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money creation

October 15th, 2019, 10:55 am

Can banks individually create money out of nothing? — The theories and the empirical evidence , 2014, International Review of Financial Analysis, Vol 36, Werner R.

"Thus it can now be said with confidence for the first time – possibly in the 5000 years' history of banking - that it has been empirically demonstrated that each individual bank creates credit and money out of nothing, when it extends what is called a ‘bank loan’. The bank does not loan any existing money, but instead creates new money. The money supply is created as ‘fairy dust’ produced by the banks out of thin air. The implications are far-reaching." 

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Re: money creation

October 15th, 2019, 11:05 am

"Why the image of ‘creating money out of thin air’ is misleading

"Ladies and gentlemen, I have tried to somewhat demystify the subject of money creation by the commercial banks. "

https://www.bis.org/review/r180118c.pdf

"The SNB’s monetary policy thus influences developments in lending both via demand for credit on the part of companies and households and via the banks’ credit supply. This keeps the creation of money by the banking system in check."

"If you, ladies and gentlemen, withdraw more money than usual before Christmas to do your Christmas shopping, the volume of banknotes in circulation increases, only to decrease again after Christmas when the money taken in by the shops flows back to the SNB via the commercial banks."
 
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Re: money creation

October 15th, 2019, 2:18 pm

I will read your reference, but before I do I will just note a couple of things. I share your skepticism about the received wisdom that banking activities increase the money supply With one exception, when they extend credit, banks lend out other people's money - either borrowed money (deposits, debt) or shareholder's money. 

The exception is, however, that banks can and do act as a conduit via which governments can increase the money supply. When governments print money they deposit it in the banking system whereupon it enters the economy via the funding of loans and such.

My other observation is that the quote makes a common mistake in that it confuses the money supply (the quantity of money) with the speed and frequency at which money circulates (the velocity of money). Banking activities serve to increase the velocity at which money circulated.