You want a skateboard. It costs 5 coins. You have none.
Ali runs the class bank. She keeps a notebook of how many coins each kid has.
Ben has 20 coins in his jar. You ask him to lend you 5.
How many coins are left in Ben's jar?
Real banks have a bank of their own: the central bank. It is the bank for banks. It can make new money too.
Back to the skateboard. Ali offers a different deal. She writes +5 on your page, and takes no coin from anyone.
Now you write a promise: "I owe Ali 5 coins." Coins now, a promise for later. That is a loan. The promise is your debt.
Put the loan in order. Tap the steps, first to last.
A loan makes new money. And a debt.
Ali made 5 new coins with one pencil stroke. But you owe 5 coins back. Money and debt are born together.
Real banks do the same. For a house, the bank types new money into the family's account. It does not hand over anyone else's savings. Most money is made this way.
Which of these make new money? Sort each card.
Lots of loans make lots of new money. Lots of paying back makes it vanish. So the pile of money can grow or shrink.
Governments borrow too, when they spend more than they get in taxes. They sell bonds. A bond is an IOU, like your note to Ali.
Sometimes the central bank buys old bonds from people who hold them. It pays with brand new money, made on a computer.
In 1694, England needed money for a war with France. A new bank was set up to be the government's banker. It raised 1.2 million pounds in 12 days.
That bank was the Bank of England. Over time it grew into the UK's central bank. Most modern central banks copied it, though Sweden's is older.
Source: Bank of England (Wikipedia)
More money sounds great. But what if the shop still has the same sweets?
What happens to prices? Find out in chapter 5.
🧠 What you learned
- A loan makes new money and a debt
- Paying back makes that money vanish
- Governments borrow, and central banks can add money too
🎯 Question 1 of 12 · Easy
Ben lends you 5 of his own coins. What happens to Ben's jar?
What did you write when Ali's bank gave you 5 coins?
What is the central bank?
You pay all of your loan back to Ali. What happens to the 5 coins?
Which of these makes new money?
A bank gives a family a house loan. Where does the new money come from?
More loans are paid back than new loans are made. What happens to the pile of money?
What do governments sell when they borrow?
Why was the Bank of England set up in 1694?
How can a central bank get new money out to people?
What is the big difference between Ben lending and Ali's bank lending?
A bank lends 1,000 coins to families. Which is true afterwards?
Well done!
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Education, not financial advice. Never put in money you can't afford to lose.
👩🏫 Grown-up corner · 1 of 5
How a bank loan really works
The Bank of England explains that banks do not simply lend out the deposits savers place with them. When a bank approves a loan, it credits the borrower's account with a new deposit, and the loan is the borrower's debt. Some economists call this "fountain pen money". At the end of 2013, bank deposits were 97% of UK broad money, the Bank said in 2014.
👩🏫 Grown-up corner · 2 of 5
What stops banks lending without limit?
Banks can't lend freely. They must stay profitable and follow safety rules, and the central bank's interest rate affects how much people want to borrow. The Bank of England calls its policy "the ultimate limit on money creation". Banks earn by charging more interest on loans than they pay on deposits. Repaying a loan destroys money, so the total can shrink as well as grow.
👩🏫 Grown-up corner · 3 of 5
Michael Saylor's argument: money that is too easy to make
Michael Saylor argues that fiat money is far easier to create than gold: a bank record or a cheque takes about 20 seconds, he says, where the same amount of gold would take a day. He also argues that banks lending at ratios like 10 to 1 turn one deposit into many claims, which he says dilutes savers.
👩🏫 Grown-up corner · 4 of 5
What the Bank of England says back
The Bank of England says some textbooks describe this differently from how it works: banks do not simply lend out deposits, nor "multiply up" central bank money, and in 2014 the UK had no reserve requirement. It says the limits are profit, safety rules and interest rates, and the UK Government sets the Bank a 2% inflation target. Whether those limits are strong enough is exactly where Saylor and the Bank disagree. You can weigh both.
👩🏫 Grown-up corner · 5 of 5
Central banks, war and quantitative easing
The Bank of England began in 1694 as the government's banker during a war. It first used quantitative easing (QE) in March 2009. For QE it creates central bank reserves digitally and uses them to buy bonds from investors. The US, the euro area and Japan have used QE too. The Bank says the aim is to push bond prices up, lower long-term interest rates and boost spending. The Saylor Series argues instead that QE moves value from people who hold cash to people who own things like houses and shares.