The texts by the B.of England and the Bundesbank about money creation, quoted by this strange article, are absolutely correct. Banks create money, but not of course, unconstrained and without limit.The article does not seem to dispute these views voxeu.org/article/banks-… 1/n
The article focus only on criticizing the expression “created out of nothing” because it interprets it as meaning that the banks create money unconstrained and without limit. Whether it means that or not, it’s not really a relevant point, requiring a Voxeu piece to make it. 2/n
What matters is that banks do not wait for previous savings to be deposited with them to create credit/money.They create “purchasing power”when they give credit which is a risky asset, just a promise of repayment.That this is not 100% equal to”out of nothing” is not important 3/n
Relevant is that banks allow an entrepreneur without enough money/savings to fund his investment. Other parts of the financial system can also fund investments but they don’t do it by creating general “purchasing power”(money). They redeploy existing “purchasing power” 4/n
For Schumpeter what matters for growth is “the creation of purchasing power by banks…It is always a question, not of transforming purchasing power which already exists in someone's possession, but of the creation of new purchasing power out of nothing” (!) 5/n
Surely, Schumpeter by writing “..out of nothing” didn’t mean that banks can do it without constraints and without limit.Banks need capital and have to find enough solvent debtors. This will also be affected by central bank policies and by banking regulation 6/n
The creation of new money expands the system and that’s what is relevant for the non-keynesian Schumpeter who, like Keynes, didn’t belief that savings had to materialise before investment was funded and done. 7/n
Schumpeter again: “The banker..is not so much primarily a middleman in the commodity of "purchasing power" as a producer of this commodity”. Investment is financed by the liquidity of “purchasing power” not by savings. 8/n
Broad monetary aggregates are mostly made of bank money; are mostly endogenous to the economy; there is not a stable, predictable multiplier, and savings do not necessarily precede investment, although, by definition, they are equal a posteriori. 9/n
The creation of bank money does not depend on banks having previous deposits or reserves in the CB. Reserves can be obtained afterwards if needed. Instead of a “multiplier” one could even talk about a “divisor” going from bank money to central bank reserves.(cf Goodhart) 10/n
Our economies absolutely need that a part of the monetary and financial system ensures this function of credit/money creation and the function of maturity transformation i.e. having credit/assets with long maturities and liabilities/ deposits with short term maturities 11/n
Gary Gorton: “ Banks produce..money..This short-term debt is an inherent feature of market economies. It is a fact that the output from real production happens at longer horizons than agents want to transact..maturity transformation is a built-in feature of a market economy” 12/n
These two function of credit/money and maturity transformation are what makes something like banks and banking indispensable to our economies. All technologic utopias of doing away with banks and banking are thus wrongheaded 13/n
Those features are also what makes banks fragile and requiring heavy regulation to protect consumers and the economy from the externalities they generate, especially if they fail 14/n
The balance sheet equation makes assets equal to liabilities (+ net worth) but the actual sequence of events in money creation is very important to understand the operation and the logic of our entrepreneurial monetary production economy. 15/n
The article in question, by focusing on the criticism of its own interpretation of what means “creation out of nothing”,hopefully, will not be interpreted as putting into question the preceding broad views about money. But that risk exists, thus these tweets. 16/16
