Bank Credit

Bank credit or bank loan is the loan from the bank. The borrower has to pay back the loan principal and loan interest as specified in the loan agreement.

Every time bank issues a loan the credit-money is created. Every time borrower is paying back the loan – the credit-money is destroyed. Freshly created credit-money increases the money supply. I.e. if one takes the loan from the bank, then the total money supply will increase all other participants in the economy.

When the total amount of base-money (central banking money) and credit-money are growing faster than the GDP, then we will get inflation. Otherwise, there will be deflation.

The central bankers’ aim is that the total money is growing faster than the inflation, they are actually targeting ca 2% inflation. Why is it so? It’s because productivity is growing year to year by 2%. Central bankers want to balance out the productivity growth in the economy by increasing the total amount of money. This results in inflation for the general populous and in the loss of wealth for the savers.