The financial crisis, banks and money creation

Throughout the financial crisis I have seen nothing about the role of banks in creating our money supply. It is a very simple process yet many people who work for banks can’t believe it yet alone everyone else. (Google money creation and you will get numerous explanations including this one from Wikipedia http://en.wikipedia.org/wiki/Money_creation

The important thing is that when banks make a loan they are creating money. Because banks are required to keep a small percentage of deposits on reserve (the fractional reserve system) when new money is added to the banking system the money creation is multiplied depending upon the reserve requirement. Central banks add new money to the system usually by buying government bonds.

All this means that banks are an essential part of our exchange of goods and services. Without them there would be no economy. It is not that some banks are too big to fail, it is that banks are too important to fail.

There has been a lot of talk recently about the power and the evil of bankers and attempts to increase regulation of the industry. It is clear that bankers are extremely powerful people and some are probably evil to varying degrees. However, I cannot see how we can hope to discuss, evaluate and even reform the banks if we don’t recognize and take into account their role in money creation.

I would also suggest there may be other ways of creating money but that is so radical as to be treasonous.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: