Banks create money out of thin air when granting loans rather than lending savings
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)
Thus, a monetary system that represses internal credit, such as the CFA system, reflects a lack of confidence in the ability of economic agents to make productive use of bank loans: etymologically, the word ‘credit’ comes from the Latin ‘credere’, which means ‘to trust’ or ‘to believe’. In this context, the paucity of bank loans is not the result of a lack of national savings. Quite the opposite: since loans create deposits, it is the paucity of loans that causes the scarcity of savings! — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 140 (
#expands, via linked claim)
Categorization
- XREF: connects to: Banks create money ex nihilo, so credit not savings finances investment — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 139; Scarcity of savings stems from scarcity of loans, not vice versa; Scarce CFA credit causes savings scarcity, not the reverse. (+9 more)
Related
- Scarcity of savings stems from scarcity of loans, not vice versa (similarity 0.97)
- Banks create money ex nihilo, so credit not savings finances investment (similarity 0.96)
- Scarce CFA credit causes savings scarcity, not the reverse. (similarity 0.94)
- The CFA system’s credit repression causes savings scarcity, not the reverse (similarity 0.91)
- Banks create money by keystroke, not by lending existing deposits (similarity 0.87)
- The CFA franc structurally denied credit to economic actors outside colonial accumulation (similarity 0.84)
- Franc-zone banks hold idle liquidity instead of lending to the economy. (similarity 0.83)
- High credit growth rarely causes inflation when directed to productive investment (similarity 0.82)
- Banks create money as ledger entries rather than lending existing deposits (similarity 0.81)
- Competition plus central bank backstops drive banks to over-extend credit beyond real savings (similarity 0.80)
Broader Connections
- Banks create money ex nihilo, so credit not savings finances investment
#corroborates(0.95) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 139 - Scarcity of savings stems from scarcity of loans, not vice versa
#expands(0.80) - The CFA system’s credit repression causes savings scarcity, not the reverse
#expands(0.70) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 140 - Scarce CFA credit causes savings scarcity, not the reverse.
#expands(0.65) - Franc-zone banks hold idle liquidity instead of lending to the economy.
#complicates(0.55) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 310 - High credit growth rarely causes inflation when directed to productive investment
#qualifies(0.50) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 145