Primary Credit

Historically, the initial funds for the economy were thought of as M0, notes and coins in circulation, cash that was created by government. It should be noted that credit (the value of credit balances in bank accounts, M4) has the same standing as cash (cash is just another form of credit and is backed by negative balance in an account).

When the Bank of England prints bank notes it puts them into its safe and debits its cash account with the same value. When high st banks buys notes from the Bank of England, they debit their cash account and credit the Bank of England the high st bank's accounts remain in balance as value of the cash in the safe is negated by debit to the cash account. The Bank of England credits its cash account reducing the size of the debit balance keeping it in balance. Cash is the same as credit, just a different method of counting it.

The government owns the Bank of England and controls the lending rules. It can ask for two accounts to be opened with zero balances - lets call one Primary Credit and one Primary Debt. Ledger entries are then passed, debiting the the Primary Debt account with £500 billion and crediting the Primary Credit account with the £500 billion. The Primary Debt account attracts no interest and there are no repayment requirements. £500 billion is created from nothing - £500 billion is roughly the size of the 2005 level of government borrowing.

If the government borrows money not backed by a Fractional Reserve Ratio it provides the economy with Primary Credit.

Any government putting too much PC into the economy will cause inflation, and a government taking too much out will cause recession as money supplies dwindle. If a government wants to restart an economy it can increase Primary Credit.

Government borrowing is currently made from a variety of sources, e.g. government bonds, direct loans from banks etc. The government pays out £29.5bn in interest payments against these loans each year. However the government could borrow this money from the Bank of England (BoE) which it owns and it could borrow the money at a zero interest rate and without the need for the loan to be backed by deposits, i.e. with a zero Fractional Reserve Ratio. The loan would effectively be backed by the government, i.e. have security based on the government's good standing but would not cost any more than the administration required to set the loan up, just a few pounds.

Currently total government borrowing is now around £570bn, which represents 32% of M4. If we view this money as the Primary Credit for the economy and transfer it to a zero interest loan, the debt no longer has the negative connotations and becomes the key driver for the economic system.

The savings to the state would be £29.5bn each year, money that could be invested into public services.

If the government repays some the loan that created Primary Credit, then it shrinks the available money supply by removing the money.

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