5. Is the bank rich because it can create an unlimited amount of deposit money?
From the bank’s point of view, the ability to create deposit money is not as impressive as it seems to private individuals. When we have a look at the bank’s simplified T-Account, we soon see why. First, we see that both parties each get two entries, which mirror each other, as the asset of one is the liability of the other.
When we now concentrate on the banks T-account, we see, that on the asset side, the bank has received a claim for repayment against Marta. But the deposit money that it created for Marta is a debt on the bank. This is because by registering this new money in Marta’s account, the bank promises to pay it out to her in cash or to transfer it to another bank for her. In both cases, the bank needs central bank money, which it cannot produce itself. The bank must borrow it from the central bank against the key interest rate. For the bank, deposit money is therefore a debt to its customers and represents a real cost.
For the bank, creating deposit money results in two equally high items on the right and left side of the balance sheet. This is called a ‘balance sheet extension’ and it leaves the equity, i.e. the own capital of the bank, unaffected. So how does the bank benefit from creating money? It is the interest that is earned on a loan that makes all the difference for the bank and its equity. We have omitted that piece in our example in order to keep the entries as simple as possible and to focus on the money creation process.
When Marta finally repays her loan, the bank’s balance sheet shortens again, as in the bank’s T-account both entries expire, as they did in Marta’s. This is because the claim for repayment on the assets side is now settled. And as Marta used her income to repay her debt, the bank no longer has the liability to cash out or retransfer the money for her. Thus, the bank does not “get” the deposit money from Marta, instead it loses a debt – as well as a claim.
And here is what we want to keep in mind at this point: in a credit-based money system, the money is entered as a debt in the balance sheet of the money creator (the bank). And if money is paid back to the money creator, then their debt disappears again – and with it the money.
