<p>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.</p>
<ul>
<li>If the deposit was with X, the deposit is just destroyed; X does not hold deposits against itself.</li>
<li>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.</li>
</ul>
<p>In either case, bank deposits are destroyed, and they are a component of the money supply.</p>

CC BY-SA 4.0
2021-02-28T07:34:04.857Z
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).
Steve
CC BY-SA 4.0
2021-03-01T15:36:44.433Z
Don't forget that when the bond matures the reverse will happen and the money will get un-destroyed, or should I say, recreated.
Mick
CC BY-SA 4.0
2021-03-01T16:26:51.017Z
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.
Brian Romanchuk
CC BY-SA 4.0
2021-02-28T03:33:39.400Z
2021-02-28T12:16:21.213Z
2021-02-28T12:16:21.213Z
Brian Romanchuk
<p>They actually explain that in greater detail in the middle of the paper. According to <a href="https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy" rel="nofollow noreferrer">McLeay, Radia and Thomas (2014)</a>:</p>
<blockquote>
<p>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.</p>
</blockquote>
<p>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.</p>

CC BY-SA 4.0
2021-02-28T03:34:21.770Z
2021-02-28T03:34:21.770Z
1muflon1
<p>Bank of England (<a href="https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy" rel="nofollow noreferrer">2014</a>):</p>
<blockquote>
<p>Money can also be destroyed through the issuance of long-term debt and equity instruments by banks.</p>
</blockquote>
<p>How is money destroyed when banks issue debt?</p>
<p>Say Bank X issues a £100 10-year bond that Person Y buys with £100 cash. Then</p>
<ul>
<li>X has assets +£100 (cash) and liabilities +£100 (10-year bond); and</li>
<li>Y has assets +£100 (10-year bond) and assets -£100 (cash).</li>
</ul>
<p>How is any money destroyed?</p>

CC BY-SA 4.0
2021-02-28T23:37:44.893Z
**Destroying money by selling** looks like the inverse of quantitative easing, which **increases money by buying** treasury bonds (or whatever the Brits call them).
RonJohn
<money-supply><money>
How is money destroyed when banks issue debt?
user92011
# How is money destroyed when banks issue debt?

(Asked by: username_0 on 2021-02-28)

Bank of England ([2014](https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy)):

> 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?

**Tags:** money-supply, money

> **Comments:**
> **username_1**: **Destroying money by selling** looks like the inverse of quantitative easing, which **increases money by buying** treasury bonds (or whatever the Brits call them).  

---

## 2 answers

### Answer by username_2 on 2021-02-28. Score: 5

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.

> **Comments:**
> **username_3**: 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).  
> **username_4**: Don't forget that when the bond matures the reverse will happen and the money will get un-destroyed, or should I say, recreated.  
> **username_2**: 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.  

---

### Answer by username_5 on 2021-02-28. Score: 4

They actually explain that in greater detail in the middle of the paper. According to [McLeay, Radia and Thomas (2014)](https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy):

> 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.


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