Daily Archives: September 25, 2014

Loan repayments destroy credit money. Right? Wrong. They don’t. (Part2)

Part 1 on this topic seemed to generate a lot of discussion both on the comments section  here  and  here

The consensus being that I was wrong !   So, what’s the correct view?

Let’s make it all as simple as possible. Let’s consider the example of  someone walking into the Royal Bank of Scotland to borrow one of their £10 notes. The RBS are one of those banks ‘north of the border’ who are allowed to print their own banknotes. They are essentially their IOUs . So these notes are the type of credit money we have been talking about. They tend to be well accepted in Scotland but less so in England.

So they borrow £10 and spend it on whatever!  When the time comes to repay the RBS the borrower could , leaving aside the complications of fees and interest payments, give them a Bank of England £10 note, the BoE being the Central bank of the UK, and the debt is cleared. The credit money is still in circulation. It isn’t destroyed.

Alternatively, they could repay with a RBS £10 note in which case the credit money is destroyed.

I probably should have said  “not necessarily” rather than “they don’t” but I think that’s all there is to the argument.