In “Money and Banking (2)” [July ‘23], you depict a bank “loan” using TWO “amber-debt” arrows pointing in opposite directions [https://www.economics21st.com/i/133430487/new-loan], which proves such a “jargon loan” process doesn’t create “new money”. That process is often called “credit creation”, but such “credit” (which you show as a pink-green arrow for “Bank owes amber to Alice”) is often confused with “money” (which is “notes and coin”) shown as “amber” in your models.
Nevertheless, in agreement with Prof. Perry Mehrling’s description of all such “jargon loans”, your 2023 article correctly showed a “bank loan” as “a swap of equal IOUs”, which belies the name “loan”; swapping “£100 in one form” for “£100 in a different form” is NOT a “loan”, it’s a “swap”.
So, what is the contradiction I mentioned in my previous comment? This present article allegedly describes “[a] bank creating money for Alice” and contains at least three errors that I can see, viz.: (1) the claim the bank is “creating new money”, and in so doing; (2) “decreases the issuing bank’s RNW”, while (3) your diagram shows the bank promising (or owing) Alice “£100” for nothing in return (L>R arrow; “Bank owes £100 to Alice”).
The errors are: (1) the issuing bank doesn’t create £100 in “new money” (amber), it creates a “credit balance in its liability account” (a green-pink arrow representing the “£100-worth” of amber the bank owes to Alice); (2) in so doing, it not only incurs a new liability (L>R arrow: “Bank owes £100 to Alice”), but also gains Alice’s promise to pay the bank, an equal new asset (L<R arrow: “Alice owes Bank £100”), so its RNW remains *unchanged*; and (3) the “issuing bank” is missing its second (L<R) arrow.
Newton would not make such mistakes. The bank's RNW would decrease if the bank gave Alice a £100 note or simply credited her account with £100 as a gift, and neither is implied by your pink-green arrow labelled “£100”, or occurs in real life.
Thanks again for the comment. I'm going to disagree with you though. One of the key ideas in this analysis is treating individual actions as the atomic units of economic activity, not the more complex transaction (exchange) consisting of multiple actions. We can analyse the effects of the individual actions, and then add them together to find the effect of a more complex scenario.
Here's my response to your 3 claimed errors:
1. Yes, in this diagram, the bank is increasing Alice's credit balance. That is an increase in M1 (see https://en.wikipedia.org/wiki/Money_supply#cite_ref-dollardaze.org_7-0), which is a monetary aggregate. I agree there's inconsistency in terminology between writers, but considering "demand deposits" to be money is broadly accepted in business, economics and banking. Firms and auditors have no interest in distinguishing between cash and demand deposits e.g. in Quantas's annual report for 2024 (https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2024-Annual-Report.pdf), you can see on P88 (Note 21(A)) that it doesn't separate out cash and demand deposits: it's all just "Cash and cash at call balances". Demand deposits are the standard means of exchange.
2. Creating a demand deposit certainly does decrease the bank's RNW (its liabilities↑). It may well be that this is one action of a transaction in which Alice gives something in exchange (e.g. writing a promissory note, or handing over a big box of stationery). That other action would cause the bank's RNW to increase, and may or may not exactly cancel out the £100 decrease in its RNW from creating the demand deposit.
3. There is no reason at all why the bank couldn't just create a £100 demand deposit for Alice. For example, it could decide to give her £100 as compensation for previous poor service. In that case, there is no arrow in the opposite direction. It simply increases Alice's RNW by £100, and decreases the bank's RNW by £100. (As we've seen, this would typically flow through to the bank's shareholders via a decrease in equity: https://www.economics21st.com/p/equity-vs-net-worth). It's very important to get away from the idea that every increase to one person's RNW is balanced by a different decrease to that person's RNW (and vice-versa). It's simply not true.
As an engineer, I understand your admiration of Newton. Without debating Qantas or Wikipedia I can help you establish the coherent “Newtonian economic language” you seek, as follows: money is money [T]; credit is not money [T]; a bank can create credit [T]; but can’t create money [T]. Your article implies it can create money [F]. {End of language debate}
My comment challenges the accounting errors in your “bank jargon” description of the bank creating “money” (but meaning credit). Your text necessarily implies the bank is “lending credit” and, in that context, your “£100 arrow” perfectly describes “one hand, trying to clap”; it just doesn’t work that way. All your alternative hypotheticals [compensation for poor service, etc.] are red herrings which don’t counteract my claim because they are obviously not “loans” and so don’t create “money”.
You can’t atomize (or disintegrate) a bank’s “money” creation trans-action because it needs two trans-actors and its opposite effects on them occur simultaneously (c.f. Newton's Laws). Its *effects* are not separate *actions*; there’s only one trans-action (c.f. ice-skating Alice’s Newtonian push against Bob) and the bank records both of its effects to balance its books (as would Alice, if she kept accounts). In the case of a bank “loan”, Alice’s promissory note provides the Newtonian “debit push”, which creates the bank’s Newtonian “credit reaction”, whereas your diagram shows the bank incoherently “reacting” to a non-existent “push”. That’s plainly non-Newtonian accounting.
Finally, the “double-entry rule” is not the *Balance Sheet Equation*. The *Balance Sheet Equation* only applies “in-house”, not “cross-border”. It’s the double-entry rule that enforces the match between “changes in RNW” of individuals “trans-acting” across their common “border”. Double-entry accounting seems to cover all your perceived aims, as long as you get the ownership of credit balances correct, and that means bank “lending of credit-balances” is criminally fraudulent, as it’s based on deliberate *linguistic deception*, which you call “curious jargon”, but insist on using. Using “bank jargon” simply maintains the deception, which hides the crime.
"Finally, the “double-entry rule” is not the *Balance Sheet Equation*. The *Balance Sheet Equation* only applies “in-house”, not “cross-border”."
I'd say both of those are "in-house". The double-entry rule is only an accounting convention. The balance sheet equation simply reflects the definition of net worth.
What's fundamental, and "cross-border", is that actions *apart from production and consumption* are one person's credit (RNW↓) and another person's equal and opposite debit (RNW↑), and that's the focus of all my writing.
The various posts on double-entry bookkeeping here may be useful:
As you say, both double-entry and the balance sheet equation are "in-house" and double-entry applies both in-house and cross-border. No problem.
I was responding to part “3” of your Dec 24 comment, in which you want to get rid of the “idea” that, for any person, every “increase” of his RNW is *balanced* by a “different decrease” of his RNW. I didn’t express that “idea”. The “idea” itself seemed self-contradictory and I’ve no idea where it came from.
Re "criminal fraud": See the one-page summary in my #6 article at this link:
If you pre-emptively believe there is no fraud, you’ll never see it. Look at the bank documents (the evidence) first. Question that evidence thoroughly. Understand the accounting rules. Then draw your own conclusion.
"I was responding to part “3” of your Dec 24 comment, in which you want to get rid of the “idea” that, for any person, every “increase” of his RNW is *balanced* by a “different decrease” of his RNW. I didn’t express that “idea”. The “idea” itself seemed self-contradictory and I’ve no idea where it came from. "
If I've understood you correctly, you claim that a bank can only credit a person's account if that person signs a promissory note to the bank. Is that correct? What I'm saying is that a bank can credit a person's account without having to receive something in exchange.
"If you pre-emptively believe there is no fraud, you’ll never see it."
That's not the case. I investigated it thoroughly, without preconceptions, and *concluded* that there is no fraud.
Delete the word "only". That is not correct. I have never restricted the capacity of the bank to create credit like that. Every deposit at a bank (cash or promissory note) obviously creates both a credit and a debit in the bank's accounts.
I've also agreed that a bank CAN give gifts. It's just a rare occurrence and irrelevant to the topic of bank fraud.
"You can’t atomize (or disintegrate) a bank’s “money” creation trans-action because it needs two trans-actors and its opposite effects on them occur simultaneously (c.f. Newton's Laws)."
Analysis involves breaking larger structures down into smaller ones. There's no problem with analysing complex accounting into its simplest components, just like we can decompose forces on an aeroplane into vertical (weight, lift) and horizontal (thrust, drag), and analyse them independently. We can even consider, say, the weight and lift forces independently, even though the effects often cancel each other out.
"In the case of a bank “loan”, Alice’s promissory note provides the Newtonian “debit push”, which creates the bank’s Newtonian “credit reaction”"
I strongly disagree with this. Newton's 3rd law describes an automatically opposite and equal reaction. The bank crediting Alice's account when she signs a promissory note is a negotiated quid pro quo, and whenever interest is charged is *not* equal.
The only automatically equal and opposite reaction to Alice crediting loans by $100 in her accounts is the bank debiting loans by $100 in its accounts. They are just the same event seen from different perspectives.
Your " not equal " mistake results from your strongly disagreeing with Newton and reality. I have not misrepresented reality; you have.
It is a mistake to include interest charges in the accounts when Alice first deposits the signed “loan agreement” because interest does not appear in the initial transaction.
The first instalment of interest only appears in a subsequent statement of the bank’s asset account as a new Debit item, increasing the Debit balance “at that time”. Wherever the matching credit goes, the bank gets it and keeps it.
You insist on “balance” between cross-border parties in every transaction but don’t see it when I present it.
If you're going to claim I'm disagreeing with Newton, I'd like to see a quote from him and a quote from me side-by-side which are mutually contradictory. Otherwise I'm afraid I'm not going to take it seriously.
There is no explicit indication of time in the diagram, and the timing of when to "recognise" a balance sheet entry (or when it appears on the statement) is a matter for accounting convention. However, agreeing to the terms of the loan, perhaps combined with not repaying early, *does* commit Alice to the payment of interest, and it's appropriate to treat them as a group. The 3 transfers of RNW are all consequences of the loan agreement.
I've never insisted on balance between parties in *transactions*. I only insist that the 5 *actions* (each represented by an arrow) other than production and consumption increase one person's RNW by exactly as much as they decrease another person's. I don't see how this can be disputed, but if you think you have an example where this isn't the case, please do reply with it, and I'll gladly respond.
I'd argue that it's perfectly possible for a borrower to agree to pay the lender $100 in the future in exchange for the lender paying the borrower $99 now. It's my understanding that that's what happens when governments issue bills.
There's no necessity for the two debts to be equal: it's decided by negotiation. One party's credit always exactly matches the other party's debit, and the first party's debit always exactly matches the second party's credit, but there's no requirement that the first party's debit and credit are equal to each other.
"they are obviously not “loans” and so don’t create “money”"
I agree that a bank crediting a customer's account (and debiting its equity) isn't lending. And yet it increases the M1 monetary aggregate. Your insistence that "money" can only be created by lending seems at odds with this very simple observation. How do you reconcile that inconsistency?
I understand you have firm views about terminology, and that's fine, but the usage I've adopted is pretty mainstream. Banks create our primary means of exchange, and I would bet that most readers consider it reasonable to call it money. From now on I'm only going to respond to the substance of balance sheet entries and changes.
I'll certainly challenge your claim of accounting errors. For example, when a bank lends $100 to Alice, there are 4 accounting entries:
Bank:
[1] Debit loans $100
[2] Credit deposits $100
Alice:
[3] Debit deposits $100
[4] Credit loans $100
As I say, I'm not going to debate terminology. This is just what the banks call it, so it's unambiguous.
The pink-to-green arrow from the bank to Alice represents entries [2] and [3], which are the same action seen from two different perspectives: the bank creating a new debt.
Entries [1] and [4] would be represented by a pink-to-green arrow from Alice to the bank. Again, they are the same action (Alice creating a new debt) seen from two different perspectives.
So lending is the creation of *two* new debts, each of which can be represented by an arrow. But it's perfectly possible for a bank simply to create a new debt without getting anything in return, and that's what's illustrated in the diagram of this article. I have been on the receiving end of such a transfer when my first bank account was credited with £20 as an incentive for opening an account with them. There was no lending involved - just accounting entries [2] and [3].
Do you disagree that such a thing is possible? If so, you have to tell me exactly which accounting entries would appear in the bank's accounts.
(Incidentally, there *is* a debit to the bank's accounts when it does this: to its equity i.e. it now owes £20 less to the shareholders).
There's no "lending of credit" - just a credit of my account: the creation of a new debt, which any adult and any legal entity is allowed to do.
Your £20 windfall is an “outlier”; unimportant in the larger scheme of things. Of course, banks CAN give gifts. So what? Planes CAN fly upside down if the pilot so chooses, but that’s not “normal” flying.
My basic rules are “truthful evidence” and “good logic”. I say (and prove) bank “lending of credit” uses fraudulent accounting. Bank “gift giving” does not.
Re: “This is just what the banks call it, so it's unambiguous”.
Since you’re talking about “money”, your statement is false and based on bad logic. “Bank use” does not remove the ambiguity of the word money. Money remains ambiguous whoever says it and saying it more often or louder doesn’t make it unambiguous. When important people use it indiscriminately, you have the best reason for questioning the integrity of their argument.
There is no inconsistency in saying governments create $money$ and banks create <money>, meaning <credit>. The two different meanings apply to the same word whether you want them to or not, so I’ll accept these “earmarks” as a means of enforcing disciplined logical thinking.
If you don’t want to recognise that difference and prefer to “go with the flow”, I wish you luck but predict confusion.
From a balance sheet perspective, the only difference between money and credit in the terminology you prefer is who the debtor is: the central bank or a retail bank. They work in exactly the same way as each other.
I'm not deliberately trying to confuse. I've just seen so many different preferences for terminology that I've decided it's best to pick a common one and stick to it. I honestly don't think that the choice of words affects any of the analysis of how banks work.
Precisely which statement do you claim is false and based on bad logic? The one you quoted? If so, all I mean is that if I tell you I'm using the word "money" to mean either "reserves" or "deposits", there's no ambiguity in what I'm talking about, because none of my analysis is affected by the difference between the two, just as it isn't affected by whether a deposit is created by Bank A or Bank B.
Go easy on *absolute* words, like "only" and "exactly". They'll often cause unnecessary disagreement; like the *ambiguity* of "money".
When you say "only", you (unintentionally) dismiss the convenience, immateriality and weightlessness of <money>, and the word "exactly" wrongly equates two different "ways of working".
$money$ is interest-free [at source].
<money> is interest-bearing [at source].
$money$ doesn't disappear when it cancels a $debt$.
<money> disappears when it cancels a <debit> but <debits> are not necessarily $debt$. [Let me know if you don't recognise or understand that last one.]
All of the differences between $money$ and <money> underpin the banks' determination to eliminate $money$ and force us to use CBDC, their "Oh so convenient" interest-bearing, <money> which can also be made "programmable" by its issuer to restrict its use in totalitarian ways.
Will your notation become an economic equivalent of Newton's laws of motion?
It may reach that point one day, and you might hasten that day if you drop the “curious … jargon” bankers have entrenched in the common language. For my money, if you don’t, it won’t.
For example, your description of banking as “creating money” contradicts your earlier article on “Money and Banking (2)” [July ‘23].
In “Money and Banking (2)” [July ‘23], you depict a bank “loan” using TWO “amber-debt” arrows pointing in opposite directions [https://www.economics21st.com/i/133430487/new-loan], which proves such a “jargon loan” process doesn’t create “new money”. That process is often called “credit creation”, but such “credit” (which you show as a pink-green arrow for “Bank owes amber to Alice”) is often confused with “money” (which is “notes and coin”) shown as “amber” in your models.
Nevertheless, in agreement with Prof. Perry Mehrling’s description of all such “jargon loans”, your 2023 article correctly showed a “bank loan” as “a swap of equal IOUs”, which belies the name “loan”; swapping “£100 in one form” for “£100 in a different form” is NOT a “loan”, it’s a “swap”.
So, what is the contradiction I mentioned in my previous comment? This present article allegedly describes “[a] bank creating money for Alice” and contains at least three errors that I can see, viz.: (1) the claim the bank is “creating new money”, and in so doing; (2) “decreases the issuing bank’s RNW”, while (3) your diagram shows the bank promising (or owing) Alice “£100” for nothing in return (L>R arrow; “Bank owes £100 to Alice”).
The errors are: (1) the issuing bank doesn’t create £100 in “new money” (amber), it creates a “credit balance in its liability account” (a green-pink arrow representing the “£100-worth” of amber the bank owes to Alice); (2) in so doing, it not only incurs a new liability (L>R arrow: “Bank owes £100 to Alice”), but also gains Alice’s promise to pay the bank, an equal new asset (L<R arrow: “Alice owes Bank £100”), so its RNW remains *unchanged*; and (3) the “issuing bank” is missing its second (L<R) arrow.
Newton would not make such mistakes. The bank's RNW would decrease if the bank gave Alice a £100 note or simply credited her account with £100 as a gift, and neither is implied by your pink-green arrow labelled “£100”, or occurs in real life.
Thanks again for the comment. I'm going to disagree with you though. One of the key ideas in this analysis is treating individual actions as the atomic units of economic activity, not the more complex transaction (exchange) consisting of multiple actions. We can analyse the effects of the individual actions, and then add them together to find the effect of a more complex scenario.
Here's my response to your 3 claimed errors:
1. Yes, in this diagram, the bank is increasing Alice's credit balance. That is an increase in M1 (see https://en.wikipedia.org/wiki/Money_supply#cite_ref-dollardaze.org_7-0), which is a monetary aggregate. I agree there's inconsistency in terminology between writers, but considering "demand deposits" to be money is broadly accepted in business, economics and banking. Firms and auditors have no interest in distinguishing between cash and demand deposits e.g. in Quantas's annual report for 2024 (https://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/annual-reports/2024-Annual-Report.pdf), you can see on P88 (Note 21(A)) that it doesn't separate out cash and demand deposits: it's all just "Cash and cash at call balances". Demand deposits are the standard means of exchange.
2. Creating a demand deposit certainly does decrease the bank's RNW (its liabilities↑). It may well be that this is one action of a transaction in which Alice gives something in exchange (e.g. writing a promissory note, or handing over a big box of stationery). That other action would cause the bank's RNW to increase, and may or may not exactly cancel out the £100 decrease in its RNW from creating the demand deposit.
3. There is no reason at all why the bank couldn't just create a £100 demand deposit for Alice. For example, it could decide to give her £100 as compensation for previous poor service. In that case, there is no arrow in the opposite direction. It simply increases Alice's RNW by £100, and decreases the bank's RNW by £100. (As we've seen, this would typically flow through to the bank's shareholders via a decrease in equity: https://www.economics21st.com/p/equity-vs-net-worth). It's very important to get away from the idea that every increase to one person's RNW is balanced by a different decrease to that person's RNW (and vice-versa). It's simply not true.
As an engineer, I understand your admiration of Newton. Without debating Qantas or Wikipedia I can help you establish the coherent “Newtonian economic language” you seek, as follows: money is money [T]; credit is not money [T]; a bank can create credit [T]; but can’t create money [T]. Your article implies it can create money [F]. {End of language debate}
My comment challenges the accounting errors in your “bank jargon” description of the bank creating “money” (but meaning credit). Your text necessarily implies the bank is “lending credit” and, in that context, your “£100 arrow” perfectly describes “one hand, trying to clap”; it just doesn’t work that way. All your alternative hypotheticals [compensation for poor service, etc.] are red herrings which don’t counteract my claim because they are obviously not “loans” and so don’t create “money”.
You can’t atomize (or disintegrate) a bank’s “money” creation trans-action because it needs two trans-actors and its opposite effects on them occur simultaneously (c.f. Newton's Laws). Its *effects* are not separate *actions*; there’s only one trans-action (c.f. ice-skating Alice’s Newtonian push against Bob) and the bank records both of its effects to balance its books (as would Alice, if she kept accounts). In the case of a bank “loan”, Alice’s promissory note provides the Newtonian “debit push”, which creates the bank’s Newtonian “credit reaction”, whereas your diagram shows the bank incoherently “reacting” to a non-existent “push”. That’s plainly non-Newtonian accounting.
Finally, the “double-entry rule” is not the *Balance Sheet Equation*. The *Balance Sheet Equation* only applies “in-house”, not “cross-border”. It’s the double-entry rule that enforces the match between “changes in RNW” of individuals “trans-acting” across their common “border”. Double-entry accounting seems to cover all your perceived aims, as long as you get the ownership of credit balances correct, and that means bank “lending of credit-balances” is criminally fraudulent, as it’s based on deliberate *linguistic deception*, which you call “curious jargon”, but insist on using. Using “bank jargon” simply maintains the deception, which hides the crime.
"Finally, the “double-entry rule” is not the *Balance Sheet Equation*. The *Balance Sheet Equation* only applies “in-house”, not “cross-border”."
I'd say both of those are "in-house". The double-entry rule is only an accounting convention. The balance sheet equation simply reflects the definition of net worth.
What's fundamental, and "cross-border", is that actions *apart from production and consumption* are one person's credit (RNW↓) and another person's equal and opposite debit (RNW↑), and that's the focus of all my writing.
The various posts on double-entry bookkeeping here may be useful:
https://www.economics21st.com/p/topic-index
"bank “lending of credit-balances” is criminally fraudulent"
It's just swapping two new IOUs. Anyone can write an IOU, and as long as they are solvent, I don't see any fraud.
As you say, both double-entry and the balance sheet equation are "in-house" and double-entry applies both in-house and cross-border. No problem.
I was responding to part “3” of your Dec 24 comment, in which you want to get rid of the “idea” that, for any person, every “increase” of his RNW is *balanced* by a “different decrease” of his RNW. I didn’t express that “idea”. The “idea” itself seemed self-contradictory and I’ve no idea where it came from.
Re "criminal fraud": See the one-page summary in my #6 article at this link:
[https://patcusack.substack.com/i/137645178/one-page-summary-of-the-credit-lending-fraud]
If you pre-emptively believe there is no fraud, you’ll never see it. Look at the bank documents (the evidence) first. Question that evidence thoroughly. Understand the accounting rules. Then draw your own conclusion.
"I was responding to part “3” of your Dec 24 comment, in which you want to get rid of the “idea” that, for any person, every “increase” of his RNW is *balanced* by a “different decrease” of his RNW. I didn’t express that “idea”. The “idea” itself seemed self-contradictory and I’ve no idea where it came from. "
If I've understood you correctly, you claim that a bank can only credit a person's account if that person signs a promissory note to the bank. Is that correct? What I'm saying is that a bank can credit a person's account without having to receive something in exchange.
"If you pre-emptively believe there is no fraud, you’ll never see it."
That's not the case. I investigated it thoroughly, without preconceptions, and *concluded* that there is no fraud.
Delete the word "only". That is not correct. I have never restricted the capacity of the bank to create credit like that. Every deposit at a bank (cash or promissory note) obviously creates both a credit and a debit in the bank's accounts.
I've also agreed that a bank CAN give gifts. It's just a rare occurrence and irrelevant to the topic of bank fraud.
Did your fraud investigation include a forensic examination of the redacted ANZ Bank account statements reproduced in my article #6 at this link [https://patcusack.substack.com/i/137645178/one-page-summary-of-the-credit-lending-fraud]? If not, I look forward to your comments on my analysis after you've read that article.
"You can’t atomize (or disintegrate) a bank’s “money” creation trans-action because it needs two trans-actors and its opposite effects on them occur simultaneously (c.f. Newton's Laws)."
Analysis involves breaking larger structures down into smaller ones. There's no problem with analysing complex accounting into its simplest components, just like we can decompose forces on an aeroplane into vertical (weight, lift) and horizontal (thrust, drag), and analyse them independently. We can even consider, say, the weight and lift forces independently, even though the effects often cancel each other out.
"In the case of a bank “loan”, Alice’s promissory note provides the Newtonian “debit push”, which creates the bank’s Newtonian “credit reaction”"
I strongly disagree with this. Newton's 3rd law describes an automatically opposite and equal reaction. The bank crediting Alice's account when she signs a promissory note is a negotiated quid pro quo, and whenever interest is charged is *not* equal.
The only automatically equal and opposite reaction to Alice crediting loans by $100 in her accounts is the bank debiting loans by $100 in its accounts. They are just the same event seen from different perspectives.
Your " not equal " mistake results from your strongly disagreeing with Newton and reality. I have not misrepresented reality; you have.
It is a mistake to include interest charges in the accounts when Alice first deposits the signed “loan agreement” because interest does not appear in the initial transaction.
The first instalment of interest only appears in a subsequent statement of the bank’s asset account as a new Debit item, increasing the Debit balance “at that time”. Wherever the matching credit goes, the bank gets it and keeps it.
You insist on “balance” between cross-border parties in every transaction but don’t see it when I present it.
If you're going to claim I'm disagreeing with Newton, I'd like to see a quote from him and a quote from me side-by-side which are mutually contradictory. Otherwise I'm afraid I'm not going to take it seriously.
There is no explicit indication of time in the diagram, and the timing of when to "recognise" a balance sheet entry (or when it appears on the statement) is a matter for accounting convention. However, agreeing to the terms of the loan, perhaps combined with not repaying early, *does* commit Alice to the payment of interest, and it's appropriate to treat them as a group. The 3 transfers of RNW are all consequences of the loan agreement.
I've never insisted on balance between parties in *transactions*. I only insist that the 5 *actions* (each represented by an arrow) other than production and consumption increase one person's RNW by exactly as much as they decrease another person's. I don't see how this can be disputed, but if you think you have an example where this isn't the case, please do reply with it, and I'll gladly respond.
I'd argue that it's perfectly possible for a borrower to agree to pay the lender $100 in the future in exchange for the lender paying the borrower $99 now. It's my understanding that that's what happens when governments issue bills.
There's no necessity for the two debts to be equal: it's decided by negotiation. One party's credit always exactly matches the other party's debit, and the first party's debit always exactly matches the second party's credit, but there's no requirement that the first party's debit and credit are equal to each other.
"they are obviously not “loans” and so don’t create “money”"
I agree that a bank crediting a customer's account (and debiting its equity) isn't lending. And yet it increases the M1 monetary aggregate. Your insistence that "money" can only be created by lending seems at odds with this very simple observation. How do you reconcile that inconsistency?
I understand you have firm views about terminology, and that's fine, but the usage I've adopted is pretty mainstream. Banks create our primary means of exchange, and I would bet that most readers consider it reasonable to call it money. From now on I'm only going to respond to the substance of balance sheet entries and changes.
I'll certainly challenge your claim of accounting errors. For example, when a bank lends $100 to Alice, there are 4 accounting entries:
Bank:
[1] Debit loans $100
[2] Credit deposits $100
Alice:
[3] Debit deposits $100
[4] Credit loans $100
As I say, I'm not going to debate terminology. This is just what the banks call it, so it's unambiguous.
The pink-to-green arrow from the bank to Alice represents entries [2] and [3], which are the same action seen from two different perspectives: the bank creating a new debt.
Entries [1] and [4] would be represented by a pink-to-green arrow from Alice to the bank. Again, they are the same action (Alice creating a new debt) seen from two different perspectives.
So lending is the creation of *two* new debts, each of which can be represented by an arrow. But it's perfectly possible for a bank simply to create a new debt without getting anything in return, and that's what's illustrated in the diagram of this article. I have been on the receiving end of such a transfer when my first bank account was credited with £20 as an incentive for opening an account with them. There was no lending involved - just accounting entries [2] and [3].
Do you disagree that such a thing is possible? If so, you have to tell me exactly which accounting entries would appear in the bank's accounts.
(Incidentally, there *is* a debit to the bank's accounts when it does this: to its equity i.e. it now owes £20 less to the shareholders).
There's no "lending of credit" - just a credit of my account: the creation of a new debt, which any adult and any legal entity is allowed to do.
Your £20 windfall is an “outlier”; unimportant in the larger scheme of things. Of course, banks CAN give gifts. So what? Planes CAN fly upside down if the pilot so chooses, but that’s not “normal” flying.
My basic rules are “truthful evidence” and “good logic”. I say (and prove) bank “lending of credit” uses fraudulent accounting. Bank “gift giving” does not.
Re: “This is just what the banks call it, so it's unambiguous”.
Since you’re talking about “money”, your statement is false and based on bad logic. “Bank use” does not remove the ambiguity of the word money. Money remains ambiguous whoever says it and saying it more often or louder doesn’t make it unambiguous. When important people use it indiscriminately, you have the best reason for questioning the integrity of their argument.
There is no inconsistency in saying governments create $money$ and banks create <money>, meaning <credit>. The two different meanings apply to the same word whether you want them to or not, so I’ll accept these “earmarks” as a means of enforcing disciplined logical thinking.
If you don’t want to recognise that difference and prefer to “go with the flow”, I wish you luck but predict confusion.
From a balance sheet perspective, the only difference between money and credit in the terminology you prefer is who the debtor is: the central bank or a retail bank. They work in exactly the same way as each other.
I'm not deliberately trying to confuse. I've just seen so many different preferences for terminology that I've decided it's best to pick a common one and stick to it. I honestly don't think that the choice of words affects any of the analysis of how banks work.
Precisely which statement do you claim is false and based on bad logic? The one you quoted? If so, all I mean is that if I tell you I'm using the word "money" to mean either "reserves" or "deposits", there's no ambiguity in what I'm talking about, because none of my analysis is affected by the difference between the two, just as it isn't affected by whether a deposit is created by Bank A or Bank B.
Go easy on *absolute* words, like "only" and "exactly". They'll often cause unnecessary disagreement; like the *ambiguity* of "money".
When you say "only", you (unintentionally) dismiss the convenience, immateriality and weightlessness of <money>, and the word "exactly" wrongly equates two different "ways of working".
$money$ is interest-free [at source].
<money> is interest-bearing [at source].
$money$ doesn't disappear when it cancels a $debt$.
<money> disappears when it cancels a <debit> but <debits> are not necessarily $debt$. [Let me know if you don't recognise or understand that last one.]
All of the differences between $money$ and <money> underpin the banks' determination to eliminate $money$ and force us to use CBDC, their "Oh so convenient" interest-bearing, <money> which can also be made "programmable" by its issuer to restrict its use in totalitarian ways.
Will your notation become an economic equivalent of Newton's laws of motion?
It may reach that point one day, and you might hasten that day if you drop the “curious … jargon” bankers have entrenched in the common language. For my money, if you don’t, it won’t.
For example, your description of banking as “creating money” contradicts your earlier article on “Money and Banking (2)” [July ‘23].