1: create money is examined, which is a candidate for a
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Speaker 1: central distinguishing feature. A review of the literature identifies three
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Speaker 1: different mutually exclusive views on the matter, each holding sway
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Speaker 1: for about a third of the twentieth century. The present
4:29
Speaker 1: conventional view is that banks are mere financial intermediaries that
4:32
Speaker 1: gather resources and reallocate them, just like other non bank
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Speaker 1: financial institutions, and without any special powers. Any differences between
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Speaker 1: banks and non bank financial institutions are seen as being
4:44
Speaker 1: due to regulation and effectively so minimal that they are
4:47
Speaker 1: immaterial for modeling or for policymakers. Thus, it is thought
4:51
Speaker 1: to be permissible to model the economy without featuring banks directly.
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Speaker 1: This view shall be called the financial intermediation theory of banking.
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Speaker 1: It has been the dominant view since about the late
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Speaker 1: nineteen sixties. Between approximately the nineteen thirties and the late
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Speaker 1: nineteen sixties, the dominant view was that the banking system
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Speaker 1: is unique since banks, unlike other financial intermediaries, can collectively
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Speaker 1: create money based on the fractional reserve or money multiplier
5:20
Speaker 1: model of banking. Despite their collective power, however, each individual
5:25
Speaker 1: bank is in this view considered to be a mere
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Speaker 1: financial intermediary, gathering deposits and lending these out without the
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Speaker 1: ability to create money. This view shall be called the
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Speaker 1: fractional reserve theory of banking. There is a third theory
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Speaker 1: about the functioning of the banking sector, with an ascendancy
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Speaker 1: in the first two decades of the twentieth century. Unlike
5:46
Speaker 1: the financial intermediation theory and in line with the fractional
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Speaker 1: reserve theory, it maintains that the banking system creates new money. However,
5:54
Speaker 1: it goes further than the latter and differs from it
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Speaker 1: in a number of respects. It argues that each which
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Speaker 1: individual bank is not a financial intermediary that passes on
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Speaker 1: deposits or reserves from the central bank. In its lending,
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Speaker 1: but instead creates the entire loan amount out of nothing.
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Speaker 1: This view shall be called the credit creation theory of banking.
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Speaker 1: The three theories are based on a different description of
6:17
Speaker 1: how money and banking work, and they differ in their
6:19
Speaker 1: policy implications. Intriguingly, the controversy about which theory is correct
6:24
Speaker 1: has never been settled. As a result, confusion reigns. Today
6:29
Speaker 1: we find central banks, sometimes the very same central bank,
6:33
Speaker 1: supporting different theories. In the case of the Bank of England,
6:37
Speaker 1: central bank staff are on record supporting each one of
6:39
Speaker 1: the three mutually exclusive theories at the same time. As
6:42
Speaker 1: will be seen below, it matters which of the three
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Speaker 1: theories is right not only for understanding and modeling the
6:49
Speaker 1: role of banks correctly within the economy, but also for
6:52
Speaker 1: the design of appropriate bank regulation that aims at sustainable
6:55
Speaker 1: economic growth without crises. The modern approach to bank rene regulation,
7:00
Speaker 1: as implemented at least since Basili nineteen eighty eight, is
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Speaker 1: predicated on the understanding that the financial intermediation theory is correct.
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Speaker 1: Capital adequacy based bank regulation, even of the countercyclical type,
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Speaker 1: is less likely to deliver financial stability if one of
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Speaker 1: the other two banking hypotheses is correct. The capital adequacy
7:21
Speaker 1: based approach to bank regulation adopted by the BCBS, as
7:25
Speaker 1: seen in Basil one in two, has so far not
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Speaker 1: been successful in preventing major banking crises. If the financial
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Speaker 1: intermediation theory is not an accurate description of reality, it
7:36
Speaker 1: would throw doubt on the suitability of Basil three in
7:38
Speaker 1: similar national approaches to bank regulation, such as in the UK.
7:43
Speaker 1: It is thus of importance for research and policy to
7:46
Speaker 1: determine which of the three theories is an accurate description
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Speaker 1: of reality. Empirical evidence can be used to test the
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Speaker 1: relative merits of the theories. Surprisingly, no such test has
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Speaker 1: so far been performed. This is the contribution of the
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Speaker 1: present paper. The remainder of the paper is structured as follows.
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Speaker 1: Section two provides an overview of relevant literature, differentiating authors
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Speaker 1: by their adherents to one of the three banking theories.
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Speaker 1: It will be seen that leading economists have gone on
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Speaker 1: the record in support of each one of the theories.
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Speaker 1: In section three, I then present an empirical test that
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Speaker 1: is able to settle the question of whether banks are
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Speaker 1: unique in whether they can individually create money out of nothing.
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Speaker 1: It involves the actual processing of a live bank loan
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Speaker 1: taken out by the researcher from a representative bank that
8:36
Speaker 1: cooperates in the monitoring of its internal records and operations,
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Speaker 1: allowing access to its documentation and accounting systems. The results
8:44
Speaker 1: and some implications are discussed in section four two. The
8:49
Speaker 1: literature on weather banks can create money. Much has been
8:52
Speaker 1: written on the role of banks in the economy in
8:54
Speaker 1: the past century and beyond. Often authors have not been
8:58
Speaker 1: concerned with the question of weather banks can create money,
9:01
Speaker 1: as they often simply assume their preferred theory to be
9:04
Speaker 1: true without discussing it directly, let alone in a comparative fashion.
9:09
Speaker 1: This literature review is restricted to authors that have contributed
9:12
Speaker 1: directly and explicitly to the question of weather banks can
9:15
Speaker 1: create credit and money during time periods when in the
9:19
Speaker 1: author's country's banks issued promissory notes bank notes that circulated
9:23
Speaker 1: as paper money, writers would often, as a matter of course, mention,
9:28
Speaker 1: even if only in passing, that banks create or issue money.
9:32
Speaker 1: In England and Wales, the Bank Charter Act of eighteen
9:35
Speaker 1: forty four forbade banks to make any engagement for the
9:38
Speaker 1: payment of money payable to bearer on demand. This ended
9:42
Speaker 1: bank note issuance for most banks in England and Wales,
9:45
Speaker 1: leaving them until nineteen forty six officially privately owned Bank
9:49
Speaker 1: of England with a monopoly on bank note issuance. Meanwhile,
9:53
Speaker 1: the practice continued in the United States until the twentieth century,
9:57
Speaker 1: and was in fact expanded with the similarly time New
9:59
Speaker 1: York Work Free Banking Act of eighteen thirty eight, so
10:02
Speaker 1: that US authors would refer to bank note issuance as
10:05
Speaker 1: evidence of the money creation function of banks until much later.
10:09
Speaker 1: For sake of clarity, our main interest in this paper
10:12
Speaker 1: is the question whether banks that do not issue bank
10:14
Speaker 1: notes are able to create money in credit out of nothing.
10:18
Speaker 1: As a result, Earlier authors writing mainly about paper money
10:22
Speaker 1: issuance are only mentioned in passing here, even if it
10:25
Speaker 1: could be said that their arguments might also apply to
10:27
Speaker 1: banks that do not issue bank notes. These include John
10:31
Speaker 1: Law seventeen oh five, James Stewart seventeen sixty seven, Adam
10:36
Speaker 1: Smith seventeen seventy six, Henry Thornton eighteen oh two, Thomas
10:41
Speaker 1: Took eighteen thirty eight, and Adam Muller eighteen sixteen, among others,
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Speaker 1: who either directly or indirectly state that banks can individually
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Speaker 1: create credit in line with the credit creation theory two
10:54
Speaker 1: point one. The credit creation theory of banking influential early
10:59
Speaker 1: writers that are gu u that non issuing banks have
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Speaker 1: the power to individually create money and credit out of nothing,
11:04
Speaker 1: wrote mainly in English or German, namely Wicksel eighteen ninety eight,
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Speaker 1: Wicksel nineteen oh seven, Withers nineteen oh nine, Schumpad nineteen twelve,
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Speaker 1: Moeler nineteen twenty five, and Hahn nineteen twenty. The review
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Speaker 1: of proponents of the credit creation theory must start with
11:23
Speaker 1: Henry Dunning MacLeod of Trinity College, Cambridge and barrister at
11:27
Speaker 1: law at the Inner Temple. McLeod produced an influential opus
11:31
Speaker 1: on banking entitled The Theory and Practice of Banking in
11:35
Speaker 1: two volumes. It was published in numerous editions well into
11:39
Speaker 1: the twentieth century McLeod eighteen fifty five to six. The
11:43
Speaker 1: quotes here are from the sixth edition of nineteen oh five.
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Speaker 1: Concerning credit creation by individual banks, MacLeod unequivocally argued that
11:51
Speaker 1: individual banks create credit and money out of nothing whenever
11:55
Speaker 1: they do what is called lending. In modern times, private
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Speaker 1: bankers discontinuea issuing notes and merely created credits in their
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Speaker 1: customer's favor, to be drawn against by checks. These credits are,
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Speaker 1: in banking language termed deposits. Now, many persons seeing a
12:11
Speaker 1: material bank note, which is only a write recorded on paper,
12:15
Speaker 1: are willing to admit that a bank note is cash,
12:18
Speaker 1: but from the want of a little reflection, they feel
12:21
Speaker 1: a difficulty with regard to what they see as deposits.
12:24
Speaker 1: They admit that a bank note is in issue and currency,
12:28
Speaker 1: but they fail to see that a bank credit is
12:30
Speaker 1: exactly in the same sense, equally in issue, currency and
12:33
Speaker 1: circulation dot Macloud, nineteen o five, page three ten. Sir
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Speaker 1: Robert Peel was quite mistaken in supposing that bankers only
12:44
Speaker 1: make advances out of bona fide capital. This is so
12:47
Speaker 1: fully set forth in the Chapter on the Theory of Banking,
12:50
Speaker 1: that we need only to remind our readers that all
12:53
Speaker 1: banking advances are made in the first instance by creating
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Speaker 1: credit page three seventy, emphasis in original. In his Theory
13:01
Speaker 1: of Credit, McLoud eighteen ninety one put it this way.
13:06
Speaker 1: A bank is therefore not an office for borrowing and
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Speaker 1: lending money, but it is a manufactory of credit. McLoud
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Speaker 1: eighteen ninety one, five hundred and ninety four. According to
13:18
Speaker 1: the credit creation theory, then banks create credit in the
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Speaker 1: form of what bankers call deposits, and this credit is money.
13:25
Speaker 1: But how much credit can they create? Wisel nineteen o
13:30
Speaker 1: seven described a credit based economy in the Economic Journal,
13:33
Speaker 1: arguing that the banks, in their lending business are not
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Speaker 1: only not limited by their own capital, they are not,
13:40
Speaker 1: at least not immediately limited by any capital whatever. By
13:44
Speaker 1: concentrating in their hands almost all payments, they themselves create
13:47
Speaker 1: the money required. In a pure system of credit, where
13:51
Speaker 1: all payments were made by transference in the bank books,
13:54
Speaker 1: the banks would be able to grant at any moment
13:56
Speaker 1: any amount of loans at any However, diminutive rate of
13:59
Speaker 1: intros Withers nineteen o nine. From nineteen sixteen to nineteen
14:05
Speaker 1: twenty one, the editor of The Economist, also saw few
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Speaker 1: restraints on the amount of money banks could create out
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Speaker 1: of nothing. It is a common popular mistake when one
14:14
Speaker 1: is told that the banks of the United Kingdom hold
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Speaker 1: over nine hundred millions of deposits, to open one's eyes
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Speaker 1: in astonishment at the thought of this huge amount of
14:22
Speaker 1: cash that has been saved by the community as a
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Speaker 1: whole and stored by them in the hands of their bankers,
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Speaker 1: and to regard it as a tremendous evidence of wealth.
14:30
Speaker 1: But this is not quite the true view of the case.
14:34
Speaker 1: Most of the money that is stored by the community
14:36
Speaker 1: in the banks consists of bookkeeping credits lent to it
14:39
Speaker 1: by its bankers. The greater part of the bank's deposits
14:42
Speaker 1: is thus seen to consist not of cash paid in,
14:45
Speaker 1: but of credits borrowed. For every loan makes a deposit.
14:50
Speaker 1: When notes were the currency of commerce, a bank which
14:53
Speaker 1: made an advance or discounted a bill gave its customer
14:55
Speaker 1: its own notes as the proceeds of the operation, and
14:58
Speaker 1: created a liability for its Now a bank makes an
15:02
Speaker 1: advance or discounts a bill and makes a liability for
15:06
Speaker 1: itself in the corresponding credit in its books. It comes
15:09
Speaker 1: to this that whenever a bank makes an advance or
15:12
Speaker 1: buys a security, it gives someone the right to draw
15:15
Speaker 1: a check upon it, which check will be paid in
15:17
Speaker 1: either to it or to some other banks. And so
15:19
Speaker 1: the volume of banking deposits as a whole will be increased,
15:22
Speaker 1: and the cash resources of the banks as a whole
15:25
Speaker 1: will be unaltered. When once this fact is recognized that
15:29
Speaker 1: the banks are, still, among other things, manufacturers of currency,
15:33
Speaker 1: just as much as they were in the days when
15:35
Speaker 1: they issued notes, we see how important a function the
15:38
Speaker 1: bank's exercise in the economic world, because it is now
15:41
Speaker 1: generally admitted that the volume of currency created has a
15:44
Speaker 1: direct and important effect upon prices. This arises from what
15:48
Speaker 1: is called the quantity theory of money. If then the
15:52
Speaker 1: quantity theory is, as I believe, broadly true, we see
15:56
Speaker 1: how great is the responsibility of the bankers as manufacturers
15:59
Speaker 1: are currency, seeing that by their action they effect not
16:03
Speaker 1: only the convenience of their customers and the profits of
16:05
Speaker 1: their shareholders, but the general level of prices. If banks
16:10
Speaker 1: create currency faster than the rate at which goods are
16:12
Speaker 1: being produced, their action will cause a rise in prices,
16:15
Speaker 1: which will have a perhaps disastrous effect. And so it
16:19
Speaker 1: becomes evident, as before stated, that the deposits of the banks,
16:23
Speaker 1: which give the commercial community the right to draw checks,
16:25
Speaker 1: are chiefly created by the action of the banks themselves
16:28
Speaker 1: in lending, discounting, and investing. Then it thus appears that
16:33
Speaker 1: credit is the machinery by which a very important part
16:36
Speaker 1: of modern currency is created. Withers argues that the sovereign
16:40
Speaker 1: prerogative to manufacture the currency of the nation has effectively
16:43
Speaker 1: been privatized and granted to the commercial banks. By this
16:47
Speaker 1: interesting development, the manufacture of currency, which for centuries has
16:51
Speaker 1: been in the hands of government, has now passed, in
16:54
Speaker 1: regard to a very important part of it, into the
16:56
Speaker 1: hands of companies working for the convenience of their customers
16:59
Speaker 1: and the profits of their shareholders. While Withers was a
17:03
Speaker 1: financial journalist, his writings had a high circulation and likely
17:07
Speaker 1: contributed to the dissemination of the credit creation theory in
17:10
Speaker 1: the form proposed by McLeod eighteen fifty five to six.
17:14
Speaker 1: This view also caught on in Germany with the publication
17:17
Speaker 1: of Schumpaters nineteen twelve influential book The Theory of Economic Development,
17:22
Speaker 1: in which he was unequivocal in his view that each
17:25
Speaker 1: individual bank has the power to create money out of nothing.
17:29
Speaker 1: Something like a certificate of future output or the award
17:32
Speaker 1: of purchasing power on the basis of promises of the
17:34
Speaker 1: entrepreneur actually exists. That is, the service that the banker
17:39
Speaker 1: performs for the entrepreneur and to obtain which the entrepreneur
17:42
Speaker 1: approaches the banker, the banker would not be an intermediary
17:46
Speaker 1: but manufacturer of credit, i e. He would create himself
17:49
Speaker 1: the purchasing power that he lends to the entrepreneur. One
17:53
Speaker 1: could say, without committing a major sin, that the banker
17:56
Speaker 1: creates money. Credit is essentially the creepedation of purchasing power
18:01
Speaker 1: for the purpose of transferring it to the entrepreneur, but
18:04
Speaker 1: not simply the transfer of existing purchasing power. By credit,
18:08
Speaker 1: entrepreneurs are given access to the social stream of goods
18:11
Speaker 1: before they have acquired the normal claim to it, and
18:15
Speaker 1: this function constitutes the keystone of the modern credit structure.
18:19
Speaker 1: The fictitious certification of products, which, as it were, the
18:23
Speaker 1: credit means of payment originally represented, has become truth. This
18:27
Speaker 1: view was also well represented across the Atlantic, as the
18:31
Speaker 1: writings of Davenport nineteen thirteen or Robert H. Howe nineteen
18:36
Speaker 1: fifteen indicate. Hawtree nineteen nineteen, another leading British economists, who
18:42
Speaker 1: like Canes, had a treasury background and moved into academia,
18:45
Speaker 1: took a clear stance in favor of the credit creation theory.
18:49
Speaker 1: For the manufacturers and others who have to pay money
18:52
Speaker 1: out credits are still created by the exchange of obligations,
18:56
Speaker 1: the banker's immediate obligation being given to his customer in
18:59
Speaker 1: exchange for the custustomer's obligation to repay at a future date.
19:03
Speaker 1: We shall still describe this dual operation as the creation
19:06
Speaker 1: of credit. By its means, the banker creates the means
19:10
Speaker 1: of payment out of nothing, whereas when he receives a
19:12
Speaker 1: bag of money from his customer, one means of payment,
19:15
Speaker 1: a bank credit is merely substituted for another, an equal
19:19
Speaker 1: amount of cash, page twenty. Apart from Schumpeter, a number
19:24
Speaker 1: of other German language authors also argued that banks create
19:27
Speaker 1: money and credit individually through the process of lending. Highly
19:31
Speaker 1: influential in both academic discourse and public debate was doctor
19:34
Speaker 1: Albert L. Hahn nineteen twenty, scion of a Frankfort banking dynasty,
19:39
Speaker 1: similarly to Thornton, who had been a banker and since
19:42
Speaker 1: nineteen nineteen, director of the major family owned effect in
19:45
Speaker 1: und Wexelbank Frankfort. Like MacLeod, a trained lawyer, he became
19:50
Speaker 1: an honorary professor at Goody University Frankfort in nineteen twenty eight,
19:55
Speaker 1: clearly not only aware of the works of MacLeod, whom
19:58
Speaker 1: he cites, but also likely aware of actual banking practice
20:01
Speaker 1: from his family business. Hahn argued that banks do indeed
20:05
Speaker 1: create money out of nothing. Every credit that is extended
20:09
Speaker 1: in the economy creates a deposit and thus the means
20:11
Speaker 1: to fund it. The conclusion from the process described can
20:15
Speaker 1: be expressed in reverse by saying that every deposit that
20:18
Speaker 1: exists somewhere and somehow in the economy has come about
20:21
Speaker 1: by a prior extension of credit. We thus maintain, contrary
20:25
Speaker 1: to the entire literature on banking and credit, that the
20:28
Speaker 1: primary business of banks is not the liability business, especially
20:32
Speaker 1: the deposit business, but that, in general and in each
20:35
Speaker 1: in every case, an asset transaction of a bank must
20:38
Speaker 1: have previously taken place in order to allow the possibility
20:41
Speaker 1: of a liability business and to cause it. The liability
20:44
Speaker 1: business of banks is nothing but a reflex of prior
20:47
Speaker 1: credit extension. The opposite view is based on a kind
20:51
Speaker 1: of optical illusion. Overall, Han probably did more than anyone
20:55
Speaker 1: to popularize the credit creation theory in Germany, his book
20:59
Speaker 1: becoming a bestat and spawning much controversy and new research
21:03
Speaker 1: among economists. In Germany. It also greatly heightened awareness among
21:07
Speaker 1: journalists and the general public of the topic in the
21:10
Speaker 1: following decades. The broad impact of his book was likely
21:14
Speaker 1: one of the reasons why this theory remained entrenched in
21:16
Speaker 1: Germany when it had long been discarded in the UK
21:19
Speaker 1: or the US, namely well into the postwar period. Hahn's
21:24
Speaker 1: book was, however, not just a popular explanation without academic credibility.
21:29
Speaker 1: Schumpeter cited it positively in the second German edition of
21:33
Speaker 1: his Theory of Economic Development Schumpater nineteen twenty six, praising
21:38
Speaker 1: it as a further development in line with but beyond
21:41
Speaker 1: his own book. The English translation of Schumpeter's influential book,
21:45
Speaker 1: Schumpater nineteen twelve, also favourablest sites Hahn. It can be
21:50
Speaker 1: said that support for the credit creation theory appears to
21:53
Speaker 1: have been fairly widespread in the late nineteenth and early
21:56
Speaker 1: twentieth century in English and German language academic publications. By
22:01
Speaker 1: nineteen twenty, the credit creation theory had become so widespread
22:05
Speaker 1: that it was dubbed the current view, the traditional theory,
22:08
Speaker 1: or the time worn theory of bank credit by later critics.
22:12
Speaker 1: The early Caines seem to also have been a supporter
22:15
Speaker 1: of this dominant view. In his tract on Monetary Reformkines
22:20
Speaker 1: nineteen twenty four, he asserts, apparently without feeling the need
22:23
Speaker 1: to establish this further, that banks create credit and money,
22:27
Speaker 1: at least in aggregate. The internal price level is mainly
22:31
Speaker 1: determined by the amount of credit created by the banks,
22:34
Speaker 1: chiefly the Big Five. The amount of credit so created is,
22:38
Speaker 1: in its turn, roughly measured by the volume of the
22:40
Speaker 1: bank's deposits, Since variations in this total must correspond to
22:44
Speaker 1: the variations in the total of their investments, bill holdings,
22:48
Speaker 1: and advances. We know from Kaine's contribution to the Macmillan
22:52
Speaker 1: Committee nineteen thirty one that Kaines meant with this that
22:55
Speaker 1: each individual bank was able to create credit. It is
22:59
Speaker 1: not unnapped to think of the deposits of a bank
23:01
Speaker 1: as being created by the public through the deposit of
23:04
Speaker 1: cash representing either savings or amounts which are not, for
23:07
Speaker 1: the time being required to meet expenditure. But the bulk
23:10
Speaker 1: of the deposits arise out of the action of the
23:12
Speaker 1: banks themselves, for by granting loans, allowing money to be
23:16
Speaker 1: drawn on an overdraft, or purchasing securities. A bank creates
23:19
Speaker 1: a credit in its books, which is the equivalent of
23:22
Speaker 1: a deposit. Concerning the banking system as a whole, this
23:26
Speaker 1: bank credit and deposit creation was thought to influence aggregate
23:29
Speaker 1: demand and the formation of prices. As Shumpater nineteen twelve
23:34
Speaker 1: had argued, the volume of bankers loans is elastic, and
23:38
Speaker 1: so therefore is the mass of purchasing power. The banking
23:42
Speaker 1: system thus forms the vital link between the two aspects
23:45
Speaker 1: of the complex structure with which we have to deal,
23:48
Speaker 1: For it relates the problems of the price level with
23:50
Speaker 1: the problems of finance, since the price level is undoubtedly
23:54
Speaker 1: influenced by the mass of purchasing power which the banking
23:57
Speaker 1: system creates and controls, and by the structure of credit
24:00
Speaker 1: which it builds. Thus, questions relating to the volume of
24:04
Speaker 1: purchasing power and questions relating to the distribution of purchasing
24:08
Speaker 1: power find a common focus in the banking system McMillan Committee,
24:11
Speaker 1: nineteen thirty one. If finally the banks pursue an easier
24:16
Speaker 1: credit policy and lend more freely to the business community,
24:19
Speaker 1: forces are set in motion, increasing profits and wages, and
24:23
Speaker 1: therefore the possibility of additional spending arises. Concerning the question
24:28
Speaker 1: whether credit demand or credit supply is more important, the
24:31
Speaker 1: report argued that the root cause is the movement of
24:34
Speaker 1: the supply of credit. The expansion or contraction of the
24:37
Speaker 1: amount of credit made available by the banking system in
24:40
Speaker 1: other directions, will, through a variety of channels, affect the
24:44
Speaker 1: ease of embarking on new investment propositions. This, in turn
24:48
Speaker 1: will affect the volume and profitableness of business, and hence
24:52
Speaker 1: react in due course on the amount of accommodation required
24:55
Speaker 1: by industry from the banking system. Thus, what started as
24:58
Speaker 1: an alteration in the supp apply of credit ends up
25:01
Speaker 1: in the guise of an alteration in the demand for credit.
25:04
Speaker 1: While money is thus seen as endogenous to credit. When
25:07
Speaker 1: what is called a bank loan is extended, the committee
25:10
Speaker 1: argued that bank credit was exogynous as far as loan
25:13
Speaker 1: applicants are concerned. There can be no doubt as to
25:17
Speaker 1: the power of the banking system to increase or decrease
25:20
Speaker 1: the volume of bank money in normal conditions. We see
25:24
Speaker 1: no reason to doubt the capacity of the banking system
25:26
Speaker 1: to influence the volume of active investment by increasing the
25:29
Speaker 1: volume and reducing the cost of bank credit. Thus, we
25:33
Speaker 1: consider that in any ordinary times, the power of the
25:35
Speaker 1: banking system to increase or diminish the active employment of
25:39
Speaker 1: money in enterprise and investment is indisputable. The McMillan Committee
25:44
Speaker 1: also argued that bank credit could be manipulated by the
25:47
Speaker 1: Bank of England and thus was also considered exogenous. In
25:50
Speaker 1: this sense, the credit creation theory remained influential until the
25:54
Speaker 1: early post war years. The links of credit creation to
25:58
Speaker 1: macroeconomic and financeantial variables were later formalized in the quantity
26:02
Speaker 1: theory of credit Werner two thousand twelve, which argues that
26:06
Speaker 1: credit for productive use in the form of investments for
26:09
Speaker 1: the production of goods and services is sustainable and non inflationary,
26:13
Speaker 1: as well as less likely to become a non performing loan.
26:16
Speaker 1: B Unproductive use in the form of consumption results in
26:19
Speaker 1: consumer price inflation and see Unproductive use in the form
26:23
Speaker 1: of asset transactions results in asset inflation and if large enough,
26:29
Speaker 1: banking crises. However, since the nineteen twenty serious doubts had
26:34
Speaker 1: spread about the veracity of the credit creation theory of banking.
26:38
Speaker 1: These doubts were initially uttered by economists who in principle
26:41
Speaker 1: supported the theory but downplayed its significance. It is this
26:46
Speaker 1: group of writers that served as a stepping stone to
26:48
Speaker 1: the formulation of the modern fractional reserve theory, which, in
26:51
Speaker 1: its most widespread and later version, however, argues that individual
26:56
Speaker 1: banks cannot create credit, but only the banking system in aggregate.
27:00
Speaker 1: It is this theory about banks that we now turn
27:02
Speaker 1: to two point two, the fractional reserve theory. An early
27:08
Speaker 1: proponent of the fractional reserve theory was Alfred Marshall. Eighteen
27:11
Speaker 1: eighty eight, he testified to a government committee about the
27:15
Speaker 1: role of banks as follows. I should consider what part
27:19
Speaker 1: of its deposits a bank could lend, and then I
27:21
Speaker 1: should consider what part of its loans would be redeposited
27:24
Speaker 1: with it and with other banks, and vice versa. What
27:27
Speaker 1: part of the loans made by other banks would be
27:29
Speaker 1: received by it as deposits. Thus I should get a
27:32
Speaker 1: geometrical progression, the effect being that if each bank could
27:36
Speaker 1: lend two thirds of its deposits, the total amount of
27:38
Speaker 1: loaning power got by the banks would amount to three
27:41
Speaker 1: times what it otherwise would be. With this, he contradicted
27:45
Speaker 1: MacLeod's arguments However, Marshal's view was still a minority view
27:50
Speaker 1: at the time. After the end of the First World War,
27:53
Speaker 1: a number of influential economists argued that the bold theory
27:57
Speaker 1: of bank credit creation by individual banks was mistake. Their
28:01
Speaker 1: view gradually became more influential. The theory of deposit expansion
28:06
Speaker 1: reached its zenith with the publication of C. A. Phillips
28:09
Speaker 1: Bank Credit Good Friend nineteen ninety one. Phillips nineteen twenty
28:14
Speaker 1: argued that it was important to distinguish between the theoretical
28:17
Speaker 1: possibility of an individual bank manufacturing money by lending in
28:21
Speaker 1: excess to cash and reserves, on the one hand, and
28:24
Speaker 1: on the other the banking system as a whole being
28:27
Speaker 1: able to do this. He argued that the bold theory
28:31
Speaker 1: the credit creation theory, was predicated upon the contention that
28:35
Speaker 1: a bank would be able to make loans to the
28:36
Speaker 1: extent of several times the amount of additional cash newly
28:39
Speaker 1: acquired and held at the time the loans were made,
28:42
Speaker 1: whereas a representative bank in a system is actually able
28:45
Speaker 1: ordinarily to lend an amount only roughly equal to such cash.
28:49
Speaker 1: According to Phillips nineteen twenty, individual banks cannot create credit
28:54
Speaker 1: or money, but collectively the banking system does so as
28:57
Speaker 1: a new reserve is split into small fragments becomes dispersed
29:01
Speaker 1: among the banks of the system. Through the process of dispersion,
29:05
Speaker 1: it comes to constitute the basis of a manifold loan expansion.
29:09
Speaker 1: Each bank is considered mainly a financial intermediary. The banker
29:13
Speaker 1: handles chiefly the funds of others. Phillips argued that since
29:18
Speaker 1: banks target particular cash to deposit and reserve to deposit
29:21
Speaker 1: ratios as cited in the money multiplier which they wish
29:25
Speaker 1: to maintain, each bank effectively works as an intermediary lending
29:28
Speaker 1: out as much as it is able to gather in
29:30
Speaker 1: new cash through the process of dispersion and reiteration. The
29:35
Speaker 1: financial intermediation function of individual banks without the power to
29:39
Speaker 1: create credit adds up to an expansion in the money
29:41
Speaker 1: supply in aggregate. Krick nineteen twenty seven shared this conclusion
29:47
Speaker 1: with some minor caveats. Thus, he argued, the important point
29:52
Speaker 1: which is responsible for much of the controversy and most
29:55
Speaker 1: of the misunderstanding, is that while one bank receiving an
29:58
Speaker 1: addition to its cash cant not forthwith undertake a full
30:01
Speaker 1: multiple addition to its own deposits. Yet the cumulative effect
30:04
Speaker 1: of the additional cash is to produce a full multiple
30:07
Speaker 1: addition to the deposits of all the banks as a whole.
30:11
Speaker 1: Summing up, then it is clear that the banks, so
30:14
Speaker 1: long as they maintain steady ratios of cash to deposits,
30:17
Speaker 1: are merely passive agents of the Bank of England policy.
30:20
Speaker 1: As far as the volume of money in the form
30:22
Speaker 1: of credit is concerned. The banks have very little scope
30:27
Speaker 1: for policy in the matter of expansion or contraction of deposits,
30:30
Speaker 1: though they have in the matter of disposition of resources
30:33
Speaker 1: between loans, investments and other assets. But this is not
30:37
Speaker 1: to say that the banks cannot and do not affect
30:40
Speaker 1: multiple additions to or subtractions from deposits as a whole
30:43
Speaker 1: on the basis of an expansion of or contraction in
30:45
Speaker 1: bank cash. The role of banks remained disputed during the
30:49
Speaker 1: nineteen twenties and nineteen thirties as several writers criticize the
30:53
Speaker 1: credit creation theory. Views not only diverged but were also
30:58
Speaker 1: in a flux as several exps berts apparently shifted their
31:01
Speaker 1: position gradually overall, an increasing number moving away from the
31:04
Speaker 1: credit creation theory and towards the fractional reserve theory. Sir
31:09
Speaker 1: Josiah C. Stamp, a former director of the Bank of England,
31:13
Speaker 1: summarized the state of debate in his review of an
31:15
Speaker 1: article by Piegu nineteen twenty seven. The general public economic
31:20
Speaker 1: mind is in a fair state of muddlement at the
31:22
Speaker 1: present moment on the apparently simple question can the banks
31:25
Speaker 1: create credit? And if so, how and how much? And
31:29
Speaker 1: between the teachings of doctor Leif and mister McKenna, Messrs
31:32
Speaker 1: canes Hawtrey, Castle, and Cannon and Gregory, people have not
31:36
Speaker 1: yet found their way. Contributions to this debate were also
31:40
Speaker 1: made by Dennis Robertson nineteen twenty six, who was influenced
31:44
Speaker 1: by Canes. Canes nineteen thirty explains the role of reserve
31:49
Speaker 1: holdings and the mechanics of determining a bank's behavior based
31:52
Speaker 1: on its preference to hold cash and reserves together with
31:55
Speaker 1: the amount of reserves provided by the central bank. The
31:58
Speaker 1: fairly predetermined micare canos postulated by the money multiplier in
32:02
Speaker 1: a fractional reserve model. Thus, in countries where the percentage
32:06
Speaker 1: of reserves to deposits is by law or customs, somewhat
32:09
Speaker 1: rigid we are thrown back for the final determination of
32:12
Speaker 1: m the volume of bank money on the factors which
32:15
Speaker 1: determine the amount of these reserves. Kines nineteen thirty also
32:20
Speaker 1: backed a key component of the fractional reserve theory, namely
32:23
Speaker 1: that banks gather deposits and place parts of them with
32:26
Speaker 1: the central bank, or alternatively, may withdraw funds from their
32:29
Speaker 1: reserves at the central bank in order to lend these
32:32
Speaker 1: out to the non banking sector of the economy. When
32:35
Speaker 1: a bank has a balance at the Bank of England
32:37
Speaker 1: in excess of its usual requirements, it can make an
32:40
Speaker 1: additional loan to the trading and manufacturing world, and this
32:43
Speaker 1: additional loan creates an additional deposit to the credit of
32:46
Speaker 1: the borrower or to the credit of those to whom
32:48
Speaker 1: he may choose to transfer it on the other side
32:50
Speaker 1: of the balance sheet of this or some other bank.
32:54
Speaker 1: Kaines here argues that new deposits based on new loans
32:57
Speaker 1: are dependent upon and connected to banks recus deserve balances
33:00
Speaker 1: held at the central bank. This view is sometimes also
33:04
Speaker 1: supported by present day central bankers, such as in Paul
33:07
Speaker 1: Tucker's or the Ecbeast's proposal to introduce negative interest rates
33:11
Speaker 1: on bank's reserve holdings at the central bank as an
33:14
Speaker 1: incentive for them to move their money from the central
33:16
Speaker 1: bank and increase lending. Nevertheless, part of Kin's nineteen thirty
33:22
Speaker 1: and much of his most influential work, his General Theory
33:26
Speaker 1: nineteen thirty six, appears more in line with the financial
33:29
Speaker 1: intermediation theory, as will be discussed in the following section.
33:33
Speaker 1: A representative example of the fractional reserve theory that at
33:36
Speaker 1: the same time was beginning to point in the direction
33:39
Speaker 1: of the financial intermediation theory is the work by Lutz
33:42
Speaker 1: nineteen thirty nine, who published in Economica, a forum for
33:46
Speaker 1: some of these debates at the time. The expansion of
33:49
Speaker 1: the economic system leads to an increase in the volume
33:52
Speaker 1: of deposits to a figure far in excess of the
33:54
Speaker 1: amount of the additional cache in use, simply because the
33:57
Speaker 1: same cache is deposited with the banking system over and
34:00
Speaker 1: over again. The fact that banking statistics show an aggregate
34:04
Speaker 1: of deposits far above the amount of cash in the
34:06
Speaker 1: banking system is therefore not of itself a sign that
34:09
Speaker 1: the banks must have created the whole of the difference.
34:12
Speaker 1: This conclusion is also of course, somehow implicit in the
34:16
Speaker 1: multiple expansion theory of the creation of bank deposits of
34:20
Speaker 1: the Phillips or Quick variety. That theory explains the creation
34:24
Speaker 1: of deposits by the fact that the same cash, in
34:27
Speaker 1: decreasing amounts is successively paid into different banks. It does, however,
34:33
Speaker 1: look upon this cash movement rather in the nature of
34:35
Speaker 1: a technical affair between banks, which would disappear if the
34:39
Speaker 1: separate banks were merged into one. In that case, the
34:42
Speaker 1: deposits would be regarded as coming into existence by outright creation.
34:47
Speaker 1: In our example, we assume throughout only one bank, and
34:50
Speaker 1: still the deposits grow out of the return again and
34:53
Speaker 1: again of the same cash by the public. The force
34:57
Speaker 1: which really creates expansion is the trade credit given by
35:00
Speaker 1: producers to one another. The bank plays the role of
35:03
Speaker 1: a mere intermediary. This seems to lead not to anew
35:07
Speaker 1: but to a very old theory of the function of banks,
35:10
Speaker 1: the function of a mere intermediary. The modern idea of
35:14
Speaker 1: banks being able to create deposits seemed to be a
35:17
Speaker 1: startling departure from the view held by most economists in
35:20
Speaker 1: the nineteenth century. If, however, we approach this modern idea
35:24
Speaker 1: along the lines followed above, we find that it resolves
35:27
Speaker 1: itself into much the same elements as those which many
35:30
Speaker 1: of the older writers regarded as the essence of banking operations,
35:33
Speaker 1: the provision of confidence, which induces the economic subjects to
35:37
Speaker 1: extend credit to each other by using the bank as
35:39
Speaker 1: an intermediary. Philip's influence has indeed been significant. Even in
35:45
Speaker 1: nineteen ninety five, good Friends still argued that Phillips showed
35:49
Speaker 1: that the summation of the loan and deposit creation series
35:52
Speaker 1: across all individual banks yields the multiple expansion formulas for
35:56
Speaker 1: the system as a whole, Philip's definitive exposition and essentially
36:00
Speaker 1: establish the theory once and for all in the form
36:03
Speaker 1: found in economics textbooks today. Statements like this became the
36:07
Speaker 1: mainstream view in the nineteen fifties and nineteen sixty s
36:10
Speaker 1: point twenty five. The view of the fractional reserve theory
36:13
Speaker 1: in time also came to dominate textbook descriptions of the
36:16
Speaker 1: functioning of the monetary and banking system. There is no
36:20
Speaker 1: post war textbook more representative and influential than that of
36:23
Speaker 1: Samuelson nineteen forty eight. The original first edition is clear
36:28
Speaker 1: in its description of the fractional reserve theory under the
36:31
Speaker 1: heading can banks really create money? Samuelson first dismisses false
36:35
Speaker 1: explanations still in wide circulation. According to these false explanations,
36:41
Speaker 1: the managers of an ordinary bank are able, by some
36:44
Speaker 1: use of their fountain pens, to lend several dollars for
36:47
Speaker 1: each dollar left on deposit with them. No wonder practical
36:50
Speaker 1: bankers see read when such behavior is attributed to them,
36:54
Speaker 1: They only wish they could do so, as every banker
36:58
Speaker 1: well knows he cannot invest money that he does not have,
37:01
Speaker 1: and any money that he does invest in buying a
37:03
Speaker 1: security or making a loan will soon leave his bank.
37:07
Speaker 1: Samuelson thus argues that a bank needs to gather the
37:10
Speaker 1: funds first before it can extend bank loans. This is
37:14
Speaker 1: not consistent with the credit creation theory. However, Samuelson argues
37:19
Speaker 1: that in aggregate, the banking system creates money. He illustrates
37:24
Speaker 1: his argument with the example of a small bank that
37:27
Speaker 1: faces a twenty percent reserve requirement and considering the accounts
37:31
Speaker 1: of the bank be slash s. If this bank receives
37:35
Speaker 1: a new cash deposit of one thousand dollars, what can
37:38
Speaker 1: the bank now do Samuelson asks, can it expand its
37:42
Speaker 1: loans and investments by four thousand dollars? The answer is
37:46
Speaker 1: definitely no. Why not total assets equal total liabilities? Cash
37:53
Speaker 1: reserves meet the legal requirement of being twenty percent of
37:56
Speaker 1: total deposits. True enough, but how does the bank pay
38:01
Speaker 1: for the investments or earning assets that it buys? Like
38:05
Speaker 1: everyone else, it writes out a check to the man
38:07
Speaker 1: who sells the bond or signs the promissory note. The
38:11
Speaker 1: borrower spends the money on labor, on materials, or perhaps
38:15
Speaker 1: on an automobile. The money will very soon therefore have
38:19
Speaker 1: to be paid out of the bank. A bank cannot
38:22
Speaker 1: eat its cake, can have it too. Table four begives
38:26
Speaker 1: therefore a completely false picture of what an individual bank
38:29
Speaker 1: can do. Instead, Samuelson explains, since all the money lent
38:34
Speaker 1: out will leave the bank, an individual bank cannot create
38:37
Speaker 1: credit out of nothing. As far as this first bank
38:41
Speaker 1: is concerned, we are through. Its legal reserves are just
38:45
Speaker 1: enough to match its deposits. There is nothing more it
38:48
Speaker 1: can do until the public decides to bring in some
38:51
Speaker 1: more money on deposit. On the other hand, Samuelson emphasizes
38:55
Speaker 1: that the banking system as a whole can do what
38:58
Speaker 1: each small bank cannot do, namely, create money. This, Samuelson
39:03
Speaker 1: explains via the iterative process of one bank's loans based
39:07
Speaker 1: on prior deposits, becoming another bank's deposits, and so forth.
39:12
Speaker 1: He shows this chain of deposit creation in a table
39:15
Speaker 1: amounting to total deposits in the banking system of five
39:18
Speaker 1: thousand dollars out of the one thousand dollars due to
39:21
Speaker 1: the reserve requirement of twenty per cent, implying a money
39:24
Speaker 1: multiplier of five times assuming no cash leakage. What Samuelson
39:30
Speaker 1: calls the multiple deposit expansion is described in the same
39:34
Speaker 1: way and with remarkable similarity in the fifteenth edition of
39:37
Speaker 1: his book nineteen ninety five, half a century later, only
39:41
Speaker 1: that the reserve requirement cited as example has been lowered
39:44
Speaker 1: to ten per cent. All banks can do what one
39:46
Speaker 1: can't do alone. There are subtle, though important differences. The
39:51
Speaker 1: overall space devoted to this topic is much smaller in
39:54
Speaker 1: nineteen ninety five compared to nineteen forty eight. The modern
39:58
Speaker 1: textbook says that the central bank created reserves are used
40:01
Speaker 1: by the banks as an input and then transformed into
40:04
Speaker 1: a much larger amount of bank money. There is far
40:08
Speaker 1: less of an attempt to deal with the credit creation theory. Instead,
40:12
Speaker 1: each bank is unambiguously represented as a pure financial intermediary,
40:17
Speaker 1: collecting deposits and lending out this money minus the reserve requirement.
40:22
Speaker 1: The fractional reserve theory had become mainstream. Each small bank
40:26
Speaker 1: is limited in its ability to expand its loans and investments.
40:31
Speaker 1: It cannot land or invest more than it has received
40:33
Speaker 1: from depositors. Meanwhile, bank deposit money is supplied by the
40:38
Speaker 1: financial system in an abstract process that each individual bank
40:42
Speaker 1: has little control over. The unambiguous fractional reserve theory thus
40:47
Speaker 1: appears to have come about in the years after the
40:49
Speaker 1: nineteen fifties. It can be described in figure one the
40:53
Speaker 1: fractional reserve theory as represented in many textbooks. The graphic
40:58
Speaker 1: illustrates that money multiplication process in a fractional reserve banking
41:02
Speaker 1: system with a one per cent reserve requirement. It starts
41:06
Speaker 1: with bank A receiving a one hundred dollars deposit. Bank
41:10
Speaker 1: A keeps one dollar as a reserve one percent of
41:13
Speaker 1: one hundred dollars and lends out the remaining ninety nine
41:16
Speaker 1: dollars as loanable funds. This ninety nine dollars is deposited
41:20
Speaker 1: into bank by bank, by then keeps ninety nine cents
41:24
Speaker 1: one percent of ninety nine dollars as a reserve and
41:26
Speaker 1: lends out ninety eight dollars in one cent. This process continues,
41:31
Speaker 1: with bank C and subsequent banks each holding one percent
41:34
Speaker 1: as a reserve and lending out the rest. The diagram
41:38
Speaker 1: shows this step by step progression, with deposits, reserves, and
41:42
Speaker 1: loanable funds decreasing slightly at each stage. Ultimately, the total
41:47
Speaker 1: deposits across all banks some to ten thousand dollars, the
41:50
Speaker 1: total reserve some to one hundred dollars, and the total
41:54
Speaker 1: loanable funds some to nine thousand, nine hundred dollars. This
41:58
Speaker 1: demonstrates how an initial deposit can lead to a much
42:00
Speaker 1: larger total amount of money in the economy through the
42:03
Speaker 1: multiplier effect, as described by Werner two thousand five. In
42:08
Speaker 1: this scheme, funds move between the public, the banks, and
42:11
Speaker 1: the central bank without any barriers. Each bank is a
42:15
Speaker 1: financial intermediary, but an aggregate. Due to fractional reserve banking,
42:19
Speaker 1: money is created multiplied in the banking system. Specifically, each
42:25
Speaker 1: bank can only grant a loan if it has previously
42:28
Speaker 1: received new reserves, of which a fraction will always be
42:31
Speaker 1: deposited with the central bank. It will then only be
42:34
Speaker 1: able to lend out as much as these excess reserves.
42:37
Speaker 1: As is made clear in major textbooks. In the words
42:41
Speaker 1: of Stiglitz nineteen ninety seven, it should be clear that
42:45
Speaker 1: when there are many banks, no individual bank can create
42:48
Speaker 1: multiple deposits. Individual banks may not even be aware of
42:52
Speaker 1: the role they play in the process of multiple deposit creation.
42:56
Speaker 1: All they see is that their deposits have increased and
42:59
Speaker 1: therefore their area able to make more loans. In another
43:02
Speaker 1: textbook on money and banking, in this example, a person
43:07
Speaker 1: went into Bank one and deposited a one hundred thousand
43:09
Speaker 1: dollars check drawn on another bank. That one hundred thousand
43:13
Speaker 1: dollars became part of the reserves of Bank one. Because
43:17
Speaker 1: that deposit immediately created excess reserves, further loans were possible
43:21
Speaker 1: for Bank one. Bank one lent the excess reserves to
43:25
Speaker 1: earn interest. A bank will not lend more than its
43:28
Speaker 1: excess reserves because by law, it must hold a certain
43:32
Speaker 1: amount of required reserves. The deposit of a check from
43:36
Speaker 1: another bank does not, however, increase the total amounts of
43:39
Speaker 1: deposits and money. Remember, though, that the deposit was a
43:43
Speaker 1: check written on another bank. Therefore, the other bank suffered
43:47
Speaker 1: a decline in its transactions, deposits, and its reserves. While
43:52
Speaker 1: total assets and liabilities in Bank one have increased by
43:55
Speaker 1: one hundred thousand dollars, they have decreased in the other
43:58
Speaker 1: bank by one hundred thousand dollars. Thus, the total amount
44:02
Speaker 1: of money and credit in the economy is unaffected by
44:04
Speaker 1: the transfer of funds from one depository institution to another.
44:09
Speaker 1: Each depository institution can create loans and deposits only to
44:13
Speaker 1: the extent that it has excess reserves. The thing to
44:17
Speaker 1: remember is that new reserves are not created when checks
44:20
Speaker 1: written on one bank are deposited in another bank. The
44:23
Speaker 1: federal reserve system, however, can create new reserves. The textbook
44:29
Speaker 1: by Heffernan nineteen ninety six says, to summarize, all modern
44:34
Speaker 1: banks act as intermediaries between borrowers and lenders, but they
44:38
Speaker 1: may do so in a variety of different ways, from
44:40
Speaker 1: the traditional function of taking deposits and lending a percentage
44:43
Speaker 1: of these deposits to fee based financial services for the
44:48
Speaker 1: bank which pools these surplus funds, there is an opportunity
44:51
Speaker 1: for profit through fractional reserve lending, that is, lending out
44:55
Speaker 1: money at an interest rate which is higher than what
44:57
Speaker 1: the bank pays on the deposit, after allowing for the
45:00
Speaker 1: riskiness of the loan and the cost of intermediation. While
45:04
Speaker 1: the fractional reserve theory succeeded in attracting many followers, rendering
45:08
Speaker 1: it an important and influential theory until this day, it
45:11
Speaker 1: is not famous for its clarity. The problem of the
45:14
Speaker 1: manner in which the banking system increases the total volume
45:17
Speaker 1: of the circulating medium while at the same time the
45:20
Speaker 1: lending power of the individual banks is severely limited has
45:23
Speaker 1: proved to be one of the most baffling for writers
45:25
Speaker 1: on banking theory. Several attempts were made to resolve this
45:29
Speaker 1: within the fractional reserve theory of banking, such as that
45:32
Speaker 1: by Saving nineteen seventy seven, who rendered the supply of
45:36
Speaker 1: bank deposits a function of the behavior of the savers,
45:39
Speaker 1: arguing that the money supply is endogenous. This effectively pushed
45:43
Speaker 1: out the intermediary function from the individual bank level to
45:47
Speaker 1: the economy level and helped ushering in the formulation of
45:50
Speaker 1: the financial intermediation theory to which we now TURNE two
45:54
Speaker 1: point three the financial intermediation theory. While the fractional reserve
45:59
Speaker 1: theory of banking was influential from the nineteen thirties to
46:02
Speaker 1: the nineteen sixties, Caines may have sown important seeds of
46:05
Speaker 1: doubt already. In his treatise. Canes nineteen thirty makes use
46:10
Speaker 1: of inverted commas in order to refer suggestively to the
46:14
Speaker 1: creation of bank money a section title. This rhetorical device,
46:19
Speaker 1: employed by the expert already hailed as the leading economist
46:22
Speaker 1: in the world, implied disapproval as well as mockery of
46:26
Speaker 1: the concept that banks could create money out of nothing.
46:29
Speaker 1: The device was copied by many other writers after Caines,
46:32
Speaker 1: who also emphasized the role of banks as financial intermediaries.
46:37
Speaker 1: In Kaine's words, a banker is in possession of resources
46:41
Speaker 1: which he can lend or invest equal to a large
46:43
Speaker 1: proportion nearly ninety percent of the deposits standing to the
46:47
Speaker 1: credit of his depositors. In so far as his deposits
46:51
Speaker 1: are savings deposits, he is acting merely as an intermediary
46:55
Speaker 1: for the transfer of loan capital. In so far as
46:58
Speaker 1: they are cash deposits, he is acting both as a
47:01
Speaker 1: provider of money for his depositors and also as a
47:04
Speaker 1: provider of resources for his borrowing customers. Thus, the modern
47:08
Speaker 1: banker performs two distinct sets of services. He supplies a
47:12
Speaker 1: substitute for state money by acting as a clearinghouse and
47:15
Speaker 1: transferring current payments backwards and forwards between his different customers
47:19
Speaker 1: by means of book entries on the credit and debit sides.
47:23
Speaker 1: But he is also acting as a middleman in respect
47:25
Speaker 1: of a particular type of lending, receiving deposits from the public,
47:29
Speaker 1: which he employs in purchasing securities or in making loans
47:32
Speaker 1: to industry in trade, mainly to meet demands for working capital.
47:36
Speaker 1: This duality of function is the clue to many difficulties
47:39
Speaker 1: in the modern theory of money and credit, and the
47:41
Speaker 1: source of some serious confusions of thought. The canes of
47:45
Speaker 1: the treatise seems to say that the two functions of
47:48
Speaker 1: banks are to either act as financial intermediary, fulfilling the
47:51
Speaker 1: utility banking function of settling trades, or to act as
47:54
Speaker 1: financial intermediary, gathering deposits and lending. The majority of these
47:58
Speaker 1: out no money creation at all involved, certainly not on
48:03
Speaker 1: the individual bank level. Kain's most influential opus General Theory
48:08
Speaker 1: Kines nineteen thirty six, quickly eclipsed his earlier treatise on
48:12
Speaker 1: Money in terms of its influence on public debate. In
48:16
Speaker 1: the General Theory, Kaines did not place any emphasis on banks,
48:20
Speaker 1: which he now argued were financial intermediaries that needed to
48:23
Speaker 1: acquire deposits before they could lend. The notion that the
48:27
Speaker 1: creation of credit by the banking system allows investment to
48:30
Speaker 1: take place to which no genuine saving corresponds can only
48:34
Speaker 1: be the result of isolating one of the consequences of
48:36
Speaker 1: the increased bank credit to the exclusion of the others.
48:40
Speaker 1: It is impossible that the intention of the entrepreneur who
48:42
Speaker 1: has borrowed in order to increase investment can become effective,
48:46
Speaker 1: except in substitution for investment by other entrepreneurs, which would
48:49
Speaker 1: have occurred otherwise at a faster rate than the public
48:52
Speaker 1: decide to increase their savings. No one can be compelled
48:56
Speaker 1: to own the additional money corresponding to the new bank credit,
48:59
Speaker 1: unless as he deliberately prefers to hold more money rather
49:02
Speaker 1: than some other form of wealth. Thus, the old fashioned
49:05
Speaker 1: view that saving always involves investment, though incomplete and misleading,
49:10
Speaker 1: is formally sounder than the new fangled view that there
49:12
Speaker 1: can be saving without investment or investment without genuine saving.
49:17
Speaker 1: Schumpeter nineteen fifty four commented on this shift in Kaine's
49:21
Speaker 1: view that deposit creating bank loan and its role in
49:25
Speaker 1: the financing of investment without any previous saving up of
49:28
Speaker 1: the sums, thus lent have practically disappeared in the analytic
49:31
Speaker 1: schema of the general theory, where it is again the
49:33
Speaker 1: saving public that holds the scene. Orthodox Kinesianism has in
49:38
Speaker 1: fact reverted to the old view. Whether this spell's progress
49:42
Speaker 1: or retrogression, every economist must decide for himself. The early
49:47
Speaker 1: postwar period saw unprecedented influence of Kaine's General Theory, and
49:51
Speaker 1: a Kinesian school of thought that managed to ignore Kaine's
49:54
Speaker 1: earlier writings on bank credit creation became dominant in academia.
49:59
Speaker 1: Given that a fo former major proponent of both the
50:01
Speaker 1: credit creation and the fractional reserve theories of banking had
50:04
Speaker 1: shifted his stance to the new financial intermediation theory, it
50:08
Speaker 1: is not surprising that others would follow A highly influential
50:12
Speaker 1: challenge to the fractional reserve theory of banking was staged
50:15
Speaker 1: by Gurley and Shaw nineteen fifty five. Gurley and Shaw
50:19
Speaker 1: nineteen sixty. They rejected the view that banks stand apart
50:23
Speaker 1: in their ability to create loanable funds out of hand,
50:26
Speaker 1: while other intermediaries, in contrast, are busy with the modest
50:29
Speaker 1: brokerage function of transmitting loanable funds that are somehow generated elsewhere.
50:34
Speaker 1: Beyond the usual rhetorical devices to denigrate the alternative theories,
50:38
Speaker 1: Gurley and Shaw's actual argument was that banks should not
50:41
Speaker 1: be singled out as being special, since the bank's financial
50:44
Speaker 1: intermediation function is identical to that of other financial intermediaries.
50:49
Speaker 1: There are many similarities between the monetary system and non
50:52
Speaker 1: monetary intermediaries, and the similarities are more important than the differences.
50:58
Speaker 1: Both types of financial institution create financial claims, and both
51:02
Speaker 1: may engage in multiple creation of their particular liabilities in
51:05
Speaker 1: relation to any one class of asset that they hold.
51:09
Speaker 1: Banks and the banking system we are told, like other
51:12
Speaker 1: financial intermediaries, need to first gather deposits and then are
51:16
Speaker 1: able to lend these out. In this view, any remaining
51:20
Speaker 1: special role of banks is due to outmoded regulations which
51:23
Speaker 1: treat banks differently. Therefore, they argue the Federal Reserve should
51:28
Speaker 1: extend its banking supervision to the growing set of non
51:31
Speaker 1: bank financial intermediaries, thus treating them equally to banks. Initial
51:36
Speaker 1: challenges by proponents of the fractional reserve theory of banking
51:40
Speaker 1: see gutten Tag and Lindsay nineteen sixty eight were swept
51:43
Speaker 1: away during the nineteen sixties when James Tobin, a new
51:47
Speaker 1: rising star in economics, took a clear stand to proclaim
51:50
Speaker 1: another new view of banking, formulating the modern version of
51:54
Speaker 1: the financial intermediation theory of banking Tobin nineteen sixty three
51:59
Speaker 1: stay ending atop the wreckage in nineteen sixty three to
52:02
Speaker 1: set forth the new view of commercial banking, stand squarely
52:06
Speaker 1: with Girly and Shaw against the traditional view. Like kanes
52:10
Speaker 1: alhadref and others before him, Tobin only referred to bank
52:14
Speaker 1: credit creation in inverted commas and used rhetorical devices to
52:17
Speaker 1: ridicule the idea that banks individually or collectively could create
52:21
Speaker 1: money and credit. Tobin nineteen sixty three argued, neither individually
52:27
Speaker 1: nor collectively do commercial banks possess a widow's cruise. The
52:32
Speaker 1: distinction between commercial banks and other financial intermediaries has been
52:36
Speaker 1: too sharply drawn. The differences are of degree, not of kind.
52:41
Speaker 1: In particular, the differences which do exist have little intrinsically
52:45
Speaker 1: to do with the monetary nature of bank liabilities. The
52:49
Speaker 1: differences are more importantly related to the special reserve requirements
52:52
Speaker 1: and interest rate ceilings to which banks are subject. Any
52:56
Speaker 1: other financial industry subject to the same kind of regulations
52:59
Speaker 1: would behave in much the same way. Banks only seem
53:03
Speaker 1: to be different from others because regulators erroneously chose to
53:07
Speaker 1: single them out for special regulation. In Tobin's view, commercial
53:11
Speaker 1: banks are different because they are controlled, and not the
53:14
Speaker 1: other way around. Gutten Tag and Lindsay, nineteen sixty eight.
53:19
Speaker 1: Tobin and Brainerd's nineteen sixty three portfolio model made no
53:23
Speaker 1: distinction between banks and non bank financial intermediaries, indeed ignored
53:28
Speaker 1: the role of banks altogether, and contributed much towards the
53:31
Speaker 1: modern mainstream view of economics models without banks. Branson nineteen
53:36
Speaker 1: sixty eight further developed Tobin's new approach, which was popular
53:40
Speaker 1: in the leading journals gutten Tag and Lindsay nineteen sixty eight,
53:46
Speaker 1: wrote in the Journal of Political Economy that despite the
53:48
Speaker 1: challenge by Gurley and Shaw nineteen fifty five, the uniqueness issue,
53:53
Speaker 1: on the other hand, remains unsettled. Banks, they argued, are
53:58
Speaker 1: different in their role and impact from them non bank
54:00
Speaker 1: financial intermediaries. Since commercial banks have a greater capacity for
54:04
Speaker 1: varying the aggregate volume of credit than other financial intermediaries.
54:09
Speaker 1: These points provide a rationale for special controls on commercial
54:12
Speaker 1: banks that goes beyond the need to prevent financial panic.
54:16
Speaker 1: It is the rationale that has been sought by defenders
54:19
Speaker 1: of the traditional view that commercial banks are unique ever
54:22
Speaker 1: since the Girly Shaw challenge to this view undaunted. Tobin
54:27
Speaker 1: nineteen sixty nine restates his view in an article establishing
54:30
Speaker 1: his portfolio balance approach to financial markets, which argues that
54:34
Speaker 1: financial markets are complex webs of assets and prices, leaving
54:38
Speaker 1: banks as one of many types of intermediaries without any
54:41
Speaker 1: special role. This was the first article in the first
54:45
Speaker 1: edition of a new journal, the Journal of Money, Credit
54:48
Speaker 1: and Banking. While its name may suggest openness towards the
54:52
Speaker 1: various theories of banking, in practice, it has only published
54:55
Speaker 1: articles that did not support the credit creation theory and
54:58
Speaker 1: were mainly in line with the financial intermediation theory. This
55:02
Speaker 1: is also true for most other journals classified as leading
55:05
Speaker 1: journals in economics, for instance, using the four rated journals
55:09
Speaker 1: from the UK Association of Business Schools list in Economics. Henceforth,
55:14
Speaker 1: the portfolio balance approach, which treated all financial institutions as
55:19
Speaker 1: mere portfolio managers, was to hold sway. It helped the
55:23
Speaker 1: financial intermediation theory become the dominant creed among economists worldwide.
55:29
Speaker 1: Modern proponents of the ubiquitous financial intermediation theory include, among others,
55:34
Speaker 1: Klein nineteen seventy one, Monty nineteen seventy two, Sealy and
55:39
Speaker 1: Lindley nineteen seventy seven, Diamond and Divveg nineteen eighty three,
55:44
Speaker 1: Diamond nineteen eighty four, Diamond nineteen ninety one, Diamond two
55:48
Speaker 1: thousand seven, spring Eatwell, Millgate and Newman nineteen eighty nine,
55:54
Speaker 1: Gordon and Panacci nineteen ninety Bensyvanga and Smith nineteen ninety one,
56:00
Speaker 1: Rannank and Girdler nineteen ninety five, Rajan nineteen ninety eight,
56:04
Speaker 1: Myers and Rajan nineteen ninety eight, Allan and Gale two thousand,
56:09
Speaker 1: Allan and Gayale two thousand four, A. Allen and Gaale
56:13
Speaker 1: two thousand four, b Allen in Santa Mario two thousand one,
56:17
Speaker 1: Diamond and Rajan two thousand one, Cuship at All two
56:22
Speaker 1: thousand two, Hoshi and Cuship two thousand four, Matthews and
56:26
Speaker 1: Thompson two thousand five, Cassu and Gerard one two thousand six,
56:31
Speaker 1: De watrupont at All two thousand ten, Girdler and Kiyotaki
56:35
Speaker 1: twenty eleven, and Stein two thousand fourteen. There are many more.
56:40
Speaker 1: It is impossible to draw up a conclusive list since
56:43
Speaker 1: the vast majority of articles published in leading economics and
56:47
Speaker 1: finance journals in the last thirty to forty years is
56:49
Speaker 1: based on the financial intermediation theory as premise. Quoting only
56:54
Speaker 1: a few examples. Klein nineteen seventy one, Monty nineteen seventy two,
57:00
Speaker 1: later to become EU Commissioner and Prime Minister of Italy
57:03
Speaker 1: and others model banks as financial intermediaries, gathering deposits and
57:07
Speaker 1: lending these funds out. The bank has two primary sources
57:11
Speaker 1: of funds, the equity originally invested in the firm and
57:14
Speaker 1: borrowed funds secured through the issuance of various types of deposits.
57:19
Speaker 1: It will be shown how the bank determines the prices
57:21
Speaker 1: it will pay for various types of deposits, and how
57:24
Speaker 1: these prices, in conjunction with the deposit supply functions the
57:27
Speaker 1: bank confronts, determine the scale and composition of the bank's
57:30
Speaker 1: deposit liabilities the bank will assume. Diamond and Divviig nineteen
57:35
Speaker 1: eighty three are cited as the seminal work on banking,
57:39
Speaker 1: and they argue that illiquidity of assets provides the rationale
57:42
Speaker 1: both for the existence of banks and for their vulnerability
57:45
Speaker 1: to runs, but in actual fact, their theory makes no
57:49
Speaker 1: distinction between banks and non banks. They therefore are unable
57:53
Speaker 1: to explain why we have heard of bank runs but
57:56
Speaker 1: not of insurance runs or finance company runs, although the
58:00
Speaker 1: latter also hold a liquid assets and give out loans.
58:03
Speaker 1: Diamond and Divvig fail to identify what could render banks special,
58:07
Speaker 1: since they assume that they are not. Other theories of
58:10
Speaker 1: banks as financial intermediaries are presented by Mayor nineteen eighty
58:14
Speaker 1: eight and Helwig nineteen seventy seven, Helwig nineteen ninety one
58:19
Speaker 1: Helwig two thousand, who also believe that banks are merely
58:22
Speaker 1: financial intermediaries. The analysis uses the original model of Diamond
58:28
Speaker 1: nineteen eighty four of financial contracting with intermediation as delegated monitoring.
58:34
Speaker 1: Monitoring is assumed to be too expensive to be used
58:36
Speaker 1: by the many households required to finance a firm or
58:39
Speaker 1: an intermediary. However, direct finance of firms based on non
58:44
Speaker 1: pecuniary penalties may be dominated by intermediated finance, with monitoring
58:48
Speaker 1: of firms by an intermediary, who in turn obtains funds
58:51
Speaker 1: from households through contracts involving non pecuniary penalties. Banking expert
58:56
Speaker 1: Hefernin nineteen ninety six states the existence of the traditional bank,
59:02
Speaker 1: which intermediates between borrower and lender and which offers a
59:05
Speaker 1: payment service to its customers, fits in well with the
59:08
Speaker 1: coast theory or a leading textbook on international economics and
59:13
Speaker 1: finance by Krugman and Obstfeld two thousand, banks use depositors'
59:18
Speaker 1: funds to make loans and to purchase other assets. A
59:21
Speaker 1: widely used reference work on banking and money, the new
59:24
Speaker 1: Palgrave Money, contains a number of contributions by leading monetary
59:28
Speaker 1: economists and banking experts in it. Boltensberger nineteen eighty nine
59:34
Speaker 1: clearly supports the financial intermediation theory. The role of credit
59:39
Speaker 1: as such must be clearly separated from the economic role
59:42
Speaker 1: of credit institutions such as banks playing the role of
59:45
Speaker 1: specialized intermediaries in the credit market by buying and simultaneously
59:49
Speaker 1: selling credit instruments of a different type and quality. Since
59:53
Speaker 1: the ultimate borrowers and lenders can in principle do business
59:57
Speaker 1: with each other directly without the help of se such
1:00:00
Speaker 1: in intermediary the function of these middlemen must be viewed
1:00:03
Speaker 1: as separate from that of credit as such. Two main
1:00:06
Speaker 1: functions of institutions of this kind can be distinguished. The
1:00:10
Speaker 1: first is the function of risk consolidation and transformation. The
1:00:14
Speaker 1: second major function of these institutions is that of a
1:00:17
Speaker 1: broker in the credit markets. As such, they specialize in
1:00:21
Speaker 1: producing intertemporal exchange transactions and owe their existence to their
1:00:25
Speaker 1: ability to bring together creditors and debtors at lower costs
1:00:28
Speaker 1: than the latter can achieve in direct transactions themselves. Indeed,
1:00:33
Speaker 1: almost all authors in this reference book refer to banks
1:00:36
Speaker 1: as mere financial intermediaries. Even good Heart nineteen eighty nine.
1:00:41
Speaker 1: Intermediation generally refers to the interposition of a financial institution
1:00:46
Speaker 1: in the process of transferring funds between ultimate savers and
1:00:49
Speaker 1: ultimate borrowers. Disintermediation is then said to occur when some intervention,
1:00:54
Speaker 1: usually by government agencies for the purpose of controlling or
1:00:58
Speaker 1: regulating the growth of financial intermediaries, lessens their advantages in
1:01:02
Speaker 1: the provision of financial services and drives financial transfers and
1:01:06
Speaker 1: business into other channels. An example of this is to
1:01:09
Speaker 1: be found when onerous reserve requirements on banks lead them
1:01:13
Speaker 1: to raise the margin, the spread between deposit and lending
1:01:16
Speaker 1: rates in order to maintain their profitability, so much that
1:01:20
Speaker 1: the more credit worthy borrowers are induced to raise short
1:01:22
Speaker 1: term funds directly from savers. For example, in the commercial
1:01:26
Speaker 1: paper market, Myers and Rajan nineteen ninety eight state we
1:01:32
Speaker 1: model the intermediary as a bank that borrows from a
1:01:34
Speaker 1: number of individual investors for its own core business and
1:01:37
Speaker 1: to lend on to a project. Even though the bank
1:01:41
Speaker 1: can extract more from the ultimate borrower, the bank has
1:01:44
Speaker 1: to finance these loans by borrowing from individual investors. Allen
1:01:48
Speaker 1: and Santa Mario two thousand one, in their paper entitled
1:01:52
Speaker 1: what do Financial Intermediaries Do? State in this paper we
1:01:56
Speaker 1: use these observations as a starting point for considering what
1:01:59
Speaker 1: it is is that financial intermediaries do. At center, of course,
1:02:04
Speaker 1: financial systems perform the function of reallocating the resources of
1:02:08
Speaker 1: economic units with surplus funds savers to economic units with
1:02:12
Speaker 1: funding needs borrowers. Cushship two thousand two also believes that
1:02:18
Speaker 1: banks are pure financial intermediaries, not materially distinguishable from other
1:02:22
Speaker 1: non bank financial institutions. Stein twenty fourteen states, albeit with
1:02:28
Speaker 1: some hesitation, at least in some cases. It seems that
1:02:33
Speaker 1: a bank's size is determined by its deposit franchise, and
1:02:36
Speaker 1: that taking these deposits as given its problem then becomes
1:02:40
Speaker 1: one of how best to invest them. Overall. Our synthesis
1:02:44
Speaker 1: of these stylized facts is that banks are in the
1:02:46
Speaker 1: business of taking deposits and investing these deposits in fixed
1:02:49
Speaker 1: income assets that have certain well defined risk and liquidity attributes,
1:02:53
Speaker 1: but which can be either loans or securities. The financial
1:02:57
Speaker 1: intermediation theory includes the credit view in ds macroeconomics, proposing
1:03:02
Speaker 1: a bank lending channel of monetary transmission Burnank and Blinder
1:03:06
Speaker 1: nineteen eighty nine, Burnanc and Girdler, nineteen ninety five, as
1:03:10
Speaker 1: well as the neoclassical and new classical macroeconomic models if
1:03:14
Speaker 1: they consider banks at all. To these and most contemporary
1:03:18
Speaker 1: authors in economics and finance, banks are financial intermediaries like
1:03:22
Speaker 1: other firms in the financial sector, which focus on the
1:03:25
Speaker 1: transformation of liabilities with particular features into assets with other
1:03:29
Speaker 1: features e g. With respect to maturity, liquidity, and quantity
1:03:33
Speaker 1: slash size, or which focus on monitoring others shared nineteen
1:03:38
Speaker 1: eighty nine, another adherent of the financial intermediation theory of banking,
1:03:42
Speaker 1: but do not create credit individually or collectively. This is
1:03:46
Speaker 1: true for many post Kynesians, who argue that the money
1:03:50
Speaker 1: supply is determined by the demand for money. It is
1:03:53
Speaker 1: also true for popular descriptions, such as that by Coup
1:03:56
Speaker 1: and Fujida nineteen ninety seven, who argue that banks are
1:04:00
Speaker 1: merely financial intermediaries. But those financial institutions that are counterparties
1:04:06
Speaker 1: of the Bank of Japan obtain their funding primarily from
1:04:08
Speaker 1: the money that depositors have deposited with them. This money
1:04:12
Speaker 1: they cannot pass on for consumption and capital investment because
1:04:16
Speaker 1: they have to lend it at interest to earn money,
1:04:19
Speaker 1: in other words, for this money to support the economy.
1:04:22
Speaker 1: These financial institutions must lend it to firms and individuals.
1:04:26
Speaker 1: Those borrowers must then use it to buy assets such
1:04:29
Speaker 1: as machinery or housing or services. A recent paper by Allen,
1:04:34
Speaker 1: Karletti and Gale twenty fourteen introduces money, albeit only cash
1:04:39
Speaker 1: created by the central bank, while banks are mere financial
1:04:42
Speaker 1: intermediaries that cannot create money or credit. As a result,
1:04:47
Speaker 1: the leading forecasting models used by policy makers also do
1:04:50
Speaker 1: not include banks. Bank of England twenty fourteen. A. Even
1:04:55
Speaker 1: the original meaning of credit creation seems forgotten by the
1:04:58
Speaker 1: modern literature. Burnank nineteen ninety three uses the expression credit
1:05:03
Speaker 1: creation much in his article, but explains that this concept
1:05:06
Speaker 1: is defined as the process by which saving is channeled
1:05:09
Speaker 1: to alternative uses i e. Financial intermediation of savers deposits
1:05:14
Speaker 1: into loans. This fortuitous conjunction of events and ideas has
1:05:18
Speaker 1: contributed to an enhanced appreciation of the role of credit
1:05:21
Speaker 1: in the macroeconomy by most economists and policy makers. The
1:05:26
Speaker 1: purpose of this paper is to review and interpret some
1:05:28
Speaker 1: recent developments in our understanding of the macroeconomic role of credit, or,
1:05:32
Speaker 1: more accurately, of the credit creation process. By credit creation process,
1:05:38
Speaker 1: I mean the process by which in exchange for paper claims.
1:05:41
Speaker 1: The savings of specific individuals or firms are made available
1:05:45
Speaker 1: for the use of other individuals or firms, for example,
1:05:48
Speaker 1: to make capital investments or simply to consume. Note that
1:05:52
Speaker 1: I am drawing a strong distinction between credit creation, which
1:05:55
Speaker 1: is the process by which saving is channel to alternative uses,
1:05:59
Speaker 1: and the act of saving it. In my broad conception
1:06:02
Speaker 1: of the credit creation process, I include most of the
1:06:05
Speaker 1: value added of the financial industry, including the information gathering, screening,
1:06:10
Speaker 1: and monitoring activities required to make sound loans or investments,
1:06:14
Speaker 1: as well as much of the risk sharing, maturity transformation,
1:06:17
Speaker 1: and liquidity provision services that attract savers and thus support
1:06:20
Speaker 1: the basic lending and investment functions. I also want to
1:06:25
Speaker 1: include in my definition of the credit creation process activities
1:06:28
Speaker 1: undertaken by potential borrowers to transmit information about themselves to lenders.
1:06:32
Speaker 1: For example, for firms, these activities include provision of data
1:06:36
Speaker 1: to the public, internal or external auditing, capital structure decisions,
1:06:41
Speaker 1: and some aspects of corporate governance. The efficiency of the
1:06:45
Speaker 1: credit creation process is reflected both in its ability to
1:06:48
Speaker 1: minimize the direct costs of extending credit. For example, the
1:06:52
Speaker 1: aggregate wage bill of the financial industry, and in the
1:06:55
Speaker 1: degree to which it is able to channel in economy
1:06:57
Speaker 1: savings into the most productive potential uses. The presumption of
1:07:01
Speaker 1: traditional macroeconomic analysis is that this credit creation process through
1:07:06
Speaker 1: which funds are transferred from ultimate savers to borrowers, works
1:07:09
Speaker 1: reasonably smoothly, and therefore can usually be ignored. As Bernank
1:07:14
Speaker 1: points out, those works that assume such a financial intermediation
1:07:18
Speaker 1: role for banks will therefore often ignore banks entirely. They
1:07:21
Speaker 1: cannot be particularly important or relevant in the economy. Many
1:07:25
Speaker 1: went as far as to leave out any kind of money.
1:07:28
Speaker 1: There are no monetary aggregates in Kyotaki and More nineteen
1:07:31
Speaker 1: ninety seven, Woodford, two thousand three. The most widely used
1:07:36
Speaker 1: textbook in advanced master level economics at leading British universities
1:07:40
Speaker 1: in twenty ten was Romer two thousand six. On page three,
1:07:45
Speaker 1: Romer tells us incorporating money in models of economic growth
1:07:49
Speaker 1: would only obscure the analysis sec. Two point four conclusion
1:07:54
Speaker 1: of the literature review. Since the nineteen sixties, it has
1:07:58
Speaker 1: become the conventional view not to cant consitter banks as
1:08:01
Speaker 1: unique and able to create money, but instead as mere
1:08:03
Speaker 1: financial intermediaries like other financial firms in line with the
1:08:07
Speaker 1: financial intermediation theory of banking. Banks have thus been dropped
1:08:11
Speaker 1: from economics models, and finance models have not suggested that
1:08:15
Speaker 1: bank action has significant macroeconomic effects. The questions of where
1:08:20
Speaker 1: money comes from and how the money supply is created
1:08:23
Speaker 1: and allocated have remained unaddressed. The literature review has identified
1:08:28
Speaker 1: a gradual progression of views from the credit creation theory
1:08:31
Speaker 1: to the fractional reserve theory to the present day ubiquitous
1:08:34
Speaker 1: financial intermediation theory. The development has not been entirely smooth.
1:08:39
Speaker 1: Several influential writers have either changed their views on occasion
1:08:43
Speaker 1: several times or have shifted between the theories. Kines, as
1:08:47
Speaker 1: an influential economist, did little to enhance clarity in this debate,
1:08:51
Speaker 1: as it is possible to cite him in support of
1:08:53
Speaker 1: each of the three hypotheses through which he seems to
1:08:56
Speaker 1: have moved sequentially. Some institutions, such as the Bank of England,
1:09:01
Speaker 1: manage to issue statements in support of all three theories.
1:09:05
Speaker 1: We conclude from the literature survey that all three theories
1:09:08
Speaker 1: of banking have been well represented in the course of
1:09:11
Speaker 1: the twentieth century by leading figures of the day. However,
1:09:15
Speaker 1: the conclusion by Sir Josiah Stamp nineteen twenty seven, a
1:09:19
Speaker 1: director at the Bank of England, still seems to hold
1:09:21
Speaker 1: to day, namely that there is a fair state of
1:09:24
Speaker 1: muddlement on the apparently simple question can the banks create credit?
1:09:28
Speaker 1: And if so, how and how much? Despite a century
1:09:32
Speaker 1: or so of theorizing on the matter, there has been
1:09:35
Speaker 1: little progress in establishing facts unambiguously. Thus today the conclusion
1:09:40
Speaker 1: of nineteen sixty eight applies, namely that the issue cannot
1:09:43
Speaker 1: be considered as settled. It is possible that the pendulum
1:09:47
Speaker 1: is about to swing away from the financial intermediation theory
1:09:50
Speaker 1: to one of the other two. But how can we
1:09:53
Speaker 1: avoid that history will merely repeat itself and the profession
1:09:56
Speaker 1: will spend another century locked into a debate without firm conclusion.
1:10:00
Speaker 1: How can the issue be settled and the muddlement cleared up.
1:10:04
Speaker 1: One reason for this state of muddlement is likely to
1:10:07
Speaker 1: be the methodology dominant in twentieth century economics, namely the
1:10:11
Speaker 1: hypothetico deductive method. Unproven axioms are posed and unrealistic assumptions
1:10:17
Speaker 1: added to build a theoretical model. This can be done
1:10:21
Speaker 1: for all three theories, and we would be none the
1:10:24
Speaker 1: wiser about which of them actually applied. How can the
1:10:27
Speaker 1: issue be settled? The only way the facts can be
1:10:31
Speaker 1: established is to leave the world of deductive theoretical models
1:10:34
Speaker 1: and consider empirical reality as the arbiter of truth in
1:10:37
Speaker 1: line with the inductive methodology. In other words, it is
1:10:41
Speaker 1: to empirical evidence we must turn to settle the issue
1:10:45
Speaker 1: free the empirical test. The simplest possible test design is
1:10:50
Speaker 1: to examine a bank's internal accounting during the process of
1:10:53
Speaker 1: granting a bank loan. When all the necessary bank credit
1:10:57
Speaker 1: procedures have been undertaken, starting from know your Customer and
1:11:01
Speaker 1: anti money laundering regulations to credit analysis risk raating to
1:11:05
Speaker 1: the negotiation of the details of the loan contract and
1:11:08
Speaker 1: signatures are exchanged. On the bank loan, the borrower's current
1:11:11
Speaker 1: account will be credited with the amount of the loan.
1:11:14
Speaker 1: The key question is whether, as a prerequisite of this
1:11:17
Speaker 1: accounting operation of booking the borrower's loan principle into their
1:11:20
Speaker 1: bank account, the bank actually withdraws this amount from another account,
1:11:24
Speaker 1: resulting in a reduction of equal value in the balance
1:11:26
Speaker 1: of another entity, either drawing down reserves as the fractional
1:11:30
Speaker 1: reserve theory maintains, or other funds as the financial intermediation
1:11:34
Speaker 1: theory maintains. Should it be found that the bank is
1:11:38
Speaker 1: able to credit the borrower's account with the loan principle
1:11:40
Speaker 1: without having withdrawn money from any other internal or external account,
1:11:44
Speaker 1: or without transferring the money from any other source internally
1:11:47
Speaker 1: or externally, this would constitute prima facie evidence that the
1:11:51
Speaker 1: bank was able to create the loan principle out of nothing.
1:11:54
Speaker 1: In that case, the credit creation theory would be supported,
1:11:58
Speaker 1: and the theory that the individual bank ac acts as
1:12:00
Speaker 1: an intermediary that needs to obtain savings or funds first
1:12:03
Speaker 1: before being able to extend credit, whether in conformity with
1:12:07
Speaker 1: the fractional reserve theory or the financial intermediation theory, would
1:12:10
Speaker 1: be rejected. Three point one expected results with a bank
1:12:16
Speaker 1: loan of two hundred thousand euros drawn by the researcher
1:12:19
Speaker 1: from a bank, The following changes in the lending bank's
1:12:22
Speaker 1: accounting entries are expected a priori according to each theory,
1:12:26
Speaker 1: a bank credit accounting according to the credit creation theory.
1:12:31
Speaker 1: According to this theory, banks behave very differently from financial
1:12:34
Speaker 1: intermediaries such as stockbrokers, since they do not separate customer
1:12:39
Speaker 1: funds from owned funds. Money deposited with a bank becomes
1:12:43
Speaker 1: the legal property of the bank, and a depositor is
1:12:46
Speaker 1: actually a lender to the bank, ranking among the general creditors.
1:12:50
Speaker 1: When extending bank credit, banks create an imaginary deposit by
1:12:54
Speaker 1: recording the loan amount in the borrower's account, although no
1:12:57
Speaker 1: new deposit has taken place. Credit creation out of nothing
1:13:01
Speaker 1: the balance sheet lengthens cash. Central bank reserves or balances
1:13:06
Speaker 1: with other banks are not immediately needed, as reserve and
1:13:09
Speaker 1: capital requirements only need to be met at particular measurement intervals.
1:13:14
Speaker 1: The account changes are shown in Table I account changes.
1:13:17
Speaker 1: Due to bank loan credit creation theory, the table presents
1:13:22
Speaker 1: a simplified balance sheet with two main columns, assets and liabilities.
1:13:27
Speaker 1: Under assets, it lists loans and investments with a value
1:13:31
Speaker 1: of plus pound two hundred and a total of plus
1:13:34
Speaker 1: pound two hundred. Under liabilities, it lists deposits borrowers a
1:13:39
Speaker 1: C with a value of plus pound two hundred and
1:13:42
Speaker 1: a total of plus pound two hundred. This indicates that
1:13:46
Speaker 1: the total value of loans and investments matches the total
1:13:49
Speaker 1: value of deposits, balancing the sheet at two hundred pounds
1:13:54
Speaker 1: b Bank credit accounting according to the fractional reserve theory.
1:13:59
Speaker 1: The distinguishing feeature of this theory is that each individual
1:14:02
Speaker 1: bank cannot create credit out of nothing. The bank is
1:14:05
Speaker 1: a financial intermediary, indistinguishable from other financial intermediaries such as
1:14:10
Speaker 1: stockbrokers and securities firms. However, banks are said to be
1:14:15
Speaker 1: different in one respect, namely the regulatory treatment. Regulators have
1:14:19
Speaker 1: placed onerous rules concerning reserves that have to be held
1:14:22
Speaker 1: with the central bank only on banks, not other financial intermediaries.
1:14:26
Speaker 1: A bank can only lend money when it has previously
1:14:29
Speaker 1: received the same amount in excess reserves from another bank
1:14:32
Speaker 1: whose own reserve balances will have declined, or from the
1:14:35
Speaker 1: central bank Table two. A bank will not lend more
1:14:39
Speaker 1: than its excess reserves because by law, it must hold
1:14:43
Speaker 1: a certain amount of required reserves. Each depository institution can
1:14:47
Speaker 1: create loans and deposits only to the extent that it
1:14:51
Speaker 1: has excess reserves. Table two. Account change is due to
1:14:56
Speaker 1: bank loan fractional reserve theory. ZO two illustrates a bank's
1:15:01
Speaker 1: balance sheet in two steps related to a bank loan process.
1:15:05
Speaker 1: In step one, precondition for the bank loan, the assets
1:15:09
Speaker 1: column lists excess reserves at plus pound two hundred and
1:15:13
Speaker 1: total reserves at plus pound two hundred. The liabilities column
1:15:18
Speaker 1: lists deposits at plus pound two hundred total at plus
1:15:21
Speaker 1: pound two hundred, showing that the excess reserves are matched
1:15:25
Speaker 1: by deposits. In step two bank loan, the assets column
1:15:30
Speaker 1: shows excess reserves decreasing by minus two hundred pounds, while
1:15:34
Speaker 1: loans and investments increase by plus pound two hundred, resulting
1:15:38
Speaker 1: in a total of zero pounds. The liability's column has
1:15:43
Speaker 1: no changes, with total remaining at zero pounds. This reflects
1:15:48
Speaker 1: the process where the bank converts excess reserves into a loan,
1:15:51
Speaker 1: balancing the assets without altering liabilities. Following the exposition in
1:15:56
Speaker 1: Miller and van Houss nineteen ninety three, Ellan's sheet evolution
1:16:01
Speaker 1: in case of a two hundred thousand euro loan is
1:16:03
Speaker 1: as shown in Table two. In other words, for the
1:16:06
Speaker 1: bank to be able to make a loan, it first
1:16:09
Speaker 1: has to check its excess reserves. As this is, according
1:16:12
Speaker 1: to this theory, a strictly binding requirement and limitation, as
1:16:16
Speaker 1: well as its distinguishing feature. The bank cannot at any
1:16:20
Speaker 1: moment lend more money than its excess reserves, and it
1:16:22
Speaker 1: will have to draw down the reserve balance to lend. Thus,
1:16:26
Speaker 1: as noted, another distinguishing feature is that the balance sheet
1:16:30
Speaker 1: expansion is driven by the prior increase in a deposit
1:16:33
Speaker 1: that boosted excess reserves, not by the granting of a loan.
1:16:37
Speaker 1: It needs to be verified when the empirical test of
1:16:39
Speaker 1: bank lending is implemented, whether the bank first confirmed the
1:16:43
Speaker 1: precise amount of its available excess reserves before entering into
1:16:46
Speaker 1: the loan contract or paying out the loan funds to
1:16:48
Speaker 1: the customer so as not to exceed that figure. If
1:16:52
Speaker 1: the bank is found not to have checked or not
1:16:54
Speaker 1: to have drawn down its reserve balances, then this constitutes
1:16:57
Speaker 1: a rejection of the fractional reserve theory see bank credit
1:17:01
Speaker 1: accounting according to the financial intermediation theory. According to this theory,
1:17:07
Speaker 1: banks are, as far as payments and accounts are concerned,
1:17:10
Speaker 1: not different from non bank financial institutions. The reserve requirement
1:17:15
Speaker 1: is not an issue, a claim supported by the empirical
1:17:18
Speaker 1: observation that reserve requirements have been abolished in a number
1:17:21
Speaker 1: of major economies such as the UK and Sweden many
1:17:24
Speaker 1: years ago. However, UK financial intermediaries are required by FSA
1:17:29
Speaker 1: SLA FAA Administered Client Money rules to hold deposits in
1:17:33
Speaker 1: custody for customers, a form of warehousing. The deposits legally
1:17:37
Speaker 1: being bailments. Client funds of financial intermediaries such as securities firms, stockbrokers,
1:17:44
Speaker 1: and the like, are therefore still owned by the depositors
1:17:46
Speaker 1: and thus kept separately from the financial institution's own funds,
1:17:50
Speaker 1: so that customer deposits are not shown on the balance
1:17:53
Speaker 1: sheet as liabilities. If banks are merely financial intermediaries indistinguishable
1:17:58
Speaker 1: from other intermediaries, then all bank funds are central bank
1:18:02
Speaker 1: money that can be held in reserve at the central
1:18:04
Speaker 1: bank or deposited with other banks. The balance sheet implications
1:18:08
Speaker 1: are shown below in Table three account changes due to
1:18:12
Speaker 1: bank loan fin intermediation theory. Table three shows a bank's
1:18:18
Speaker 1: balance sheet with changes in assets. The assets column lists
1:18:22
Speaker 1: excess reserves decreasing by minus two hundred pounds, and loans
1:18:26
Speaker 1: and investments increasing by plus pound two hundred, resulting in
1:18:30
Speaker 1: a total of zero pounds. The liability's column has no changes,
1:18:35
Speaker 1: with total remaining at zero pounds. This indicates that the
1:18:40
Speaker 1: reduction in excess reserves is offset by an equal increase
1:18:43
Speaker 1: in loans and investments, maintaining a balanced sheet. According to
1:18:48
Speaker 1: this theory, the bank balance sheet does not lengthen as
1:18:51
Speaker 1: a result of the bank loan. The funds for the
1:18:53
Speaker 1: loan are drawn from the bank's reserve account at the
1:18:55
Speaker 1: Central Bank three point two A live empirical ten. The
1:19:01
Speaker 1: design of the empirical test takes the form of a
1:19:04
Speaker 1: researcher entering into a live loan contract with the bank
1:19:07
Speaker 1: and the bank extending alone while its relevant internal accounting
1:19:10
Speaker 1: is disclosed. Several banks in the UK and Germany were
1:19:14
Speaker 1: approached and asked to cooperate in an academic study of
1:19:17
Speaker 1: bank loan operations. The large banks declined to cooperate. The
1:19:23
Speaker 1: reason given was usually twofold, the required disclosure of internal
1:19:27
Speaker 1: accounting data and procedures would breach their confidentiality or IT
1:19:31
Speaker 1: security rules. Secondly, the transactions volumes of the banks were
1:19:35
Speaker 1: so large that the planned test would be very difficult
1:19:37
Speaker 1: to conduct when borrowing sensibly sized amounts of money that
1:19:40
Speaker 1: would not clash with the bank's internal risk management rules.
1:19:44
Speaker 1: In that case, any single transaction would not be easy
1:19:48
Speaker 1: to isolate within the bank's IT systems. Despite various discussions
1:19:52
Speaker 1: with a number of banks. In the end, the banks
1:19:55
Speaker 1: declined on the basis of the above reasons and additionally
1:19:57
Speaker 1: that the costs of operating their systems and can controlling
1:20:00
Speaker 1: for any potential other transactions would be prohibitive. It was
1:20:04
Speaker 1: therefore decided to approach smaller banks, of which there are
1:20:07
Speaker 1: many in Germany. There are approximately seventeen hundred local, mostly
1:20:11
Speaker 1: small banks in Germany. Each owns a full banking license
1:20:15
Speaker 1: and engages in universal banking, offering all major banking services,
1:20:20
Speaker 1: including stock trading and currencies to the general public. A
1:20:24
Speaker 1: local bank with a balance sheet of approximately three billion
1:20:27
Speaker 1: euros was approached, as well as a bank with a
1:20:30
Speaker 1: balance sheet of about seven hundred million euros. Both declined
1:20:34
Speaker 1: on the same grounds as the larger banks, but one
1:20:37
Speaker 1: suggested that a much smaller bank might be able to oblige,
1:20:40
Speaker 1: pointing out the advantage that there would be fewer transactions
1:20:43
Speaker 1: booked during the day, allowing a clearer identification of the
1:20:46
Speaker 1: empirical test transaction. At the same time, the empirical information
1:20:51
Speaker 1: value would not diminish with bank size, since all banks
1:20:54
Speaker 1: in the EU conformed to identical European bank regulations. Thus
1:20:59
Speaker 1: an introduction to Raphizenbank Wildenburg EG, located in a small
1:21:03
Speaker 1: town in the district of Lower Bavaria, was made. The
1:21:07
Speaker 1: bank is a cooperative bank within the Raephisen and Cooperative
1:21:10
Speaker 1: Banking Association of banks, with eight full time staff. The
1:21:15
Speaker 1: two joint directors, mister Michael Betsen Bickler and mister Marco Rebel,
1:21:19
Speaker 1: both agreed to the empirical examination and also to share
1:21:22
Speaker 1: all available internal accounting records and documentation on their procedures.
1:21:27
Speaker 1: A written agreement was signed that confirmed that the plan
1:21:29
Speaker 1: transactions would be part of a scientific empirical test and
1:21:33
Speaker 1: the researcher would not abscond with the funds when they
1:21:35
Speaker 1: would be transferred to his personal account and undertakes to
1:21:38
Speaker 1: immediately repay the loan upon completion of the test. Supplementary
1:21:42
Speaker 1: material one in online Appendix three. One limitation on the
1:21:46
Speaker 1: accounting records, which is common to most banks is that
1:21:49
Speaker 1: they are outsourcing the IT to a specialized bank IT
1:21:52
Speaker 1: company which maintains its own rules concerning data protection and confidentiality.
1:21:58
Speaker 1: The IT firm serves the majority of the one thousand,
1:22:01
Speaker 1: one hundred cooperative banks in Germany using the same software
1:22:04
Speaker 1: and internal systems in accounting rules, ensuring that the test
1:22:08
Speaker 1: is representative of more than fifteen per cent of bank
1:22:10
Speaker 1: deposits in Germany. It was agreed that the researcher would
1:22:14
Speaker 1: personally borrow two hundred thousand euros from the bank. The
1:22:18
Speaker 1: transaction was undertaken on August seventh, twenty thirteen, in the
1:22:22
Speaker 1: offices of the bank in Wildenburg in Bavaria. Apart from
1:22:26
Speaker 1: the two sole directors, also the head and sole staff
1:22:30
Speaker 1: of the credit department, mister Ludwig Keel, was present. The
1:22:34
Speaker 1: directors were bystanders, not engaging in any action. Mister Keel
1:22:39
Speaker 1: was the only bank representative involved in processing the loan,
1:22:42
Speaker 1: from the start of the customer documentation to the signing
1:22:45
Speaker 1: of the loan contract and finally paying out the loan
1:22:48
Speaker 1: into the borrower's account. The entire transaction, including the manual
1:22:53
Speaker 1: entries made by mister Keel, was filmed. The screens of
1:22:57
Speaker 1: the bank's internal IT terminal were also photographed. Moreover, a
1:23:02
Speaker 1: team from the BBC was present and filmed the central
1:23:04
Speaker 1: part of the empirical bank credit experiment reporter Alistair Fi
1:23:08
Speaker 1: and a cameraman. The bank disclosed their standard internal credit
1:23:13
Speaker 1: procedure The sequence of the key steps is shown in
1:23:16
Speaker 1: Appendix one. As can be seen, the last two steps
1:23:20
Speaker 1: are the signing of the credit documents by the borrower
1:23:23
Speaker 1: the researcher and finally the payment of the loan at
1:23:27
Speaker 1: the value date the loan conditions were agreed, the researcher
1:23:31
Speaker 1: would borrow two hundred thousand euros from the bank at
1:23:33
Speaker 1: the prime rate, the interest rate for the best customer
1:23:37
Speaker 1: in the event the bank waighed the actual interest proceeds
1:23:40
Speaker 1: in support of the scientific research project. When the bank
1:23:44
Speaker 1: loan contract was signed by both the bank and the
1:23:47
Speaker 1: borrower on August seventh, twenty thirteen, the loan amount was
1:23:51
Speaker 1: immediately credited to the borrower's account with the bank, as
1:23:54
Speaker 1: agreed in the loan contract. Supplementary Material two in online
1:23:58
Speaker 1: Appendix two shows the original borrowers accounts and balances with
1:24:02
Speaker 1: Raephaisenbank Wildenberg. The key information from the account's summary table
1:24:07
Speaker 1: is repeated here in English in Table four. The empirical
1:24:11
Speaker 1: Researcher's new bank account. Table four details the bank account
1:24:15
Speaker 1: of Richard Werner at Raephaisenbank Wildenburg EG, dated August seventh,
1:24:20
Speaker 1: two thousand thirteen. It includes two sections A current account
1:24:25
Speaker 1: and a loan account. The current account with account number
1:24:28
Speaker 1: four four six three six is a fee free account
1:24:31
Speaker 1: in Euro, holding a balance of two hundred thousand euros
1:24:35
Speaker 1: with a total of two hundred thousand euros. The loan
1:24:38
Speaker 1: account with account number two zero zero four four six
1:24:42
Speaker 1: three six is categorized as other private financing in Euro,
1:24:46
Speaker 1: showing a balance of minus two hundred thousand point zero
1:24:49
Speaker 1: zero euros with a total of minus two hundred thousand
1:24:52
Speaker 1: point zero zero euros. This reflects a net balance of
1:24:56
Speaker 1: zero between the account and loan. The bank all al
1:25:00
Speaker 1: So issued the following account's overview, which is a standard
1:25:03
Speaker 1: T account of the transaction from the borrower's perspective. Table five.
1:25:07
Speaker 1: Table five The empirical researcher's new bank account Balances. Table
1:25:14
Speaker 1: five provides an overview of the bank account balances for
1:25:17
Speaker 1: Richard Werner at Rapheisenbank Wildeenburg EG. It includes two accounts,
1:25:22
Speaker 1: a current account and a loan account, both in Euro.
1:25:26
Speaker 1: The current account has a credit of two hundred thousand euros,
1:25:29
Speaker 1: no liabilities, a balance of two hundred thousand euros and
1:25:33
Speaker 1: one contract. The loan account has a credit of zero
1:25:37
Speaker 1: euros liabilities of two hundred thousand euros, a balance of
1:25:41
Speaker 1: minus two hundred thousand point zero zero euros, and one contract.
1:25:46
Speaker 1: The bank some total shows a credit of two hundred
1:25:48
Speaker 1: thousand euros, liabilities of two hundred thousand euros, a net
1:25:52
Speaker 1: balance of zero euros, and a total of two contracts.
1:25:57
Speaker 1: The borrower confirmed that his new current account with the
1:25:59
Speaker 1: bank now showed a balance of two hundred thousand euros
1:26:02
Speaker 1: that was available for spending. An extension of the experiment
1:26:05
Speaker 1: to be reported on separately used the balance the following
1:26:08
Speaker 1: day for a particular transaction outside the banking institution, transferring
1:26:12
Speaker 1: the funds to another account of the researcher held with
1:26:15
Speaker 1: another bank. This transfer was duly completed, demonstrating that the
1:26:19
Speaker 1: funds could be used for actual transactions. We are now
1:26:23
Speaker 1: moving to the empirical test of the three banking theories.
1:26:27
Speaker 1: The critical question is where did Rapheizenbank wildeenburg Eg obtain
1:26:31
Speaker 1: the funds from that the borrower researcher was credited with
1:26:35
Speaker 1: and duly used and transferred out of the bank The
1:26:37
Speaker 1: following day, when the researcher inquired about the bank's reserve
1:26:41
Speaker 1: holdings in line with the fractional reserve theory of banking.
1:26:45
Speaker 1: Director Marco Rebel explained that the bank maintained its reserves
1:26:48
Speaker 1: with the Central Organization of Cooperative Banks, which in turn
1:26:51
Speaker 1: maintained an account with the Central Bank. These reserves amounted
1:26:55
Speaker 1: to a fixed amount of three hundred and fifty thousand
1:26:58
Speaker 1: euros that did not change during the OBSOT period. Concerning
1:27:02
Speaker 1: the bank credit procedure, the researcher attempted to verify the
1:27:05
Speaker 1: source of the funds that were about to be lent. Firstly,
1:27:09
Speaker 1: the researcher confirmed that the only three bank officers involved
1:27:13
Speaker 1: in this test and bank transaction were present throughout whereby
1:27:16
Speaker 1: two the directors only watched and neither accessed any computer
1:27:20
Speaker 1: terminal nor transmitted any instructions whatsoever. The account's manager, head
1:27:25
Speaker 1: of the credit department, mister Keel, was the only operator
1:27:29
Speaker 1: involved in implementing, booking and paying out the loan. His
1:27:33
Speaker 1: actions were filmed. It was noted and confirmed that none
1:27:37
Speaker 1: of the bank's staff present engaged in any additional activity
1:27:40
Speaker 1: such as ascertaining the available deposits or funds within the
1:27:43
Speaker 1: bank or giving instructions to transfer funds from various sources
1:27:46
Speaker 1: to the borrower's account, for instance, by contacting the bank
1:27:50
Speaker 1: internal treasury desk and contacting bank external interbank funding sources.
1:27:55
Speaker 1: Neither were instructions given to increase, draw down or borrow
1:27:58
Speaker 1: reserves from the Central Bank, the Central Cooperative Bank, or
1:28:02
Speaker 1: indeed any other bank or entity. In other words, it
1:28:06
Speaker 1: was apparent that upon the signing of the loan contract
1:28:08
Speaker 1: by both parties, the funds were credited to the borrower's
1:28:11
Speaker 1: account immediately, without any other activity of checking or giving
1:28:15
Speaker 1: instructions to transfer funds. There were no delays or deliberations
1:28:19
Speaker 1: or other bookings. The moment the loan was implemented, the
1:28:23
Speaker 1: borrower saw his current account balance increase by the loan amount.
1:28:28
Speaker 1: The overall credit transaction from start to finish until funds
1:28:31
Speaker 1: were available in the borrower's account took about thirty five
1:28:34
Speaker 1: minutes and was clearly slowed down by the filming and
1:28:37
Speaker 1: frequent questions by the researcher. Secondly, the researcher asked the
1:28:42
Speaker 1: three bank staff present whether they had, either before or
1:28:45
Speaker 1: after signing the loan contract and before crediting the borrower's
1:28:48
Speaker 1: account with the full loan amount, inquired of any other
1:28:51
Speaker 1: parties internally or externally checked the bank's available deposit balances,
1:28:56
Speaker 1: or made any bookings or transfers of any kind in
1:28:58
Speaker 1: connection to this loan contract. They all confirmed that they
1:29:02
Speaker 1: did not engage in any such activity. They confirmed that
1:29:06
Speaker 1: upon signing the loan contract, the borrower's account was credited
1:29:10
Speaker 1: immediately without any such steps. Thirdly, the researcher obtained the
1:29:15
Speaker 1: internal daily account statements from the bank. These are produced
1:29:19
Speaker 1: only once a day after close of business. Since the
1:29:23
Speaker 1: bank is small, it was hoped that it would be
1:29:25
Speaker 1: possible to identify the impact of the two hundred thousand
1:29:28
Speaker 1: euro loan transaction and distinguish the accounting pattern corresponding to
1:29:32
Speaker 1: one of the three banking hypotheses. Four results. Supplementary material
1:29:38
Speaker 1: three in online Appendix three shows the scan of the
1:29:41
Speaker 1: bank's balance sheet at the end of August sixth, twenty thirteen,
1:29:45
Speaker 1: the day before the transaction of the empirical test was undertaken.
1:29:49
Speaker 1: Supplementary Material four in online Appendix three shows the daily
1:29:53
Speaker 1: balance of the following day. In Table six, the key
1:29:57
Speaker 1: asset positions are summarized in account names true translated for
1:30:01
Speaker 1: the end of the day prior to the lone experiment
1:30:03
Speaker 1: and for the end of the day on which the
1:30:05
Speaker 1: researcher had borrowed the money. Table six presents the daily
1:30:08
Speaker 1: accounts assets of Rapheisenbank Wildenburg EG, comparing balances at twenty
1:30:13
Speaker 1: two forty six h on August sixth two thousand thirteen
1:30:17
Speaker 1: and twenty two fifty six h on August seventh, two
1:30:20
Speaker 1: thousand thirteen in euro The table lists various asset categories
1:30:25
Speaker 1: with their balances and differences. One cash increased from one
1:30:30
Speaker 1: hundred eighty one thousand, seven hundred and three euros and
1:30:33
Speaker 1: three cents to three hundred forty thousand, thirty two euros
1:30:36
Speaker 1: and eighty nine cents, a difference of one hundred and
1:30:38
Speaker 1: fifty eight thousand, three hundred and twenty nine euros and
1:30:41
Speaker 1: eighty six cents. Two Bills of exchange had no balance
1:30:46
Speaker 1: or change not applicable. Three Claims on financial institutions decreased
1:30:51
Speaker 1: from five million, two hundred ninety eight thousand, seven hundred
1:30:55
Speaker 1: thirteen euros and seventy six cents to five million, seventy
1:30:58
Speaker 1: nine thousand, seven hundred and nine euros and twenty one cents,
1:31:01
Speaker 1: a difference of minus two hundred nineteen thousand and four
1:31:04
Speaker 1: euros and fifty five cents. Four claims on customers rose
1:31:09
Speaker 1: from twenty three million, seven hundred and twelve thousand, five
1:31:12
Speaker 1: hundred and fifty eight euros and thirteen cents to twenty
1:31:15
Speaker 1: three million, nine hundred and forty seven thousand, seven hundred
1:31:18
Speaker 1: and twenty nine euros and ninety two cents, a difference
1:31:21
Speaker 1: of two hundred and thirty five thousand, one hundred and
1:31:23
Speaker 1: seventy one euros and seventy nine cents with subcategories. Maturing
1:31:28
Speaker 1: daily increased from nine hundred and thirty two thousand, six
1:31:31
Speaker 1: hundred and ninety five euros and forty four cents to
1:31:34
Speaker 1: nine hundred and sixty seven thousand, seven hundred and sixty
1:31:37
Speaker 1: seven euros and thirty two cents, a difference of thirty
1:31:40
Speaker 1: five thousand and seventy one euros and eighty eight cents.
1:31:44
Speaker 1: Maturity under four years increased from one million, six hundred
1:31:47
Speaker 1: and eighty nine thousand, six hundred nineteen euros and ninety
1:31:50
Speaker 1: seven cents to one million, eight hundred and eighty nine thousand,
1:31:53
Speaker 1: six hundred and nineteen euros and ninety seven cents. A
1:31:56
Speaker 1: difference of two hundred thousand euros four years or longer
1:32:01
Speaker 1: increased from twenty one million ninety thousand, two hundred and
1:32:04
Speaker 1: forty two euros and seventy two cents to twenty one million,
1:32:07
Speaker 1: ninety thousand, three hundred and forty two euros and seventy
1:32:10
Speaker 1: two cents, a difference of one hundred euros. Five bonds,
1:32:15
Speaker 1: bills and debt instruments remained steady at nineteen million, one
1:32:19
Speaker 1: hundred and seventy eight thousand, sixty five euros. Six stocks
1:32:24
Speaker 1: and shares had no balance or change not applicable. Seven
1:32:29
Speaker 1: stakeholdings stayed at three hundred ninety seven thousand, seven hundred
1:32:32
Speaker 1: and sixty eight euros and sixty eight cents. Eight stakes
1:32:37
Speaker 1: and related firms had no balance or change not applicable.
1:32:41
Speaker 1: Nine trust assets remained at five thousand, two hundred and
1:32:45
Speaker 1: sixty two euros and sixty nine cents. Ten compensation claims
1:32:50
Speaker 1: on the public sector had no balance or change not applicable.
1:32:55
Speaker 1: Eleven immaterial assets stayed at one hundred and two euros.
1:33:00
Speaker 1: Twelve fixed assets remained at two hundred and twenty one thousand,
1:33:03
Speaker 1: five hundred and forty nine euros and forty six cents.
1:33:07
Speaker 1: Thirteen called but not deployed capital had no balance or
1:33:11
Speaker 1: change not applicable. Fourteen Other assets increased from seven hundred
1:33:16
Speaker 1: and seven thousand, five hundred and sixty nine euros and
1:33:19
Speaker 1: twenty six cents to seven hundred eleven thousand, two hundred
1:33:22
Speaker 1: eighty eight euros and sixty four cents, a difference of
1:33:25
Speaker 1: three thousand, seven hundred nineteen euros and thirty eight cents. Fifteen.
1:33:30
Speaker 1: Balancing items stayed at two thousand, eight hundred and forty
1:33:33
Speaker 1: four euros and thirty two cents. Sixteen. The sum of
1:33:37
Speaker 1: assets rose from forty nine million, seven hundred and six thousand,
1:33:41
Speaker 1: one hundred thirty six euros and thirty three cents to
1:33:44
Speaker 1: forty nine million, eight hundred eighty four thousand, three hundred
1:33:47
Speaker 1: fifty two euros and eighty one cents, a total difference
1:33:50
Speaker 1: of one hundred seventy eight thousand, two hundred and sixteen
1:33:53
Speaker 1: euros and forty eight cents. Table seven shows the key
1:33:57
Speaker 1: liability positions for the same periods. Table seven presents the
1:34:01
Speaker 1: daily accounts liabilities of Rapheizenbank Wildenburg e G, comparing balances
1:34:06
Speaker 1: at twenty two forty six h on August sixth two
1:34:09
Speaker 1: thousand thirteen and twenty two fifty six h on August seventh,
1:34:13
Speaker 1: two thousand thirteen in euro The table lists various liability
1:34:18
Speaker 1: categories with their balances and differences. One, Claims by financial
1:34:23
Speaker 1: institutions increased from five million, six hundred twenty one thousand,
1:34:27
Speaker 1: four hundred fifty six euros and sixty cents to five million,
1:34:31
Speaker 1: six hundred and twenty one thousand, eight hundred seventy nine
1:34:33
Speaker 1: euros and sixty six cents, a difference of four hundred
1:34:37
Speaker 1: and twenty three euros and six cents. Two Claims by
1:34:41
Speaker 1: customers rose from thirty nine million, five hundred eighty nine thousand,
1:34:45
Speaker 1: one hundred seventy seven euros and nine cents to thirty
1:34:48
Speaker 1: nine million, seven hundred fifty nine thousand, one hundred fifty
1:34:51
Speaker 1: six euros and forty two cents, a difference of one
1:34:54
Speaker 1: hundred sixty nine thousand, nine hundred seventy nine euros and
1:34:57
Speaker 1: thirty three cents. With subcategories two A, savings accounts increased
1:35:04
Speaker 1: from ten million, two hundred thirty four thousand, eight hundred
1:35:07
Speaker 1: and six euros and one cent to ten million, two
1:35:09
Speaker 1: hundred and thirty seven thousand, one hundred and eighteen euros
1:35:12
Speaker 1: and twenty four cents, a difference of two thousand, three
1:35:15
Speaker 1: hundred and twelve euros and twenty three cents. Two B
1:35:19
Speaker 1: Other liabilities increased from twenty nine million, three hundred and
1:35:23
Speaker 1: fifty four thousand, three hundred and seventy one euros and
1:35:25
Speaker 1: eight cents to twenty nine million, five hundred and twenty
1:35:28
Speaker 1: two thousand, thirty eight euros and eighteen cents, a difference
1:35:31
Speaker 1: of one hundred and sixty seven thousand, six hundred and
1:35:34
Speaker 1: sixty seven euros and ten cents, with further breakdowns. BA
1:35:39
Speaker 1: daily increased from thirteen million, seven hundred and seventy three thousand,
1:35:43
Speaker 1: nine hundred and twenty five euros and ninety three cents
1:35:45
Speaker 1: to thirteen million, nine hundred and sixty three thousand, eight
1:35:48
Speaker 1: hundred and ninety nine euros and eighty nine cents, a
1:35:51
Speaker 1: difference of one hundred and eighty nine thousand, nine hundred
1:35:54
Speaker 1: and seventy three euros and ninety six cents. B B
1:35:58
Speaker 1: maturity less four years decreased from thirteen million, two hundred
1:36:01
Speaker 1: ninety six thousand, forty two euros and ninety two cents
1:36:04
Speaker 1: to thirteen million, two hundred and seventy three thousand, seven
1:36:07
Speaker 1: hundred and thirty six euros and six cents, a difference
1:36:10
Speaker 1: of minus twenty two thousand, three hundred and six euros
1:36:13
Speaker 1: and eighty six cents. B C maturity four years or
1:36:17
Speaker 1: longer remained at two million, two hundred eighty four thousand,
1:36:20
Speaker 1: four hundred and two euros and twenty three cents. Four
1:36:24
Speaker 1: Trust liabilities stayed at five thousand, two hundred and sixty
1:36:27
Speaker 1: two euros and seventy cents. Five. Other liabilities increased from
1:36:32
Speaker 1: twelve thousand, three hundred and seventy eight euros and eighty
1:36:35
Speaker 1: one cents to twelve thousand, five hundred and ninety nine
1:36:38
Speaker 1: euros and forty four cents, a difference of two hundred
1:36:41
Speaker 1: and twenty euros and sixty three cents. Six. Balancing item
1:36:46
Speaker 1: remained at sixteen thousand, nine hundred and ninety six euros
1:36:49
Speaker 1: and four cents. Seven Reserves stayed at one million, one
1:36:54
Speaker 1: hundred and thirty eight thousand, four hundred and ninety seven
1:36:56
Speaker 1: euros and sixty four cents. Eleven. Fund for bank risk
1:37:01
Speaker 1: remained at two hundred and fifty thousand euros. Twelve. Owned
1:37:05
Speaker 1: capital stayed at three million, fifty seven thousand, two hundred
1:37:09
Speaker 1: forty eight euros and fifty seven cents. Thirteen. The sum
1:37:13
Speaker 1: of liabilities increased from forty nine million, seven hundred and
1:37:17
Speaker 1: six thousand, one hundred thirty six euros and thirty three
1:37:20
Speaker 1: cents to forty nine million, eight hundred eighty four thousand,
1:37:22
Speaker 1: three hundred fifty two euros and eighty one cents, a
1:37:26
Speaker 1: total difference of one hundred seventy eight thousand, two hundred
1:37:29
Speaker 1: sixteen euros and forty eight cents. Starting by analyzing the
1:37:33
Speaker 1: liability side information Table seven, we find that customer deposits
1:37:37
Speaker 1: are considered part of the financial institution's balance sheet. This
1:37:42
Speaker 1: contradicts the financial intermediation theory, which assumes that banks are
1:37:46
Speaker 1: not special and are virtually indistinguishable from non bank financial
1:37:49
Speaker 1: institutions that have to keep customer deposits off balance sheet.
1:37:53
Speaker 1: In actual fact, a bank considers a customer's deposit starkly
1:37:57
Speaker 1: differently from non bank financial institutions who record customer deposits
1:38:01
Speaker 1: off their balance sheet. Instead, we find that the bank
1:38:05
Speaker 1: treats customer deposits as a loan to the bank recorded
1:38:08
Speaker 1: under rubric claims by customers, who in turn receive as
1:38:12
Speaker 1: record of their loans to the bank called deposits, what
1:38:15
Speaker 1: is known as their account statement. This can only be
1:38:19
Speaker 1: reconciled with the credit creation or fractional reserve theories of banking.
1:38:24
Speaker 1: We observe that an amount not far below the loan balance,
1:38:27
Speaker 1: about one hundred ninety thousand euros, has been deposited with
1:38:30
Speaker 1: the bank. This is itself not far from the increase
1:38:34
Speaker 1: in total liabilities and assets. Since the fractional reserve hypothesis
1:38:40
Speaker 1: requires such an increase in deposits as a precondition for
1:38:43
Speaker 1: being able to grant the bank loan, i e. It
1:38:45
Speaker 1: must precede the bank loan, it is difficult to reconcile
1:38:48
Speaker 1: this observation with the fractional reserve theory. Moreover, the researcher
1:38:53
Speaker 1: confirmed that in his own bank account, the loan balance
1:38:55
Speaker 1: of two hundred thousand euros was shown on the same day.
1:38:59
Speaker 1: This means means that the increase in liabilities was driven
1:39:02
Speaker 1: by the increase by two hundred thousand euros in daily
1:39:05
Speaker 1: liabilities item two b BA in Table seven. Thus, the
1:39:09
Speaker 1: total increase in liabilities could not have been due to
1:39:12
Speaker 1: a coincidental increase in customer deposits on the day of
1:39:15
Speaker 1: the loan. The liability side account information seems only fully
1:39:19
Speaker 1: in line with the credit creation theory. Turning to an
1:39:23
Speaker 1: analysis of the asset side, we note that the category
1:39:26
Speaker 1: where we find our loan is item four claims on customers,
1:39:30
Speaker 1: fortunately the only one that day with a maturity below
1:39:32
Speaker 1: four years and hence clearly identifiable on the bank balance sheet. Apparently,
1:39:38
Speaker 1: customers also took out short term loans, most likely overdrafts,
1:39:42
Speaker 1: amounting to thirty five thousand and seventy one euros and
1:39:45
Speaker 1: eighty eight cents, producing a total new loan balance of
1:39:48
Speaker 1: two hundred and thirty five thousand, seventy one euros and
1:39:51
Speaker 1: eighty eight cents. In order to keep the analysis as
1:39:54
Speaker 1: simple as possible, let us proceed from here assuming that
1:39:57
Speaker 1: our test loan amounted to this total loan figure two
1:40:00
Speaker 1: hundred thirty five thousand, seventy one euros and eighty eight cents.
1:40:05
Speaker 1: So the balance sheet item of interest on the asset
1:40:07
Speaker 1: side is delta A four, the increase in loans claims
1:40:11
Speaker 1: on customers amounting to two hundred thirty five thousand, seventy
1:40:14
Speaker 1: one euros and eighty eight cents. We now would like
1:40:18
Speaker 1: to analyze the balance sheet in order to see whether
1:40:20
Speaker 1: this new loan of two hundred thirty five thousand, seventy
1:40:23
Speaker 1: one euros and eighty eight cents was withdrawn from other
1:40:25
Speaker 1: accounts at the bank, or how else it was funded.
1:40:29
Speaker 1: We first proceed with considering activity on the asset side,
1:40:33
Speaker 1: denoting balances in thousands below. We can summarize the balance
1:40:37
Speaker 1: sheet changes during the observation period within the balance sheet
1:40:40
Speaker 1: constraints as follows. The fractional reserve theory says that the
1:40:45
Speaker 1: loan balance must be paid from reserves. These can be
1:40:48
Speaker 1: either cash balances or reserves with other banks, including the
1:40:52
Speaker 1: central bank. The deposits claims with other financial institutions, which
1:40:58
Speaker 1: effectively includes the bank's central Bank reserve balances decline significantly
1:41:03
Speaker 1: by two hundred and nineteen thousand euros at the same
1:41:06
Speaker 1: time cash reserves increased significantly. What may have happened is
1:41:11
Speaker 1: that the bank withdrew legal tender from its account with
1:41:13
Speaker 1: the Cooperative Central Bank, explaining both the rise in cash
1:41:17
Speaker 1: and decline in balances with other financial institutions. Since the
1:41:21
Speaker 1: theories do not distinguish between these categories, we can aggregate
1:41:25
Speaker 1: A one and A three the cash balances and reserves. Also,
1:41:30
Speaker 1: to simplify, we aggregate A fourteen other assets with A
1:41:34
Speaker 1: four claims on customers to obtain. We observe that reserves
1:41:39
Speaker 1: fell while claims on customers rose significantly. Moreover, total assets
1:41:45
Speaker 1: also rose by an amount not dissimilar to our loan balance.
1:41:49
Speaker 1: Can this information be reconciled with the three theories of banking?
1:41:53
Speaker 1: Considering the financial intermediation hypothesis, we would expect a decline
1:41:58
Speaker 1: in reserves, accounts with other financial institutions and cash of
1:42:02
Speaker 1: the same amount as customer loans increased. Reserves, however, declined
1:42:06
Speaker 1: by far less. At the same time, the balance sheet expanded,
1:42:11
Speaker 1: driven by a significant increase in claims on customers. If
1:42:15
Speaker 1: the bank borrowed money from other banks in order to
1:42:18
Speaker 1: fund the loan, thus reducing its balance of net claims
1:42:21
Speaker 1: on other banks. In line with the financial intermediation theory
1:42:24
Speaker 1: of banking, balt cash should not increase, and neither should
1:42:27
Speaker 1: the balance sheet. We observe both a significant rise in
1:42:31
Speaker 1: cash holdings and an expansion in the total balance sheet
1:42:34
Speaker 1: total assets and total liabilities, which rose by one hundred
1:42:38
Speaker 1: and seventy eight thousand euros. This cannot be reconciled with
1:42:42
Speaker 1: the financial intermediation theory, which we therefore must consider as rejected.
1:42:47
Speaker 1: Considering the fractional reserve theory. We confirmed by asking the
1:42:51
Speaker 1: credit departments mister Keel as well as the directors that
1:42:54
Speaker 1: none of them checked their reserve balance or balance of
1:42:57
Speaker 1: deposits with other banks before signing the loan come contract
1:43:00
Speaker 1: in making the funds available to the borrower. See the
1:43:03
Speaker 1: translated letter in Appendix two and the original letter in
1:43:06
Speaker 1: the online Appendix three. Furthermore, there seems no evidence that reserves,
1:43:11
Speaker 1: cash and claims on other financial institutions declined in an
1:43:15
Speaker 1: amount commensurate with the loan taken out. Finally, the observed
1:43:19
Speaker 1: increase in the balance sheet can also not be reconciled
1:43:22
Speaker 1: with the standard description of the fractional reserve theory. We
1:43:26
Speaker 1: must therefore consider it as rejected. Two. This leaves us
1:43:30
Speaker 1: with the credit creation theory. Can we reconcile the observed
1:43:34
Speaker 1: accounting asset side information with it? And what do we
1:43:38
Speaker 1: learn from the liability side information? The transactions are linked
1:43:42
Speaker 1: to each other via the accounting identities of the balance
1:43:45
Speaker 1: sheet X one two three. We can therefore ask the
1:43:51
Speaker 1: question what would have happened to total assets if we
1:43:53
Speaker 1: assumed for the moment that no other transaction had taken
1:43:56
Speaker 1: place apart from the loan two hundred thirty five. We
1:44:00
Speaker 1: can set the change in each asset item except for
1:44:03
Speaker 1: delta A four our loan to zero if we subtract
1:44:06
Speaker 1: the same amount from the change in total assets. In
1:44:10
Speaker 1: other words, if the other transactions had not happened, the
1:44:13
Speaker 1: bank's balance sheet would have expanded by the same amount
1:44:16
Speaker 1: as the loans taken out. This finding is consistent only
1:44:20
Speaker 1: with the credit creation theory of bank lending. The evidence
1:44:24
Speaker 1: is not as easily interpreted as may have been desired,
1:44:27
Speaker 1: since in practice it is not possible to stop all
1:44:29
Speaker 1: other bank transactions that may be initiated by bank customers
1:44:33
Speaker 1: who are nowadays able to implement transactions via internet banking,
1:44:37
Speaker 1: even on holidays. But the available accounting data cannot be
1:44:41
Speaker 1: reconciled with the fractional reserve and the financial intermediation hypotheses
1:44:45
Speaker 1: of banking. Five conclusion, This paper was intended to serve
1:44:51
Speaker 1: two functions. First, the history of economic thought was examined
1:44:56
Speaker 1: concerning the question of how banks function. It was found
1:44:59
Speaker 1: that a long standing controversy exists that has not been
1:45:02
Speaker 1: settled empirically. Secondly, empirical tests were conducted to settle the
1:45:07
Speaker 1: existing in continuing controversies and find out which of the
1:45:10
Speaker 1: three theories of banking is consistent with the empirical observations
1:45:15
Speaker 1: sec five point one three theories, but no empirical tests
1:45:20
Speaker 1: concerning the first issue. In this paper, we identified three
1:45:23
Speaker 1: distinct hypotheses concerning the role of banks, namely the credit
1:45:27
Speaker 1: creation theory, the fractional reserve theory, and the financial intermediation theory.
1:45:32
Speaker 1: It was found that the first theory was dominant until
1:45:34
Speaker 1: about the mid to late nineteen twenties, featuring leading proponents
1:45:38
Speaker 1: such as McLeod and Schumpeter. Then the second theory became
1:45:42
Speaker 1: dominant under the influence of such economists as Kines, Krick, Phillips,
1:45:47
Speaker 1: and Samuelson until about the early nineteen sixties. From the
1:45:52
Speaker 1: early nineteen sixties, first under the influence of Caines and
1:45:55
Speaker 1: Tobin and the Journal of Money, Credit and Banking, the
1:45:58
Speaker 1: financial intermediation theory became dominant. Yet despite these identifiable eras
1:46:04
Speaker 1: of predominance, doubts have remained concerning each theory. Most recently,
1:46:09
Speaker 1: the credit creation theory has experienced a revival, having been
1:46:13
Speaker 1: championed again in the aftermath of the Japanese banking crisis
1:46:16
Speaker 1: in the early nineteen nineties. And in the run up
1:46:18
Speaker 1: to and aftermath of the European and US financial crises
1:46:22
Speaker 1: Since two thousand seven. However, such works have not yet
1:46:26
Speaker 1: become influential in the majority of models and theories of
1:46:29
Speaker 1: the macroeconomy or banking. Thus, it had to be concluded
1:46:33
Speaker 1: that the controversy continues without any scientific attempt having been
1:46:36
Speaker 1: made at settling it through empirical evidence. Five point two
1:46:41
Speaker 1: the empirical evidence credit creation theory supported. The second contribution
1:46:47
Speaker 1: of this paper has been to report on the first
1:46:49
Speaker 1: empirical study testing the three main hypotheses. They have been
1:46:53
Speaker 1: successfully tested in a real world setting of borrowing from
1:46:56
Speaker 1: a bank and examining the actual internal bank accounting in
1:46:59
Speaker 1: an unconnrolled real world environment. It was examined whether in
1:47:03
Speaker 1: the process of making money available to the borrower, the
1:47:06
Speaker 1: bank transfers these funds from other accounts within or outside
1:47:10
Speaker 1: the bank. In the process of making loan money available
1:47:13
Speaker 1: in the borrower's bank account, it was found that the
1:47:16
Speaker 1: bank did not transfer the money away from other internal
1:47:19
Speaker 1: or external accounts, resulting in a rejection of both the
1:47:22
Speaker 1: fractional reserve theory and the financial intermediation theory. Instead, it
1:47:27
Speaker 1: was found that the bank newly invented the funds by
1:47:30
Speaker 1: crediting the borrower's account with a deposit, although no such
1:47:33
Speaker 1: deposit had taken place. This is in line with the
1:47:36
Speaker 1: claims of the credit creation theory. Thus, it can now
1:47:40
Speaker 1: be said with confidence for the first time, possibly in
1:47:43
Speaker 1: the five thousand years history of banking, that it has
1:47:46
Speaker 1: been empirically demonstrated that each individual bank creates credit and
1:47:50
Speaker 1: money out of nothing. When it extends what is called
1:47:52
Speaker 1: a bank loan. The bank does not loan any existing money,
1:47:57
Speaker 1: but instead creates new money. The money, nay supply is
1:48:00
Speaker 1: created as ferry dust produced by the banks out of
1:48:03
Speaker 1: thin air. Point thirty two. The implications are far reaching
1:48:07
Speaker 1: five point three What is special about banks? Henceforth, economists
1:48:13
Speaker 1: need not rely on assertions concerning banks. We now know,
1:48:17
Speaker 1: based on empirical evidence, why banks are different, indeed unique,
1:48:22
Speaker 1: solving the long standing puzzle posed by Fauma nineteen eighty
1:48:25
Speaker 1: five and others, and different from both non bank financial
1:48:29
Speaker 1: institutions and corporations. It is because they can individually create
1:48:33
Speaker 1: money out of nothing. Five point four implications five point
1:48:39
Speaker 1: four point one implications for economic theory. The empirical evidence
1:48:44
Speaker 1: shows that of the three theories of banking, it is
1:48:46
Speaker 1: the one that today has the least influence and that
1:48:49
Speaker 1: is being belittled in the literature, that is supported by
1:48:51
Speaker 1: the empirical evidence. Furthermore, it is the theory which was
1:48:55
Speaker 1: widely held at the end of the nineteenth century and
1:48:58
Speaker 1: in the first three decades of the twenty aeth It
1:49:01
Speaker 1: is sobering to realize that since the nineteen thirties economists
1:49:04
Speaker 1: have moved further and further away from the truth instead
1:49:07
Speaker 1: of coming closer to it. This happened first via the
1:49:11
Speaker 1: half truth of the fractional reserve theory and then reached
1:49:14
Speaker 1: the completely false and misleading financial intermediation theory that today
1:49:18
Speaker 1: is so dominant. Thus, this paper has found evidence that
1:49:21
Speaker 1: there has been no progress in scientific knowledge in economics, finance,
1:49:25
Speaker 1: and banking in the twentieth century concerning one of the
1:49:28
Speaker 1: most important and fundamental facts for these disciplines. Instead, there
1:49:33
Speaker 1: has been a regressive development. The known facts were unlearned
1:49:37
Speaker 1: and have become unknown. This phenomenon deserves further research for now.
1:49:43
Speaker 1: It can be mentioned that this process of unlearning the
1:49:45
Speaker 1: facts of banking could not possibly have taken place without
1:49:48
Speaker 1: the leading economists of the day, having played a significant
1:49:51
Speaker 1: role in it. The most influential and famous of all
1:49:54
Speaker 1: twentieth century economists, as we saw, was a sequential adherent
1:49:58
Speaker 1: of all three theories, which is a surprising phenomenon. Moreover,
1:50:03
Speaker 1: Kines used his considerable clout to slow scientific analysis of
1:50:07
Speaker 1: the question whether banks could create money, as he instead
1:50:10
Speaker 1: engaged in ad hominem attacks on followers of the credit
1:50:12
Speaker 1: creation theory. Despite his enthusiastic early support for the credit
1:50:17
Speaker 1: creation theory Canes, nineteen twenty four, only six years later
1:50:22
Speaker 1: he was condescending, if not dismissive, of this theory, referring
1:50:26
Speaker 1: to credit creation only in inverted commas. He was perhaps
1:50:30
Speaker 1: even more dismissive of supporters of the credit creation theory,
1:50:33
Speaker 1: who he referred to as being part of the army
1:50:35
Speaker 1: of heretics and cranks, whose numbers and enthusiasm are extraordinary,
1:50:39
Speaker 1: and who seem to believe in magic and some kind
1:50:42
Speaker 1: of utopia. Needless to mention, such rhetoric is not conducive
1:50:47
Speaker 1: to scientific argument. But this technique was followed by other
1:50:51
Speaker 1: economists engaged in advancing the fractional reserve and later financial
1:50:55
Speaker 1: intermediation theories. US Federal Reserve Staffer. Alhadef nineteen fifty four
1:51:01
Speaker 1: argued similarly. During the era when economists worked on getting
1:51:04
Speaker 1: the fractional reserve theory established, one complication worth discussing concerns
1:51:10
Speaker 1: the alleged creation of money by bankers. It used to
1:51:14
Speaker 1: be claimed that bankers could create money by the simple
1:51:16
Speaker 1: device of opening deposit accounts for their business borrowers. It
1:51:21
Speaker 1: has since been amply demonstrated that under a fractional reserve system,
1:51:24
Speaker 1: only the totality of banks can expand deposits to the
1:51:27
Speaker 1: full reciprocal of the reserve ratio. The individual bank can
1:51:32
Speaker 1: normally expand to an amount about equal to its primary deposits.
1:51:36
Speaker 1: The creation of credit by banks had become, in the
1:51:39
Speaker 1: style of Canes nineteen thirty, an alleged creation, whereby rhetorically
1:51:44
Speaker 1: it was suggested that such thinking was simplistic and hence
1:51:47
Speaker 1: could not possibly be true. Tobin used the rhetorical device
1:51:51
Speaker 1: of abduccio at absurdum to denigrate the credit creation theory
1:51:55
Speaker 1: by incorrectly suggesting it postulated a widow's cruise, a miraculous
1:51:59
Speaker 1: vessel producer unlimited amounts of valuable physical goods, and thus
1:52:03
Speaker 1: its followers were believers in miracles or utopias. This same
1:52:07
Speaker 1: type of rhetorical denigration of and disengagement with the credit
1:52:10
Speaker 1: creation theory is also visible in the most recent era.
1:52:14
Speaker 1: For instance, the new Palgrave Money eat Well nineteen eighty
1:52:18
Speaker 1: nine is an influential three hundred and forty page reference
1:52:21
Speaker 1: work that claims to present a balanced perspective on each topic,
1:52:25
Speaker 1: Yet the financial intermediation theory is dominant, with a minor
1:52:29
Speaker 1: representation of the fractional reserve theory. The credit creation theory
1:52:34
Speaker 1: is not presented at all, even as a possibility, but
1:52:37
Speaker 1: the book does include a chapter entitled Monetary Cranks. In
1:52:42
Speaker 1: this brief chapter, Cain's nineteen thirty derogatory treatment of supporters
1:52:47
Speaker 1: of the credit creation theory is updated for use in
1:52:50
Speaker 1: the nineteen nineties with sharpened clause. Ridicule and insult is
1:52:54
Speaker 1: heaped on several fateful authors that have produced thoughtful analyzes
1:52:57
Speaker 1: of the economy, the monetary system, and the role of banks,
1:53:00
Speaker 1: such as Nobel Laureate Sir Frederic Soddi nineteen thirty four
1:53:04
Speaker 1: and C. H. Douglas nineteen twenty four. Even the seminal
1:53:09
Speaker 1: and influential work by George Friedrich Knapp nineteen o five,
1:53:13
Speaker 1: still favorably cited by Knes nineteen thirty six, is identified
1:53:17
Speaker 1: as being created by a crank. What these apparently wretched
1:53:21
Speaker 1: authors have in common, and what seems to be their
1:53:24
Speaker 1: main fault punishable by being listed in this inauspicious chapter,
1:53:28
Speaker 1: is that they are adherents of the credit creation theory,
1:53:31
Speaker 1: but revealingly, their contributions are belittled without it anywhere being
1:53:35
Speaker 1: stated what their key tenets are, and that their analyzes
1:53:38
Speaker 1: center on the credit creation theory, which itself remains unnamed
1:53:42
Speaker 1: and is never spelled out. This is not a small
1:53:45
Speaker 1: feat and leaves one pondering the possibility that the eat
1:53:48
Speaker 1: Well at All nineteen eighty nine tome was purposely designed
1:53:51
Speaker 1: to ignore and distract from the rich literature supporting the
1:53:54
Speaker 1: credit creation theory. Nothing lost, according to the authors, who
1:53:59
Speaker 1: applaud the development that due to the increased emphasis given
1:54:02
Speaker 1: to monetary theory by academic economists in recent decades, the
1:54:06
Speaker 1: monetary cranks have largely disappeared from public debate, and so
1:54:10
Speaker 1: has the credit creation theory, since the tenets of this
1:54:14
Speaker 1: theory are never stated and eat Well at All nineteen
1:54:17
Speaker 1: eighty nine, the chapter on cranks ends up being a
1:54:20
Speaker 1: litany of ad hominin denigration, defamation, and character assassination. Liberally
1:54:25
Speaker 1: distributing labels such as cranks, phrasemongers, agitators, populists, and even
1:54:31
Speaker 1: conspiracy theorists that believe in miracles and engage in wishful thinking,
1:54:35
Speaker 1: ultimately deceiving their readers by trying to impress their peers
1:54:39
Speaker 1: with their apparent understanding of economics, even though they had
1:54:43
Speaker 1: no formal training in the discipline. All that we learn
1:54:47
Speaker 1: about their actual theories is that somehow these ill fated
1:54:50
Speaker 1: authors are opposed to private banks and the money power,
1:54:54
Speaker 1: without their opposition leading to more sophisticated political analysis. Any
1:54:59
Speaker 1: reading of the high highly sophisticated Saudi nineteen thirty four
1:55:03
Speaker 1: quickly reveals such labels as unfounded defamation. To the contrary,
1:55:08
Speaker 1: the empirical evidence presented in this paper has revealed that
1:55:11
Speaker 1: the many supporters of the financial intermediation theory, and also
1:55:14
Speaker 1: the adherents of the fractional reserve theory, are flatter thirsts
1:55:17
Speaker 1: that believe in what is empirically proven to be wrong
1:55:20
Speaker 1: and which should have been recognizable as being impossible upon
1:55:23
Speaker 1: deeper consideration of the accounting requirements. Whether the authors in
1:55:27
Speaker 1: eat Well at al. Nineteen eighty nine did, in fact
1:55:30
Speaker 1: no better is an open question that deserves attention in
1:55:33
Speaker 1: future research. Certainly, the unscientific treatment of the credit creation
1:55:38
Speaker 1: theory and its supporters by such authors as Kanes, who
1:55:41
Speaker 1: strongly endorse the theory only a few years before aufering
1:55:44
Speaker 1: tirades against its supporters, or by the authors in eat
1:55:47
Speaker 1: Well at al. Nineteen eighty nine, raises this possibility five
1:55:52
Speaker 1: point four point two implications for government policy. There are
1:55:57
Speaker 1: other far reaching ramifications of the finding that banks individually
1:56:01
Speaker 1: create credit and money when they do what is called
1:56:03
Speaker 1: lending money. It is readily seen that this fact is
1:56:07
Speaker 1: important not only for monetary policy, but also for fiscal policy,
1:56:11
Speaker 1: and needs to be reflected in economic theories. Policies concerning
1:56:15
Speaker 1: the avoidance of banking crises or dealing with the aftermath
1:56:19
Speaker 1: of crises require a different shape once the reality of
1:56:22
Speaker 1: the credit creation theory is recognized. They call for a
1:56:26
Speaker 1: whole new paradigm in monetary economics, macroeconomics, finance, and banking.
1:56:31
Speaker 1: For details see for instance, Werner twenty thirteen that is
1:56:35
Speaker 1: based on the reality of banks as creators of the
1:56:38
Speaker 1: money supply. It has potentially important implications for other disciplines
1:56:43
Speaker 1: such as accounting, economic and business history, economic geography, politics, sociology,
1:56:49
Speaker 1: and law five point four point three implications for bank regulation.
1:56:55
Speaker 1: The implications are far reaching for bank regulation and the
1:56:58
Speaker 1: design of official policy. As mentioned in the introduction, modern
1:57:03
Speaker 1: national and international banking regulation is predicated on the assumption
1:57:07
Speaker 1: that the financial intermediation theory is correct. Since in fact
1:57:11
Speaker 1: banks are able to create money out of nothing, Imposing
1:57:14
Speaker 1: higher capital requirements on banks will not necessarily enable the
1:57:17
Speaker 1: prevention of boom bust cycles and banking crises, since even
1:57:21
Speaker 1: with higher capital requirements, banks could still continue to expand
1:57:25
Speaker 1: the money supply, thereby fueling asset prices, whereby some of
1:57:29
Speaker 1: this newly created money can be used to increase bank capital.
1:57:33
Speaker 1: Based on the recognition of this, some economists have argued
1:57:37
Speaker 1: for more direct intervention by the central bank in the
1:57:39
Speaker 1: credit market, for instance via quantitative credit guidance Onerner two
1:57:43
Speaker 1: thousand five five point four point four monetary reform the
1:57:49
Speaker 1: Bank of England two thousand fourteen. Recent intervention has triggered
1:57:53
Speaker 1: a public debate about whether the privilege of banks to
1:57:55
Speaker 1: create money should in fact be revoked Wolf two thousand fourteen.
1:58:00
Speaker 1: The reality of banks as creators of the money supply
1:58:03
Speaker 1: does raise the question of the ideal type of monetary system.
1:58:07
Speaker 1: Much research is needed on this account. Among the many
1:58:11
Speaker 1: different monetary system designs tried over the past five thousand years,
1:58:15
Speaker 1: very few have met the requirement for a fair, effective, accountable, stable,
1:58:20
Speaker 1: sustainable and democratic creation and allocation of money. The view
1:58:24
Speaker 1: of the author, based on more than twenty three years
1:58:27
Speaker 1: of research on this topic, is that it is the
1:58:29
Speaker 1: safest bet to ensure that the awesome power to create
1:58:32
Speaker 1: money is returned directly to those to whom it belongs,
1:58:35
Speaker 1: ordinary people, not technocrats. This can be insured by the
1:58:39
Speaker 1: introduction of a network of small, not for profit local
1:58:42
Speaker 1: banks across the nation. Most countries do not currently possess
1:58:46
Speaker 1: such a system. However, it is at the heart of
1:58:50
Speaker 1: the successful German economic performance in the past two hundred years.
1:58:54
Speaker 1: It is the very rapeisen folks bank or sparks banks,
1:58:58
Speaker 1: the smaller the better, that are helpful in the implementation
1:59:01
Speaker 1: of this empirical study that should serve as the role
1:59:03
Speaker 1: model for future policies concerning our monetary system. In addition,
1:59:08
Speaker 1: one can complement such local public bank money with money
1:59:11
Speaker 1: issued by local authorities that is accepted to pay local taxes, namely,
1:59:15
Speaker 1: a local public money that has not come about by
1:59:18
Speaker 1: creating debt, but that is created for services rendered to
1:59:21
Speaker 1: local authorities or the community. Both forms of local money
1:59:25
Speaker 1: creation together would create a decentral eased, and more accountable
1:59:28
Speaker 1: monetary system that should perform better, based on the empirical
1:59:31
Speaker 1: evidence from Germany than the unholy alliance of central banks
1:59:35
Speaker 1: and big banks, which have done much to create unsustainable
1:59:38
Speaker 1: asset bubbles and banking crises. Werner, twenty thirteen, Appendix one.
1:59:45
Speaker 1: Sequence of steps for the extension of a loan Rapheisenbank
1:59:48
Speaker 1: Wildenburg Eg. One Negotiations concerning the details of the loan.
1:59:55
Speaker 1: Two receipt of KYC information and opening of a new
1:59:58
Speaker 1: customer file customer. Three opening of a current account new customer.
2:00:05
Speaker 1: Four Calculation of the loan and repayment schedule model calculation
2:00:10
Speaker 1: European required customer notification information, record of customer advisory. Five
2:00:16
Speaker 1: entry of loan application into the bank it system. Six
2:00:21
Speaker 1: check of ability to service and repay the loan slash
2:00:24
Speaker 1: conducting liquidity calculation in loan application. Seven credit rating of
2:00:29
Speaker 1: customer entry into customer file. Eight search of customer data
2:00:34
Speaker 1: on Central Bank database for singular economic dependencies and entry
2:00:38
Speaker 1: of results into bank IT nine Ink Board recommendation on
2:00:43
Speaker 1: loan application with justification two directors. Ten print out of
2:00:48
Speaker 1: loan contract general loan conditions with handover receded by customer.
2:00:54
Speaker 1: Eleven print out of the protocol of the loan process.
2:00:58
Speaker 1: Twelve Approval of credit by bank directors by signing the
2:01:01
Speaker 1: protocol and the loan contract. Thirteen creation of loan account
2:01:06
Speaker 1: in the IT system. Fourteen establishment of credit limit and
2:01:11
Speaker 1: availability of credit fifteen appointment with customer sixteen customer signs
2:01:18
Speaker 1: credit documents. Seventeen payment of loan at the value date
2:01:23
Speaker 1: in exchange for evidence of use of the loan in
2:01:26
Speaker 1: line with the declared use in the loan application. Appendix two.
2:01:31
Speaker 1: Letter of confirmation of facts by Raphisenbank Wildenburg EG June tenth,
2:01:37
Speaker 1: twenty fourteen. Dear Professor Doctor Werner, confirmation of facts in
2:01:44
Speaker 1: connection with the extension of credit to you in August
2:01:46
Speaker 1: twenty fourteen. I am pleased to confirm that neither I,
2:01:49
Speaker 1: as director of Raphisenbank Wildenburg EG, nor are staff checked
2:01:53
Speaker 1: either before or during the granting of the loan to you,
2:01:56
Speaker 1: whether we keep sufficient funds with our central bank, dz
2:01:59
Speaker 1: Bank or the Bundesbank. We also did not engage in
2:02:04
Speaker 1: any such related transaction, nor did we undertake any transfers
2:02:07
Speaker 1: or account bookings in order to finance the credit balance
2:02:10
Speaker 1: in your account. Therefore, we did not engage in any
2:02:14
Speaker 1: checks or transactions in order to provide liquidity. Yours, sincerely, M. Rebel,
2:02:21
Speaker 1: Director Rapheizenbank Wildenburg EG