The Bank Of England Goes Austrian?

Tyler Durden's picture

From Sean Corrigan of Diapason Commodities Management

BOE's View On Money Creation

Of late there has been much breathless wonder expressed at the Bank of England’s supposedly ground-breaking release. ‘Money in the Modern Economy’, in which it argues – shock! horror! - that banks do not lend out previously received deposits, but that they create the latter ex nihilo by first making loans. Alas, as Gunnar Myrdal waspishly observed of Keynes himself, this has been a reaction plagued with the ‘unnecessary originality’ of those who don’t know their literature.

As an example, some few months ago, I had an exchange with the disputatious George Selgin (he of the perfervid fractional free banking bent) in which I cited – after a good twenty minutes’ research – the following authorities to that very same effect:-

Roepke from a footnote (p113) to his 1936 work, ‘Crises & Cycles’:

The process [of credit creation] is now clearly explained in any text-book on economics, banking or money (especially recommendable is Hartley Withers’ Meaning of Money). A fuller treatment may be found in the following books: R. G. Hawtrey, op. cit.; J. M. Keynes, A Treatise on Money, pp. 23-49 : C. A. Philips, Bank Credit, New York, 1920; W. F. Crick, “The Genesis of Bank Deposits,” Economica, June 1927, and F. A. von Hayek, Monetary Theory and the Trade Cycle, London,1933.


Without an understanding of this process and of its limitations, no real insight into the working of our banking system and, consequently, of our entire economic system seems possible, to say nothing of the mechanism of business cycles. There may still be many people who can no more believe the story of the genesis of bank money than they can believe the genesis of the Bible, but on the whole it now seems to be generally accepted. A last but hopeless attempt at disproving it has recently been made by M. Bouniatian, Credit et conjoncture, Paris, 1933. [Emphasis mine and apparently NOT the last!]

Or as Hayek indeed noted in ‘Prices and Production’ above his own lengthy footnote (pp 81-2):

The main reason for the existing confusion with regard to the creation of deposits is to be found in the lack of any distinction between the possibilities open to a single bank and those open to the banking system as a whole.

Shall we hear from Mises?  ‘Monetary Stabilization and Cyclical Policy’ (p105) seems pretty unequivocal on the matter:-

If the banks grant circulation credit by discounting a three month bill of exchange, they exchange a future good—a claim payable in three months—for a present good that they produce out of nothing. It is not correct, therefore, to maintain that it is immaterial whether the bill of exchange is discounted by a bank of issue or whether it remains in circulation, passing from hand to hand. Whoever takes the bill of exchange in trade can do so only if he has the resources. But the bank of issue discounts by creating the necessary funds and putting them into circulation. [which, incidentally, is an almost exact paraphrase of the argument I advanced and to which you took such exception, George]

Finally, let us allow Dennis Robertson a few words on the matter from the posthumous collection ‘Essays in Money and Interest’, p25:

…bank money comes into existence mainly as the result of loans and investments made in the banking system… … Historically, there seems to me no question that the bulk of bank money in existence has come into existence in this way… If anyone retains any lingering doubts on this matter, whether these doubts arise from consideration of the multiplicity of banks or from some less rational cause, I commend to him the patient and careful article of Mr. Crick [see above]… Here time forces me to treat this particular controversy as closed. [Emphasis mine again]

Since when I have found an even more waspish dismissal of the dullards who hold the contrary view from the inimitable Fritz Machlup, from an early 70s discussion of the development of the Eurodollar market:


There is a wider significance to this long-held misapprehension. Namely, that Keynes – so enamoured of his circular flow visualisation of the economy and yet also so prone to the confusion of mere snapshot accounting identities with dynamic and causative  phenomena – also held that banks were simple, passive intermediaries in the system and could therefore safely be shorn of having any true role to play in the determination of financial variables. Having similarly insisted that saving and investment MUST be equal (accounting v causation, again), he was thus left with nothing by which to determine the rate of interest and so opted for his ludicrous ‘liquidity preference’ idea that the rate of interest is a bribe by means of which to discourage the common man’s economy-sapping fetish for hoarding money.

From there, it was but a short step to the vilification of savers as the enemies of public well being and - via the further idiocy of the ‘liquidity trap’ with which this seemed perennially to threaten us - to the evils inherent in the incessantly inflationary ravings of the likes of Paul Krugman and all the other bien pensants of his stripe. 

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Independent's picture

Austrian???  I thought it went JEWISH Long time ago?  Or Yiddish, oy vey.

Occident Mortal's picture




^^What was that?

flacon's picture

Keynes created an unnatural theory that nobody (and I mean NOBODY) in their OWN PERSONAL FINANCIAL LIFE believes. (you can't get richer by accumulating more and more credit cards to pay off the old credit cards). 

Richard Chesler's picture

bien pensants or mal pisants?

koncaswatch's picture

Well they're not very good thinkers; Keynesians=mal pisants

Jack Napier's picture

Keynes' method to riches would have worked perfectly if we still had a jubilee every 7 years. Apparently a lot of debt slaves are betting the farm on another one.

philipat's picture

Actually, in fairness to Keynes, his theory  was that Government spending should be counter-cyclical, Governments should SAVE during good times and SPEND during hard times. The problem is that "Modern" politicians forgot the first part??

BLOTTO's picture

Somehow the word 'Austrian' irks me just as much as 'Keynes' doesnt make me feel much better.


We (the masses) are fucked either which way in the end. We are ruled by bloodlines that think its their divine right to rule over us...and thats that.


'The Rothschild banking family of Austria was founded by banker Salomon Mayer von Rothschild in 1820 in Vienna in what was then the Austrian Empire'

HoofHearted's picture

Keynes wasn't the first to posit such countercyclical spending. If you forgive me the idea of spending grain, Joseph was the first to come up with this, and that was through an interpretation of a dream. I've written a piece on this that appeared last year. 

Keynes was just stealing an idea from Joseph. Wait, Joseph was Hebrew. Oh crap, now some of the knee-jerk anti-Semites are going to start hating on these idea. 

flacon's picture

Forgive me for saying this, but Keynes's theory (the one you describe) happens naturally in a microeconomic level as long as interest rates aren't being tampered with. Virtually everyone knows that saving money is a good thing, but when interest rates are very low, or essentially negative (by decree, not by market forces) then it makes people NOT want to save, but to BORROW MORE. The whole system is F'd! 

kchrisc's picture

What Keyes was actually saying was that the governmnet--central banks--had to 'print' more to counter the collapse of the bubble created by the central bank's previous 'printing.'

The previous bubble was predicated on the back of 'loan money' to businesses. WIth its collapse and threat of taking down the ponzi and its operators, he advocated the 'printing' of more 'loan money' in the form of government debt.

All the gobtly gook surrounding that premise is just "gravy on shit," as my dad like to say.

rex-lacrymarum's picture

It makes just as little sense for government to 'save during good times' as it makes to 'spend during bad times'. So even if Keynes had been misinterpreted by his followers, the original idea isn't any better. 

TideFighter's picture

The "Creature" has grown, had offspring, they have grown, had offspring...

Oh regional Indian's picture

Yes, it's called devolution.

Just like us humans. Less power in every successive generation.

Degeneration is the order of the day.

Is it anywonder everythign feels powerless, including most humans?

And what will it take to re-ignite?


centerline's picture

All the same bullshit that has the tail wagging proverbial dog.

LawsofPhysics's picture

and the "business" of printing money and handing it out to your friends continues...

PlusTic's picture

I'd like to hit Krugman over the head with a Hayekian Triangle!

centerline's picture

+1.  Furthermore, wasn't it one the fed guys (Fischer?) who indicated that in reality the banks simply make loans and seek the necessary reserves after the fact?



Serfs Up's picture

This just in!!  Bank of England admits money is loaned into existence.


Only the terminally incurious could hold otherwise.  (See also: Krugman, Yellen, Pew, Obama, et al.)

kito's picture

you tryin to steal my thunder serfer boy?

jaxville's picture

  Good to see the level of understanding of credit based money on Zero Hedge. So few understand that basic mechanism of our money thus they are destined to make ill informed financial decisions as a result of that ignorance. They will be financially erased in the years ahead. Fractional reserve banking/credit based money is the greatest fraud in human history and we are going to see this abomination buried once and for all.

pods's picture

Definitely going to send that out, thanks kito.  Have spent a lot of time trying to explain this to others. Most cannot believe it because it is just too outrageous to comprehend.


kito's picture

read and then REVOLT!!!!!!

pods's picture

That is why I have said the best way to destroy this unjust system is avoid taking out loans.

We make the noose that strangles us, and pay the banks handily for it.

Our system needs exponential expansion of debt to pay the exponentially expanding interest.

Starve the beast and start fresh after the collapse.


ebworthen's picture

That - or everyone take out more debt than they can possibly ever pay back - like .gov and banks - until there are so many hungry people on the streets they will have nothing better to do than storm the castles.

But yes, on an individual basis, your advice is sound.

NoDebt's picture

If you stop borrowing at a personal level the government will just borrow for you.  You can't stop it.

RSloane's picture

I read it and learned nothing new! I will plan my revolution for another day.

kito's picture

oh rsloane!!! you know its not about what you learned, but rather what they have revealed!!

Dr. Engali's picture

Problem is that the vast majority of people who would read that article already know that fact, and it's just falling on deaf ears. The sheep are too stupid to comprehend.

fonzannoon's picture

Is it stupid? Maybe. I can't find the right word for it. Apathetic? I think it is more so that people are so mentally enslaved to the system that even shocking them with the truth can't bring them back at this point. This is like the 5th turn of the 4th turning.

Also doc, I went back and looked at our bet. I never said 6 months. I said 4 months and 12 days. I'm sure of it. So our bet is over today, okay? Please?

Dr. Engali's picture

Lol.... I'm pretty confident it was six months. Although my wife will be quick to point out that I tend to forget things :)

RSloane's picture

They revealed a French secret which is a secret that is known by everyone but no one dares speak its name.  In terms of revolution, niet!

kito's picture

most people in england dont know butter comes from a cow or eggs from a hen, and you believe they understand banking???!! come on rsloane!! the revolution needs YOU!!! remember that revolutions begin with a very small percentage of the population!!!! REVOLT!!

ebworthen's picture

Oh man, c'mon:  perfervid, ex nihilo, bien pensant, and disputatious?

Dugald's picture


Ahhhh, give the man some credit....he spelt them correctly....

Radical Marijuana's picture

As that article you linked, kito, stated, way back in the 20th Century Henry Ford is supposed to have remarked that most Americans did not know how banking really works, because, if they did, "there'd be a revolution before tomorrow morning." The overwhelming vast majority of people are too ignorant, if not too willfully stupid, to understand what that article actually means to them, their children, and their children's children. Furthermore, the established political processes are already so totally stacked in favour of the banksters that there are no practical ways to reform the monetary system.

Therefore, the established systems based on making "money" out of nothing, and destroying that "money" back to nothing, are going to continue to destroy the world, since those things are actually the result of the triumphant runaway frauds of the biggest gangsters, the banksters, who have captured control over governments, as well as social institutions such as schools and the mass media, by being able to dominate the funding of the political processes and social institutions. Since our society is controlled by legalized lies, backed by legalized violence, which have created conditions whereby civilization is dominated by attitudes which were necessary to enable fundamentally fraudulent financial accounting systems to be made and maintained, ALMOST EVERYTHING CIVILIZATION DOES IS BASED ON THOSE ATTITUDES OF EVIL DELIBERATE IGNORANCE.

Since ignorance is the source of suffering, evil deliberate ignorance is the source of the greatest suffering. The triumphant systems which were built on the basis of backing up dishonesty with violence have enabled runaway social polarization to manifest inside of the pyramid systems that were built on that foundation. MUCH MORE IMPORTANTLY, THE WAYS THAT EVIL DELIBERATE IGNORANCE DOMINATE EVERYTHING THAT OUR CIVILIZATION DOES MEANS THAT WE HAVE ALREADY ENTERED INTO VICIOUS SPIRALS OF DESTROYING LIFE IN THE NATURAL WORLD.

The longer term consequences of backing up the claims of private property with coercion are cutting the world up into privatized pieces, which, as a living whole, are being killed by those processes. The successes of the systems of lies backed by violence have driven society as a whole to become terminally sick and insane, since each incremental action based on carrying on attitudes of evil deliberate ignorance results in privatizing the profits, while socializing the greater losses. Overall, we have already crossed the event horizon into a social and environmental black hole.

There are no reasonable grounds to doubt that the ways that the monetary systems are based on frauds, which violate the basic laws of nature, are going to result in the destruction of much of the life in the natural world. However, other that wishing for some series of political miracles to cure the terminal social sickness and insanity of the established and entrenched social pyramid systems, there are no practical political ways to stop the runaway fascist plutocracy juggernaut from continuing to turn most of the world's people, and the natural world, into the road kill of that runaway system of legalized lies, backed by legalized violence.


"Corrections" to that runaway social insanity can not occur within a human world which is almost completely dominated by the long history of enforcing frauds. The only real connections between the physical world and the psychological worlds were the abilities to back up lies with violence. Since the entire political economy is controlled by runaway triumphant frauds of making "money" out of nothing, and that "money" can return to nothing, there are absolutely no ways that that social pyramid system can be reconciled with human ecology, industrial ecology, or natural ecology. Instead, the runaway fraudulence of the financial accounting system is setting up all those ecologies to go through catastrophic collapses into chaos, with the worst of those being the degree to which the evil deliberate ignorance of human beings is going to destroy the natural world, wherein things like the air we breathe, and the plankton and plants that produce that, have ZERO VALUE.

It that overall context, it is another ridiculous tempest in a teapot, tit for tat debate, between the goofy Austrians and the Keynesians. Both are mostly hermetically sealed within the human world, which is almost totally based on maintaining attitudes of evil deliberate ignorance towards the natural world. There is ZERO CHANCE of developing a better industrial ecology when the accounting system makes "money" out of nothing, and that "money" can disappear back to nothing. Therefore, all of the progress in science and technology that understands general energy systems better mainly magnifies the magnitude of the runaway social insanities developed through the history of the social pyramid systems, which were based on the history of the biggest bullies being able to back up their bullshit social stories, to the point where that bullshit totally dominates almost everything, and especially the theories of economics.

The ONLY way that that privatized fiat "money" made out of nothing as debts system really works is that it is backed up by the power of governments: MONEY IS MEASUREMENT BACKED BY MURDER, because the political economy is inside of the human ecology. However, since our murder systems evolved through warfare, where success was based upon deceits, and that became the foundation for the political economy to have it success based upon frauds, THE REAL WORLD TODAY OPERATES THROUGH THE MAXIMUM POSSIBLE DECEITS AND FRAUDS REGARDING WHAT IT IS REALLY DOING ... THE CONSEQUENCES OF WHICH WILL MORE AND MORE MANIFEST IN THE LONGER TERM, AT AN EXPONENTIALLY ACCELERATING RATE, BY THAT EVIL DELIBERATE IGNORANCE CAUSING THE MAXIMUM POSSIBLE SUFFERING FOR HUMAN BEINGS AND OTHER LIVING BEINGS.

Kantbelieveit's picture

Krugman's predictions have been correct, and the predictions of the austerians have been wrong. Where is the roaring inflation predicted by the austerians? The Fed has been running up a huge balance sheet, which Krugman said would not spur inflation in a liquidity trap. The austerians have been predicting huge inflation for three years, and it has not appeared. They were wrong, and Krugman's model was correct. It's just that simple.

PlusTic's picture

The inflation was transfered from real assets to financial assets (because banks didn't lend the reserves, they levered them to trade financial assets)...take a look at the stock market chief, now that's inflation!

spacehedgie's picture

This, and foreign markets as well.

I'm dragging Marc Faber back in here to once again perform his regular routine on Helo-Ben, printing, not being able to control where it all ends up - and much of it ending up outside of the US borders, propping up inflation outside the US - like in the EM, especially China.

Herd Redirection Committee's picture

I mentioned this to a friend who works in local gov't about 4 years ago.  I said "You have all these gov't officials, and CB heads, talking about the economy, the economy.  Don't they know cutting taxes is the most helpful thing they could do?  Have you seen any western countries contemplating tax cuts?"

So I told him it seems gov'ts want the economy to improve, but not if it comes at the expense of a smaller gov't!

Rising Sun's picture

What kind of bullshit is this????


Krugman is a windbag who brags about his PhD when he gets challenged.


Oh and being wrong?  Krugman leads the pack or he generalizes bullshit so that he can play both sides.


Krugman is a paid for mainstream media bullshitter!!!!!

kito's picture

where is the roaring inflation he asks!!!!!   check out fine art!!! million dollar penthouses!!! the stawk market!!!! any place that yellen's favored sons can park their money!!! 

centerline's picture

Shadow banking, consumer credit, etc.  Massive inflation already occurred.  The only way it has been continuing since 2000 is bubbles.  Essentially cramming down more debt than otherwise would be possible.  Is how the middle class gets crushed.

ebworthen's picture

Krugman the bearded potato is right only because it is twelve noon in his broken clock world; and because the FED and .gov have ginned the economy with un-payable debt.

The coin is still in the air; I can call heads or tails and be right.

And, it's a Gold coin, and it's mine.

You buying lunch?

chapaev's ghost's picture

Well, I just asked Petka to read this article and tell me what he thinks.

"Sir the piece is an exposition on the futility of Keynesian economics", Petka said to me,

"Keynes?" I replied. "Well, as long as Grandpa has one, I'm all for it!"

A Lunatic's picture

Makes for a nice little chat over a spot of tea; now back to reality.......

Quinvarius's picture

In other words, any time you put more than one bank in a system, you achieve an unstoppable critical mass of redeposit activity which can only result in total annihilation the second a withdraw is made.