4
$\begingroup$

Bank of England (2014):

Money can also be destroyed through the issuance of long-term debt and equity instruments by banks.

How is money destroyed when banks issue debt?

Say Bank X issues a £100 10-year bond that Person Y buys with £100 cash. Then

  • X has assets +£100 (cash) and liabilities +£100 (10-year bond); and
  • Y has assets +£100 (10-year bond) and assets -£100 (cash).

How is any money destroyed?

Improve this question
$\endgroup$
1
  • $\begingroup$ Destroying money by selling looks like the inverse of quantitative easing, which increases money by buying treasury bonds (or whatever the Brits call them). $\endgroup$
    – RonJohn
    Feb 28, 2021 at 23:37

2 Answers 2

Reset to default
5
$\begingroup$

Generally, people do not pay for bonds with currency (e.g. pound notes). They pay with bank deposits. This means that Y has lost a deposit.

  • If the deposit was with X, the deposit is just destroyed; X does not hold deposits against itself.
  • If the deposit was with another bank Z, bank Z loses the deposit, and it has to transfer the 100 pounds to X via the payments system. X will not hold a deposit at Z.

In either case, bank deposits are destroyed, and they are a component of the money supply.

Improve this answer
$\endgroup$
3
  • 2
    $\begingroup$ It may also be worth examining the meaning of "money" in this context. The OP talks of "money" and not "money supply", and essentially what happens here is not that "money is destroyed" (in the sense of the transaction having an overall neutralising effect), but that the transaction yields assets and liabilities which are no longer considered conventionally to be part of the "money supply" (unlike bank account deposits). $\endgroup$
    – Steve
    Feb 28, 2021 at 7:34
  • $\begingroup$ Don't forget that when the bond matures the reverse will happen and the money will get un-destroyed, or should I say, recreated. $\endgroup$
    – Mick
    Mar 1, 2021 at 15:36
  • $\begingroup$ The quoted text refers to the issuance of bonds, not the entire life cycle. In a growing economy, issuance will tend to be larger than maturities, and so net issuance remains positive. $\endgroup$
    – Brian Romanchuk
    Mar 1, 2021 at 16:26
4
$\begingroup$

They actually explain that in greater detail in the middle of the paper. According to McLeay, Radia and Thomas (2014):

Money can also be destroyed through the issuance of long-term debt and equity instruments by banks. In addition to deposits, banks hold other liabilities on their balance sheets. Banks manage their liabilities to ensure that they have at least some capital and longer-term debt liabilities to mitigate certain risks and meet regulatory requirements. Because these ‘non-deposit’ liabilities represent longer-term investments in the banking system by households and companies, they cannot be exchanged for currency as easily as bank deposits, and therefore increase the resilience of the bank. When banks issue these longer-term debt and equity instruments to non-bank financial companies, those companies pay for them with bank deposits. That reduces the amount of deposit, or money, liabilities on the banking sector’s balance sheet and increases their non-deposit liabilities.

In the 10y bond example above I would say money was not destroyed because that 10y bond would be likely liquid enough to count as broad money (although if you would just want to look at narrower measures it would). However, some non-traditional long term debt that is very illiquid would qualify even with broad measures of money.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.