Despite What You’re Told, Banks Do Not ‘Create Money’

Despite What You’re Told, Banks Do Not ‘Create Money’

Share to Linkedin In addressing what's ridiculous, it's probably best to start with something basic. Let's imagine you the reader possess $1, 000 in cash. As the owner of those funds you have no limits on what you can do with them. In other words, you could lend to someone else the $1, 000 in total. Which elicits a question: how much would you have after lending $1, 000? That you would have $0 is a statement of the obvious, but sometimes the obvious requires stating. It does given the popular view among financial journalists and Fed officials that banks, for being banks, can create money. A recent book review in the Wall Street Journal asserted just that. In an analysis of former Fed official Lev Menand's new book, The Fed Unbound, the reviewer contended that banks, seemingly for being banks, are similarly unbound. According to the reviewer, when you take out a mortgage "your bank credits your account with dollars that did not previously exist." Yes, the Fed official and the reviewer believe banks operate without boundaries. No, this thinking isn't serious. If it were, why would banks pay interest at all on deposits? If banks can just create