SIR – Mr Bird (Letters, January 2) is quite right; he never made any money out of thin air because he is not a bank. However, his mortgage did create new money.
Every loan creates a deposit. Ms Prudent has £100 and she gives it to Mr Banker to look after. Ron’s car needs a new tyre, so he borrows £100 from the bank using his credit card. We will assume TyreCo uses the same bank, so Ron’s payment appears as a credit in TyreCo’s account, and the bank has the £100 back.
Mindful of the 21 per cent APR it is getting, the bank would like to lend the £100 out again, and is quite happy when Phil’s car needs a new tyre and he pays using his credit card. The £100 comes back as a credit in TyreCo’s account.
One deposit of £100 has now created two deposits of £100 in TyreCo’s account. Why not repeat this trick for Tom, Dick and Harry?
The Government says the bank can lend out only a certain multiple of its capital. One of the causes of the boom leading up to the credit crunch in 2008 was banks finding ways round this.
The flows of money from Mr Bird’s mortgage are more complicated than this example. However, the principle is the same.
Ron Harding, Beck Houses, Bingley
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