Banks create money by keystroke, not by lending existing deposits

Evidence

There is an idea that is still widespread in economics textbooks and among orthodox economists: the notion that banks are financial intermediaries that collect household savings which they then offer to businesses. This implies that it is the savings of households that allow for the financing of businesses. This vision of the role of banks and the financing of investment, however, is at odds with reality. When a bank lends 1 million euros to a company, it simultaneously creates a deposit of 1 million euros for its client. In other words, it creates an additional purchasing power of 1 million euros in the local economy. In order to be able to grant this loan, the bank does not need to have previously collected savings for an equivalent amount. It simply taps some numbers into a computer and credits 1 million euros – which are effectively created ‘out of thin air’ – to the account of its client. Only later does the bank worry about collecting the required reserves. In modern economies, therefore, ‘fresh’ money is created when commercial banks grant loans. This leads to the surprising consequence that credit – the creation of money ex nihilo – is what finances investment, not savings. In fact, it works the other way round: the investment is what creates the savings, as the economic growth induced by the increase in the investment rate tends to increase the national saving rate as well. — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 139 (#corroborates, via linked claim)

Imagine that the central bank provided everyone with a free digital wallet, effectively a free bank account. To attract people to use it, a stipend (or basic dividend) is credited monthly to each account making universal basic income a reality. Taking one step further, the central bank pays interest to those who shift monies from their savings at commercial banks to their new digital wallet. In time, a mass if not total exodus would follow as people moved their savings from the private banks to this new public digital payments and savings system. — Yanis Varoufakis, Technofeudalism, 720 (#complicates, via linked claim)

Categorization

• corroborated: 2 independent passages support this claim
• XREF: connects to: Banks create money out of thin air when granting loans rather than lending savings; Banks create money ex nihilo, so credit not savings finances investment — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 139; A public central-bank wallet can drain private banks of deposits — Yanis Varoufakis, Technofeudalism: What Killed Capitalism, 720 (+1 more)

Related

• Banks create money as ledger entries rather than lending existing deposits (similarity 0.90)
• Banks create money ex nihilo, so credit not savings finances investment (similarity 0.89)
• Banks create money out of thin air when granting loans rather than lending savings (similarity 0.87)
• A public central-bank wallet can drain private banks of deposits (similarity 0.86)
• Scarcity of savings stems from scarcity of loans, not vice versa (similarity 0.83)

Broader Connections

• Banks create money out of thin air when granting loans rather than lending savings #corroborates (1.00)
• Banks create money ex nihilo, so credit not savings finances investment #corroborates (1.00) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 139
• A public central-bank wallet can drain private banks of deposits #complicates (1.00) — Yanis Varoufakis, Technofeudalism, 720