A really stupid Question

Can a bank secretly create money?

I know via fractional reserve banking they can, whereby the asset & liability is created at the same time. Can say Barcalys,at a push of a button, electronically create £1m more in their account to sit on their Balance sheet as an asset?

Obviously this does not happen? But why?

Also, how do forex trading actually work? If financial institution A sells yen to Financial instition B (both based in London), how is it credited/debited to them. Can Financial institution A not electronic create yens to sell? I mean, the Japanese aren't going to know if someone in UK sold yen for sterling right?

Thanks

Yes, so long as an auditor doesn't notice

In practice, I'm afraid they will. Eventually.

(Above assuming entire bank is in on it)

bullboy8 said:

Can say Barcalys,at a push of a button, electronically create £1m more in their account to sit on their Balance sheet as an asset?

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You cannot add an asset to the balance sheet without either adding a liability, reducing another asset, or increasing an expense. The books wouldn't balance so it would all show up in the quarterly statement - and presumably the reports to regulators.

Also, how do forex trading actually work? If financial institution A sells yen to Financial instition B (both based in London), how is it credited/debited to them. Can Financial institution A not electronic create yens to sell? I mean, the Japanese aren't going to know if someone in UK sold yen for sterling right?

Click to expand...

Same idea as above. The bank is receiving something in exchange for the Yen - sterling for example. There has to be an offset to the addition of sterling to the balance sheet and there has to be a balance from which the yen outflow is accounted for. Plus on one side. Minus on the other.

John of course they could if everyone were in on it, they could just make up the balance sheet.

Yes it would eventually be noticed, but for some time they could get away with it...

If you (for example) buy EUR 1mio vs USD from Bank A, then your Euro account will be credited tomorrow with EUR 1mio, and your USD account debited to the tune of USD 1.3mio (or whatever the relevant rate is).

From tomorrow, you will earn interest on your EUR day by day, whilst simultaneously paying interest on your overdrawn USD account.

In other words, you are borrowing USD to lend EUR.

The key is this - in order to short something (in this example USD), you need to BORROW it (because you don't have it in the first place).

Fractional reserve banking ---- excellent piece on that on Wikipedia. The bank does not create money, it simply leverages its deposits, according to whichever capital requirements are in place at the time.

Why would they need to fraudulently create money when they can do it legitimately on the backs of the army of idiots lining up for credit to buy silly things?

I still don't understand the forex question. Let me use another example, Bank UK has no yen. I bank with Bank UK and sell sterling to buy yen. Can Bank UK not create the Yen out of thin air? How will Japan know if Bank UK has created their currency. There must be something in the middle to match the trade up, like the sterling being sent over to Japan and Japan receiving the sterling.

You're making it too complicated.

Let's say Bank UK itself wants to sell the JPY, but it doesn't have any. It needs to find someone from whom it can borrown the JPY, in order to then sell. In return for selling the JPY, it will receive GBP which it will then lend out.

OR it could simply buy GBP/JPY in the market. Two days later, its GBP account will be credited with the GBP, and its JPY account debited for the JPY. But wait .. it never had any JPY to sell! So it will now be charged overdrawn interest on its JPY account, by the bank with whom it has a JPY account.

However you slice it, buying GBP is borrowing in JPY to lend into GBP, with the attendant exchange risk.

The fact of the matter is that just about anyone can create an asset out of thin air, but it's usually called fraud to do so. To quote an old line:

He who sells something that isn't his'n
Must buy it back or go to prison

Banks create credit through fractional reserve banking. In fact, fractional reserve banking necessitates the continuous creation of new money.

E.g. if the central bank originally creates £100 and lends it out at interest, then additional money needs to be created in order to pay that interest.