Credit and Capital Markets 3/2013 (Richard Werner)
What is the money that is used for the majority of our transactions, and where does it come from? Werner (1992, 1997, 2005) pointed out that our money supply is mainly created by banks . How do banks create money? As Werner (2005) ex- plains, banks simply invent 97% of the money supply when they credit borrowers’ bank accounts with sums of money that nobody transferred into these accounts from other parts of the economy . In other words, banks create money out of nothing when they extend bank credit (or purchase other assets) . This is why the process of granting bank loans is better described by the expression ‘credit creation’ .
Textbooks are still reluctant to make this clear, and many a trained economist, even banking expert or banking regulator seems unaware of this fact .
Bank of England:
|Whenever a bank makes a loan, it
simultaneously creates a matching deposit in the
borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the
description found in some economics textbooks:• Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
How do banks create the money supply?
• When someone takes out a bank loan the bank pretends that the borrower has paid in a deposit
• But neither the borrower nor the bank (nor anyone else) has paid in or transferred any money into the borrower’s account.
• The bank creates a fictitious deposit, and nobody is able to tell the difference – because banks are the settlement system of the economy, and we believe them to be honest accountants.
Since banks works as the accountants of record – while the rest of the economy assumes they are honest accountants – it is possible for the banks to increase the money in the accounts of some of us (those who reciece a loan), by simply altering the figures. Nobody else will notice, because agents cannot distinguish between money that had actually been saved and deposited and money that has been created ‘out of nothing’ by the banks.
This then, is also a major dustinguishing feature between credit creation in the banking system and the debasement of coinage that was implemented by monarchs in their attempts to increase the money supply: debased coins can be checked and indentified as such by experienced traders or professional assayists. However, bank credit creation is impossible to distinguish from ‘legitimate’ deposits, especially when the majority of transactions already takes place in a cashless form via the banking system