By Douglas Coe and Ann Pettifor
The Bank of England has performed a vital service with two articles on the nature of money in their latest Quarterly Bulletin. Its economists have confirmed that most of the money in the modern economy is created by private banks making loans. Rather than banks lending out deposits that are placed with them, the act of lending itself creates deposits. Banks, it turns out, are not simply intermediaries lending out money that savers deposit with them. The money multiplier process is an incorrect account of the lending process; and bank lending is not constrained by reserves.
Moreover the Bank emphasises that this is “the reverse of the sequence typically described in textbooks”. Let us be clear here: this is not a failure of some textbooks; it is a failure of virtually all textbooks.
In this latest in PRIME’s series of analytic pieces, Coe and Pettifor explore the implications for the economics profession of the Bank of England’s two articles. Click here to view the full analysis.
We really do have to stop all this talk of bank ‘lending’ if we’re going to get this vital point across. Banks aren’t lending, they’re creating. That’s the real story.