youtube 2015 Banks don’t lend money, they create it: Demystifying monetary and banking terminology by Ib Ravn
paecon.net/RWER97pdf 2021 How financial bubbles are fueled by money creation a.k.a. bank lending: An explanation for public education – by Ib Ravn
tandfonline.com/ gg/pdf 5-2022 Examining modern money creation: An institution-centered explanation and visualization of the “credit theory” of money and some reflections on its significance – by Andrew Hook
Abstract – Despite recent clarifications by central banks that it is indeed commercial banks that are the main creators of the money supply, money creation processes remain as confusing and opaque as ever to many. This article develops a simplified macro-visual diagram of today’s money system based on the increasingly accepted “credit theory” of money creation. It aims to explain not only how money is created and which institutions have the authority to create it; it also aims to discuss the implications of this understanding of money creation for wider issues, such as political sovereignty, inequality, and socio-economic development. Ultimately, it aims to provide a pedagogical resource upon which both technical and normative discussions about our current money system among academics, activists, and students can be based.
The need for money education
After years of post-2008 scrutiny on money and banking, in March 2014, a Bank of England paper (McLeay, Radia, and Thomas 2014) was released entitled “Money Creation in the Modern Economy.” The paper described the process through which, in coordination with the national central bank, “the majority of money in the modern economy is created by commercial banks making loans” (14). This detailed and clearly written report confirmed years of assertions by money analysts and reformers who had been regularly dismissed as “cranks” for claiming that, contrary to the common view (that banks were simply “intermediaries” who lent out preexisting customer deposits), rather, it was the banks themselves that created new money through the act of lending (Ingham, Coutts, and Konzelmann 2016, 1247). It also clarified the position that, beyond their role as creators of the legal monetary framework, governments themselves play no role in money creation and are themselves effectively “borrowers” of private-sector-created money1 (Sgambati 2016; Mellor 2019).
While the Bank of England’s clarification was shortly followed by those from other important central banking authorities, such as the Bank for International Settlements,2 the few polls to have been conducted in recent years on the subject reveal that the overall public understanding of money and banks (in the United Kingdom [UK] and elsewhere) remains very low. A study3 conducted by the University of Zurich in 2014 about the level of knowledge in the general population about the financial system, for example, found that only 13 percent knew that private commercial banks provide the majority of the money in circulation; 73 percent mistakenly believed money is created by the state or by the Swiss National Bank. This ignorance extends to politicians, with a 2014 survey4 by the money reform group, Positive Money, finding that only 15 percent of UK Members of Parliament (MPs) realized that private banks create the money supply. Overall, conversations today continue to be driven by “folk” metaphors that frame money as a scarce commodity that can somehow become exhausted (Braun 2016; Mellor 2019). Because of this, most citizens are unable to begin to offer informed rebuttals to orthodox claims by politicians who recycle metaphors of “scarcity” to explain why, for example, poverty and homelessness are unfortunate—but unavoidable—things that we just have to live with (Mellor 2019; Kelton 2020a). Moreover, most people are aware of a growing amount of private indebtedness across society but don’t have a clear idea of where this money came from and who exactly it is owed to (Montgomerie 2019). The ongoing “mystery” surrounding money and banks—combined with growing inequality in many societies—meanwhile risks fueling misinformation and dangerous conspiracies (Lockwood 2021).
This lack of public understanding about money and banks is also reflected in the relative lack of explicit attention that money—as a social and political object of study—receives in general across the social sciences, even within economics (Mirowski 2013; Goodwin 2014; Morgan 2015). As reform group Rethinking Economics argued in a 2019 letter addressed to University Economics Departments:
Banks and their role in the creation of money are integral to our modern, financialized economies. Yet, the teaching economics students receive doesn’t give them the full picture. As those with the power to influence the next generation of economists, it is essential that you review the teaching of the role of banks in economics courses and bring it in line with up-to-date research. Our economics graduates need to understand how banks function in the real-world in order to avoid past crises and to create better economies in the future.
Where money creation is covered within orthodox economics teaching, it still tends to be based on increasingly discredited theories, such as the basic reserve-constrained base-multiplier (i.e., the money multiplier) and the quantity theory of money (Di Muzio and Noble 2017). This is because, as Neveu (2020, 298) comments, the “status quo bias” within the economics discipline itself “presents a strong roadblock to textbook authors and publishers.” However, this bias is undermining the credibility of economics teaching, particularly in the light of both the post-2008 actions by central banks and advances in the collective understanding of how money creation actually occurs. Indeed, the money multiplier and the quantity theory of money now appear dramatically at odds with the recent clarification of commercial bank-led credit creation (Ryan-Collins et al. 2012). Overall, the predication of economics teaching on outdated or vague understandings of money creation is preventing today’s students from being able to engage properly with a range of pressing economic, social, political, and environmental challenges that are intimately connected to questions of money, finance, and banking (Di Muzio and Noble 2017).
Despite the ongoing silence in relation to money across much of society and academia, the overall attention on both the technical and political dimensions of money has expanded since 2008 within the more specialist literatures. Scholarship in critical finance and accounting studies has, for example, explained the highly complex and idiosyncratic processes through which commercial banks create the money supply and governments borrow money (e.g., Ryan-Collins et al. 2012; Werner 2014a, 2014b, 2016). This work has offered considerably clearer explanations and visualizations of the money creation process than previously existed, where the visual explanations relied on algebra and, as such, remained inaccessible for many noneconomists (e.g., Gamble 1991; Thornton, Ekelund, and DeLorme 1991; Lai, Chang, and Kao 2004). It has joined emerging work within the economics pedagogy itself, which has offered clearer explanations of money creation processes based on more up-to-date understandings (e.g., Pitrou 2019; Guse and Brasfield 2020; Neveu 2020). Political economy and economic sociology scholarship have meanwhile drawn attention to the historical evolution of monetary institutions and the questions of politics and power that underlie all systems of money governance (e.g., Weber 2018; Koddenbrock 2019; Feinig 2020). Along with advocacy groups such as Positive Money, this scholarship has opened a broader conversation about the normative dimensions of the current money system and about proposals for re-engineering it to better support financial stability and socio-economic needs.
Although these recent developments are welcome, this article argues that two gaps still need to be addressed to make the topic even more accessible to a non-specialist audience. The first is a clear, visual, integrative overview of the entire money system that illustrates the money creation process according to the increasingly accepted “credit theory” of money. So far, a few excellent visualizations have been provided of specific components or processes within the money system (see especially Ryan-Collins et al.  and Positive Money [n.d.]5); but a macro-visual model that clarifies the overall institutional picture accompanied by clear, simple explanations does not so far exist—not least within a single journal article. Such visual conceptualizations can be critical in facilitating better understandings of financial processes and practices that are particularly complex and unintuitive (Boehnert 2018; Shanks 2020). The second gap is a generalized disconnect between the technical and the sociological literature. The more technical literature (e.g., Ryan-Collins et al. 2012) provides unprecedentedly clear explanations of the operation of the money system but tends not to engage with broader normative debates about the system it is describing. Thus, in this more technical writing, it is not always clear what the relevance of today’s particular money system is for the very latest debates across the social sciences. Conversely, while providing this historical and political contextualization, the more sociological writing (e.g., Sgambati 2016; Koddenbrock 2019; Ingham 2020) tends not to provide the same complementary visual presentations as the more technical literature.
This article is therefore an attempt to address these gaps. To do this, it centers its analysis on an original visual figure that represents the whole money system. This figure attempts to explain how money comes into existence and which institutions have the authority to create it. The figure provides a basis for discussion of the implications of the current system for broader concerns about legitimacy and democracy. The article proceeds as follows. The next section introduces the set of theoretical debates that circumscribe this article, especially debates about where money comes from and who has the authority to create it. These debates relate to folk, neoclassical, and state-centered theories of money creation, as well as to emerging scholarship around the increasingly accepted “credit theory” of money creation. The following section introduces and explains fully the money system figure that has been developed as a visual conceptualization based on the credit theory of money creation. The next section reflects on the implications of the expositions of the money creation process and the broader money governance system for a range of contemporary macroeconomic debates before the article concludes. … continue reading pdf below
springer.com 2021 On the money creation approach to banking – Salomon Faure & Hans Gersbach