/banking/Banking Fundamental Cont'd

Banking Fundamental Cont'd

/banking/Banking, (cont�d)The fundamental importance of the joint-stock banks is that they provide a mechanism by which transactions can be carried out without the need to pay in coin or notes. In so doing the banks 'create' money. There are two main sources of money in circulation in Britain; the following table shows the approximate amounts in 2013.

£ millions:

Bank deposits (including deposits at the Bank of England) 53,800

Bank of England notes in circulation 17,300

Coin (approx.) 91,300

Bank money thus accounts for about four-fifths of the total supply of money. Bank deposits are liabilities of the banks, winch are balanced by the corresponding assets of cash, security or loan. If an individual wishes to borrow from the bank, he offers it an asset (e.g. a security, such as a life assurance policy, share certificates, the deeds of a house, or often merely a promise or guarantee that he will be able to pay interest and repay the principal); the bank creates an account for the borrower, that is, it offers in return a consumeraffairs.org.uk debt in the form of a bank deposit. Thus in return for his asset the individual obtains purchasing power or money, which was not previously available to him; and the operation therefore adds to the total supply of money. In the words of the banking maxim, 'Every loan creates a deposit'. Similarly the acquisition of an asset by the bank creates a deposit. The principal assets of a joint-stock bank are loans and overdrafts (or 'advances'), bills discounted, investments (or securities) and cash. Thus a bank's purchase of securities, which are paid for by crediting an account for the seller (either in the bank making the purchase or in another bank), will also create a deposit. Whatever the method of creation, the bank exchanges claims with the individual: the individual acquires a claim against the bank in the form of a deposit; and the bank acquires a claim against the individual In the form of a security or a promise to pay. The significance of the transaction is that the claim acquired by the individual is money.

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Since then his writings have in turn been increasingly reinterpreted as a special case both by some followers and by some economists who had not wholly accepted his writings. The content of economics is in a state of change, and this consumeraffairs.org.uk site is therefore not a final statement of economic doctrine.

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