Endogenous Money Creation by Banks
Post-Keynesian economics, Basil Moore · Horizontalists and Verticalists: The Macroeconomics of Credit Money (1988)
Banks do not lend out pre-existing deposits; they create new money ex nihilo when they extend loans. This makes the money supply endogenous, driven by the demand for credit rather than central bank reserves.
Core Concepts
The Problem
Mainstream economics treats banks as intermediaries that transfer savings to borrowers, leading to mistaken policies that attempt to control money supply via reserve requirements, when the real issue is credit creation and its impact on asset prices.
The Claim
The money supply expands and contracts endogenously with bank lending, and the central bank can only influence the price of credit (interest rates) but not the quantity directly.
Key Evidence
- •Empirical studies showing that loans create deposits, not vice versa
- •Bank of England paper 'Money creation in the modern economy' (2014)
- •Historical operations of banking systems
Practical Implication
Policies must regulate bank lending standards and speculative credit directly, as interest rate adjustments are insufficient to prevent credit-driven bubbles.
Nuance & Limits
While banks create money, they are still constrained by profitability and capital requirements; thus central banks can influence credit through regulation and macroprudential tools.
Source Material
Citation Density
High — widely recognized in heterodox and increasingly mainstream discourse
Gaps
- ⚠ Transition from current fractional-reserve institutional framework
- ⚠ Measurement difficulties in real-time credit flows
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