07 December 2009

The Growth of Bank Notes

I've been involved in a few debates where I've expressed the opinion that the growth in the overall money supply is driven largely by growth in the fiat currency (notes, coins and Bank of England reserves). I've managed to pull together figures from the BoE in the past to show some movements, but I've never been able to get enough consistent data to show long term trends. Which is why I was glad to get hold of this graph from a speech given by Andrew Bailey, the Chief Cashier of the BoE:

I think that, by any standard, that's significant growth.

4 comments:

Mark Wadsworth said...

Those are drops in the ocean.

The cleverest single statement on the whole banking and finance system I have ever read was "Borrowings create deposits, not the other way round".

The increase in holdings of government bonds or physical bank notes (small denomination, non-interest bearing government bonds) is not because people are 'saving' more, it is because the government is borrowing more.

From the point of view of the government, issuing bank notes is the best kind of borrowing what is, as it's interest free and the chance is that half will end up being lost down the back of the sofa etc.

Robin Smith said...

Interesting how its not at all affected by the cycles of money as debt (biz cycles)

Paul Lockett said...

Robin,

I have a suspicion about the reason for that:

As government measures inflation without housing prices, in the upward phase, it will tend to increase the supply of cash and obtain the associated gains (increased lending, debt, etc.), without increasing the measure of inflation.

In the downward phase, the government will then continue increasing the supply of cash in an attempt to kick-start the economy.

It's a mirror of the new form of Keynsianism which seems to have emerged, where, instead of borrowing in the downward phase and paying off debt in the upward phase, the government will borrow in the downward phase in an attempt to kick-start the economy, but also borrow heavily in the upward phase, using investment as a justification, creating a one way spiral of debt.

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