View source for Money creation

{{Short description|Process by which the money supply of an economic region is increased}}
{{use dmy dates|date=February 2025}}
{{About|the changes in the money supply|how money itself was first created|History of money}}
{{Banking|terms}}
{{Macroeconomics sidebar}}
{{Copy edit|date=April 2024}}

'''Money creation''', or '''money issuance''', is the process by which the [[money supply]] of a country, or an economic or monetary region,<ref group=note>Such as the [[Eurozone]] or [[Economic Community of Central African States|ECCAS]]</ref> is increased. In most modern economies, money is created by both [[central bank]]s and [[commercial bank]]s. Money issued by central banks is a liability, typically called reserve deposits, and is only available for use by central bank account holders, which are generally large commercial banks and foreign central banks.<ref name=bell>{{cite web |last1=Bell |first1=Stephanie |title=The Role of the State and the Hierarchy of Money |url=https://www.researchgate.net/publication/5208277 |website=Research Gate |publisher=Cambridge Journal of Economics |access-date=29 December 2023}}</ref> 

Central banks can increase the quantity of reserve deposits directly, by making loans to account holders, purchasing [[asset]]s from account holders, or by recording an asset, such as a deferred asset, and directly increasing liabilities. However, the majority of the money supply used by the public for conducting [[Financial transaction|transactions]] is created by the commercial banking system in the form of commercial bank deposits. Bank loans issued by commercial banks expand the quantity of bank deposits.<ref name=bell/>

Money creation occurs when the amount of loans issued by banks increases relative to the repayment and default of existing loans. Governmental authorities, including central banks and other bank regulators, can use various policies, mainly setting short-term [[interest rate]]s, to influence the amount of bank deposits commercial banks create.<ref name="ecb2017">{{Cite web|url=https://www.ecb.europa.eu/explainers/tell-me-more/html/what_is_money.en.html|title=What is money?|last=European Central Bank|date=20 June 2017|website=European Central Bank|language=en|access-date=8 March 2018}}</ref>

==Monetary policy==
{{Main|Monetary policy}}

The [[monetary authority]] of a nation—typically its [[central bank]]—influences the economy by creating and destroying liabilities on its balance sheet with the intent to change the supply of money available for conducting transactions and generating income. The policy which defines how the central bank changes its ledger to reduce or increase the amount of money in the economy available for banks to conduct transactions is known as monetary policy.

If the central bank is charged with maintaining price or employment levels in the economy by law, monetary policy may include reducing the money supply during times of high inflation in order to increase unemployment, in the hopes that reducing employment also reduces spending on goods and services which exhibit increasing prices.<ref name=Palgrave/><ref>{{cite web |title=Federal Reserve Board - Monetary Policy: What Are Its Goals? How Does It Work? |url=https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm |website=Board of Governors of the Federal Reserve System |access-date=15 August 2023 |language=en |date=July 29, 2021}}</ref><ref>{{cite web |url= https://fixingtheeconomists.wordpress.com/2014/08/15/does-the-central-banks-control-long-term-interest-rates-a-glance-at-operation-twist/|title= Does the Central Bank Control Long-Term Interest Rates?: A Glance at Operation Twist|last= Pilkington|first= Philip|date= 15 August 2014|website= Fixing the economists|access-date=8 March 2018 }}</ref> Monetary policy directly impacts the availability and the cost of commercial bank deposits in the economy,<ref name=fedmon>{{cite web |url= https://www.federalreserve.gov/monetarypolicy.htm |title= Monetary Policy |publisher= Federal Reserve Board |date= 2024 |archive-url= https://web.archive.org/web/20240320175531/https://www.federalreserve.gov/monetarypolicy.htm |archive-date= March 20, 2024 }}</ref> which in turn impacts investment, stock prices, [[Consumption (economics)|private consumption]], [[demand for money]], and overall economic activity.<ref name=imfmon>{{cite web |url= https://www.imf.org/en/About/Factsheets/Sheets/2023/monetary-policy-and-central-banking |title= Monetary Policy and Central Banking |publisher= International Monetary Fund |date= 2023 |archive-url=https://web.archive.org/web/20240301165840/https://www.imf.org/en/About/Factsheets/Sheets/2023/monetary-policy-and-central-banking |archive-date= March 1, 2024 }}</ref> The [[Exchange rate]] of a country's [[Fiat money|currency]] influences the value of its [[net export]]s.

In most [[developed countries]], central banks conduct their monetary policy within an [[inflation targeting]] framework,<ref>{{cite web |url=http://www.imf.org/external/pubs/ft/fandd/basics/target.htm |title=Inflation Targeting: Holding the Line |last=Jahan |first=Sarwat |publisher=International Monetary Funds, Finance & Development |access-date=17 October 2023}}</ref> whereas the monetary policies of most [[developing countries]]' central banks target some kind of a [[fixed exchange rate system]].<ref name=IMF>{{cite book |last1=Department |first1=International Monetary Fund Monetary and Capital Markets |title=Annual Report on Exchange Arrangements and Exchange Restrictions 2022 |date=26 July 2023 |publisher=International Monetary Fund |isbn=979-8-4002-3526-9 |url=https://www.elibrary.imf.org/display/book/9798400235269/9798400235269.xml?code=imf.org |access-date=17 October 2023 |language=en }}</ref> Central banks operate in practically every nation in the world, with few exceptions. There are also groups of countries for which a single entity acts as their central bank, such as the organization of states of Central Africa, which have a common central bank (the [[Bank of Central African States]]); or monetary unions, such as the [[Eurozone]], whereby nations retain their respective central bank yet submit to the policies of a central entity, the [[European Central Bank]].

Central banks conduct monetary policy by setting a rate of interest paid on central bank deposit liabilities, directly purchasing or selling assets in order to change the amount of deposits on their balance sheet, or by signaling to the market through speeches and written guidance an intent to change the rate of interest on deposits or purchase or sell assets in the future.<ref>{{cite web |last1=Baker |first1=Nick |last2=Rafter |first2=Sally |title=An International Perspective on Monetary Policy Implementation Systems {{!}} Bulletin – June 2022 |url=https://www.rba.gov.au/publications/bulletin/2022/jun/an-international-perspective-on-monetary-policy-implementation-systems.html |publisher=Reserve Bank of Australia |access-date=17 October 2023 |language=en-AU |date=16 June 2022}}</ref>

Lowering interest rates by reducing the amount of interest paid on central bank liabilities or purchasing assets like bank loans and government bonds for higher prices (resulting in an increase in bank reserve deposits on the central bank ledger) is called [[monetary expansion]] or [[monetary easing]], whereas raising rates by paying more interest on central bank liabilities is known as [[monetary contraction]] or tightening (resulting in a decrease of bank reserve deposits on the central bank ledger). An extraordinary process of monetary easing (keeping rates low) is denoted as [[quantitative easing]], which involves the central bank purchasing large amounts of assets for high prices over an extended period of time.

===Money supply===
{{Main|Money supply}}

[[File:Credit_Mechanics_4_mechanical_interrelationships_governing_the_credit_volume_(Table_1_by_F._Decker_&_C._Goodhart_2021).PNG|thumb|right|upright=2|In accordance to "credit mechanics" bank money expansion or destruction (or not changing) depends on payment flows.]]

The term "money supply" commonly denotes the total, safe, [[financial asset]]s that households and businesses can use to make payments or to hold as short-term investment.<ref name=fedms>[https://www.federalreserve.gov/faqs/money_12845.htm Money supply], [[Federal Reserve System|FRS]]</ref> The money supply is measured using the so-called "[[monetary aggregates]]", defined based on their respective level of [[liquidity]]. In the United States, for example:

* '''M0''': The total of all physical currency including coinage. Using the United States dollar as an example, M0 = [[Federal Reserve note]]s + [[United States Note|US notes]] + [[Coins of the United States dollar|coins]]. It is not relevant whether the currency is held inside or outside of the private banking system as reserves.
* '''M1''': The total amount of M0 (cash/coin) outside of the private banking system{{Clarify|reason=Is this M0 different from the M0 number above? Sounds like M0 above includes reserve balances, M0 here does not?|date=December 2020}} plus the amount of [[demand deposit]]s, [[Traveler's cheque|travelers checks]] and [[Negotiable Order of Withdrawal account|other checkable deposits]]
* '''M2''': M1 + most [[savings account]]s, [[money market account]]s, retail [[Money market fund|money market mutual funds]], and small denomination time deposits ([[Certificate of deposit|certificates of deposit]] of under $100,000).

In most countries the central bank, treasury, or other designated state authority is empowered to mint new physical currency, usually taking the form of metal coinage or paper banknotes. While the value of major currencies was once backed by the [[gold standard]], the end of the [[Bretton Woods system]] in 1971 led to all major currencies becoming [[fiat money]] — backed by a mutual agreement of value rather than a [[commodity]].

Various measures are taken to prevent [[Counterfeit money|counterfeiting]], including the use of [[serial number]]s on banknotes and the minting of coinage using an [[alloy]] at or above its face value. Currency may be [[Legal tender#Demonetization|demonetized]] for a variety of reasons, including [[Withdrawal of low-denomination coins|loss of value]] over time due to inflation, [[redenomination]] of its face value due to [[hyperinflation]], or its replacement as [[legal tender]] by another currency. The currency-issuing government agency typically work with commercial banks to distribute freshly-minted currency and retrieve worn currency for destruction, enabling the reuse of serial numbers on new banknotes.<ref name=mankiw2012>Mankiw (2012)</ref>

In modern economies, physical currency consists only of a fraction of the [[broad money]] supply.<ref group=note>For example, in December 2010, in the United States, of the $8.853 trillion broad money supply (M2, table 1), only about 10% (or $915.7 billion, table 3) consisted of coins and paper money. See [http://www.federalreserve.gov/releases/h6/20110127/ Statistic], FRS</ref> In the United Kingdom, [[Gross (economic)|gross]] bank [[Deposit (finance)|deposit]]s outweigh the physical currency issued by the central bank by a factor of more than 30 to 1. The United States, with a currency used substantially in legal and illicit international transactions, has a lower ratio of 8 to 1.<ref name="Palgrave">{{cite book |last1=Friedman |first1=Benjamin M. |chapter=Money Supply |chapter-url=https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_875-2 |title=The New Palgrave Dictionary of Economics |publisher=Palgrave Macmillan UK |pages=1–10 |language=en |doi=10.1057/978-1-349-95121-5_875-2 |date=2017|isbn=978-1-349-95121-5 }}</ref>

=== Debt monetization ===
{{Main|Debt monetization}}

Debt monetization is a term used to describe central bank money creation for use by government fiscal authorities, like the U.S. Treasury. In many states, such as Great Britain, all government spending is always financed by central bank money creation.<ref name="Berkeley2020">{{cite web |last1=Berkeley |first1=Andrew |title=An Accounting Model of the UK Exchequer |url=https://gimms.org.uk/wp-content/uploads/2021/02/An-Accounting-Model-of-the-UK-Exchequer-2nd-edition.pdf |website=gimms.org.uk |access-date=26 May 2024}}</ref> Debt monetization as a concept is often based on a misunderstanding of modern financial systems compared to fixed exchange rate systems like the gold standard.

Historically,  in a fixed exchanged rate financial system, central bank money creation directly for government spending by the fiscal authority was prohibited by law in many countries.<ref name=ryan2015>{{Cite web|url=http://www.levyinstitute.org/publications/is-monetary-financing-inflationary-a-case-study-of-the-canadian-economy-1935-75|title=Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75|last=Ryan-Collins|first=Josh|date=25 October 2015|publisher= Levy Economics Institute|access-date=8 March 2018}}</ref> However, in modern financial systems central banks and fiscal authorities work closely together to manage interest rates and economic stability. This involves the creation and destruction of deposits on the central bank ledger to ensure transactions can settle such that short term interest rates don't exceed specified targets.

In the [[Eurozone]], Article 123 of the [[Lisbon Treaty]] explicitly prohibits the [[European Central Bank]] from financing public institutions and state governments.<ref>[https://www.ecb.europa.eu/mopo/eaec/fiscal/html/index.en.html Fiscal policies], ECB</ref> In Japan, the nation's [[Bank of Japan|central bank]] "routinely" purchases approximately 70% of state debt issued each month,<ref>{{cite web |url= http://www.businessinsider.com/japans-1-trillion-yen-of-debt-2013-8|title=Japan's Debt Has Officially Passed ¥1,000,000,000,000,000 — No Problem|last= Evans-Pritchard|first= Ambrose|author-link= Ambrose Evans-Pritchard|date= 10 August 2013|website= [[The Daily Telegraph]]|access-date=8 March 2018 }}</ref> and owns, as of Oct 2018, approximately 440 [[trillion (short scale)|trillion]] [[Yen|JP¥]] (approx. $4trillion)<ref group=note>At a $1=¥0.0094 conversion rate</ref> or over 40% of all outstanding government bonds.<ref>[https://www.boj.or.jp/en/statistics/boj/other/mei/index.htm/ Gov't Bonds], [[Bank of Japan]]</ref>

In the United States, the 1913 [[Federal Reserve Act]] allowed [[Federal Reserve System|federal]] banks to purchase short-term securities directly from the Treasury, in order to facilitate its [[cash]]-management operations. The [[Banking Act of 1935]] prohibited the central bank from directly purchasing Treasury securities, and permitted their purchase and sale only "in the open market". In 1942, during [[United States home front during World War II|wartime]], Congress amended the Banking Act's provisions to allow purchases of government debt by the federal banks, with the total amount they'd hold "not [to] exceed $5 billion". After the war, the exemption was renewed, with time limitations, until it was allowed to expire in June 1981.<ref name="garbade">{{cite web |last=Garbade |first=Kenneth D. | url=https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr684.pdf |title=Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks |date=August 2014|website= FRBNY Staff Reports no. 684}}</ref> Today, primary dealers in the United States are required to purchase all Treasuries at auction, and the U.S. central bank will create any quantity of reserve deposits necessary to settle the auction transaction.

=== Open market operations ===
{{Main|Open market operation}}

Central banks can purchase or sell assets in the market, which is referred to as open market operations. When a central bank purchases assets from market participants, such as commercial banks which hold accounts at the central bank, reserve deposits are credited to the commercial banks’ accounts and asset ownership is transferred to the central bank. In this way the central bank can modulate the amount of reserve deposits in the financial system, by exchanging financial assets like bonds for reserve deposits. For example, in the United States, when the Federal Reserve permanently purchases a security, the office responsible for implementing purchases and sales (The New York Fed's Open Market Trading Desk) buys eligible securities from primary dealers at prices determined in a competitive auction. The Federal Reserve pays for those securities by crediting the reserve accounts of the correspondent banks of the primary dealers. (The correspondent banks, in turn, credit the dealers’ bank accounts.) In this way, the open market purchase leads to an increase in reserve balances.<ref name="USFedExplained2024">{{cite web |last1=US Federal Reserve |title=The Fed Explained |url=https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf |publisher=US Federal Reserve |access-date=26 May 2024}}</ref>

Conversely, sales of assets by the US central bank reduces reserve balances, which reduces the amount of money available in the financial system for settling transactions between member banks. Central banks also engage in short term contracts to 'sell-assets-now, repurchase-later' to manage short term reserve deposit balances. These contracts, known as Repo (Repurchase) contracts, are short term (often overnight) contracts that are continually rolled over until some desired result in the financial system is achieved. Operations conducted by central banks can either address short-term goals on its agenda or long-term factors such as maintaining financial stability or maintaining a floor and/or ceiling around a targeted interest rate for reserve deposits.

=== Money multiplier ===
{{Main|Money multiplier}}

Historical explanations of money creation often focused on the concept of a money multiplier, where reserve deposits or an underlying commodity such as gold were multiplied by bank lending of those deposits or gold balances to a maximum limit defined by the reserve requirement for money lenders. Thus the total money supply was a function of the reserve requirement. Many states today, however, have no reserve requirement. The money multiplier has thus largely been abandoned as an explanatory tool for the money creation process.

When commercial banks lend money today, they expand the amount of bank deposits in the economy.<ref name=mcleay>{{cite web |url= https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf|title= Money creation in the modern economy|last1= McLeay|first1= Michael|last2= Radia |first2= Amar|last3= Thomas |first3= Ryland|date= 2014|website= Quarterly Bulletin|publisher= [[Bank of England]]|access-date=8 March 2018 }}</ref> The banking system can expand the money supply of a country far beyond the amount of reserve deposits created by the central bank, meaning contrary to popular belief, most money is not created by central banks.<ref>{{Cite news |last=Revill |first=John |date=June 11, 2018 |title=Swiss voters reject campaign to radically alter banking system |url=https://www.reuters.com/article/idUSKBN1J60C0/ |access-date=July 6, 2024 |work=[[Reuters]]}}</ref><ref>{{Cite news |last=Werner |first=Richard |date=March 14, 2023 |title=Why central banks are too powerful and have created our inflation crisis – by the banking expert who pioneered quantitative easing |url=https://theconversation.com/why-central-banks-are-too-powerful-and-have-created-our-inflation-crisis-by-the-banking-expert-who-pioneered-quantitative-easing-201158 |access-date=July 6, 2024 |work=[[The Conversation (website)|The Conversation]]}}</ref> Some argue that banks are limited in the total amount they can lend by their [[capital adequacy ratio]]s and, in countries that impose [[required reserve ratio]]s, by required reserves.

Bank capital, used for calculating the capital adequacy ratio, is assets on the bank balance sheet in excess of liabilities, with values further refined by regulation such as the international regulatory framework for banks, Basel III. Banks create capital by creating loans (assets) and destroying bank liabilities, which occurs when loans are repaid. This process increases bank equity, enabling banks to create commercial bank deposit liabilities (money) for their own use. In this way, banks create and manage their own capital levels. Because accounting conventions define the value of any given asset or liability, bank capital is a subjective measure which many argue is open to manipulation and may be a poor method for regulating money creation.

Reserve requirements oblige commercial banks to keep a minimum, predetermined, percentage of their deposits at an account at the central bank. Countries with no reserve requirement include the United States, Great Britain, Australia, Canada and New Zealand, which means no minimum reserve requirement is imposed on banks. The constraining factor on bank lending recognized today is largely the number of available borrowers willing to create loan contracts.

==Degree of control==
Whereas central banks can directly control the issuance of physical currency, the question to what extent they can control broad monetary aggregates like [[M2 (economics)|M2]] by also indirectly controlling the money creation of commercial banks is more controversial.<ref name=Abel>{{cite journal |last1=Ábel |first1=István |last2=Lehmann |first2=Kristóf |last3=Tapaszti |first3=Attila |title=The controversial treatment of money and banks in macroeconomics |journal=Financial and Economic Review |date=June 2016 |volume=15 |issue=2 |pages=33–58 |url=https://en-hitelintezetiszemle.mnb.hu/letoltes/istvan-abel-kristof-lehmann-attila-tapaszti-en.pdf |access-date=17 October 2023}}</ref> According to the [[money multiplier]] theory, which is often cited in macroeconomics textbooks, the central bank controls the money multiplier because it can impose [[reserve requirement]]s, and consequently via this mechanism also governs the amount of money created by commercial banks.<ref name=Abel/><ref>{{cite web |last1=Ihrig |first1=Jane |last2=Weinbach |first2=Gretchen C. |last3=Wolla |first3=Scott A. |title=Teaching the Linkage Between Banks and the Fed: R.I.P. Money Multiplier |url=https://research.stlouisfed.org/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier |website=research.stlouisfed.org |access-date=18 October 2023 |language=en |date=September 2021}}</ref> Most central banks in developed countries, however, have ceased to rely on this theory and stopped shaping their monetary policy through required reserves.<ref name=Abel/>

[[Benjamin M. Friedman|Benjamin Friedman]] explains in his chapter on the money supply in ''[[The New Palgrave Dictionary of Economics]]'' that the money multiplier representation is a short-hand simplification of a more complex equilibrium of supply and demand in the markets for both reserves ([[outside money]]) and [[inside money]]. Friedman adds that the simplification will work well or badly ''"depending on the strength of the relevant interest elasticities and the extent of variation in interest rates and the many other factors involved"''.<ref name="Palgrave"/> [[David Romer]] notes in his graduate textbook "''Advanced Macroeconomics''" that it is difficult for central banks to control broad monetary aggregates like M2.<ref>{{cite book |last1=Romer |first1=David |title=Advanced macroeconomics |date=2019 |publisher=McGraw-Hill |location=New York, NY |isbn=978-1-260-18521-8 |edition=Fifth |quote=The measures of the money stock that the central bank can control tightly, such as [[high-powered money]], are not closely linked to [[aggregate demand]]. And the measures of the money stock that are sometimes closely linked with aggregate demand, such as ''M2'', are difficult for the central bank to control.}}</ref>{{rp|607–608}}

[[Monetarist]] theory, which was prominent during the 1970s and 1980s, argued that the central bank should concentrate on controlling the money supply through its monetary operations.<ref name="jahan2014">{{cite web |url=http://www.imf.org/external/pubs/ft/fandd/2014/03/pdf/basics.pdf|title=What Is Monetarism? |last1= Jahan|first1=Sarwat |last2= Papageorgiou|first2= Chris|date= March 2014|website= Finance & Development|publisher= [[IMF]]|access-date=8 March 2018 }}</ref> The strategy did not work well for the central banks like the Federal Reserve who tried it, however, and it was abandoned after some years, central banks turning to steer interest rates to obtain their monetary policy goals rather than holding the quantity of base money fixed in order to steer money growth.<ref name=Blanchard>{{cite book |last1=Blanchard |first1=Olivier |last2=Amighini |first2=Alessia |last3=Giavazzi |first3=Francesco |title=Macroeconomics: a European perspective |date=2017 |publisher=Pearson |isbn=978-1-292-08567-8 |edition=3rd}}</ref>{{rp|464–465}} Interest rates influence commercial bank issuance of credit indirectly, so the ceiling implied by the money multiplier does not impose a limit on money creation in practice.<ref>{{cite book |last1=Hubbard & O'Brien |title=Economics |chapter=Chapter 25, Monetary Policy |page=943}}</ref> By setting interest rates, central-bank operations will affect, but not control the money supply.<ref name="mcleay" /><ref group=note>"Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money. ... Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates." McLeay (2014)</ref>

== Credit theory of money ==
{{Main|Credit theory of money}}

The [[fractional-reserve banking|fractional reserve]] theory of money creation where the [[money supply]] is limited by the [[money multiplier]] has been abandoned since the [[2008 financial crisis]]. It has been observed that [[bank reserves]] are not a limiting factor because the [[central bank]]s supply more reserves than necessary (excess reserves).<ref name="SP2013">[[Standard & Poor's]] (13 August 2013) "[https://www.kreditmagazin.net/wp-content/uploads/2021/02/S_and_P__Repeat_After_Me_8_14_13.pdf Repeat after me: Banks cannot and do not lend out reserves]", Ratings Direct</ref> Economists and bankers now understand that the amount of money in circulation is limited only by the demand for loans.<ref>{{cite journal |last1=Benes |first1=Jaromir |last2=Kumhof |first2=Michael |title=The Chicago Plan Revisited |journal=IMF Working Paper |date=2012 |volume=202 |url=https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Chicago-Plan-Revisited-26178}}</ref><ref name="kumhof2016">{{cite journal |last1=Kumhof |first1=Michael |last2=Jakab |first2=Zoltán| title=The Truth about Banks |journal=Finance & Development |date=2016 |volume=53 |issue=1 |pages=50–53 |url=http://www.imf.org/external/pubs/ft/fandd/2016/03/kumhof.htm}}</ref><ref name="mcleay" />

The [[credit theory of money]], initiated by [[Joseph Schumpeter]], asserts the central role of banks as creators and allocators of the money supply, and distinguishes between "productive credit creation" (allowing non-inflationary [[economic growth]] even at [[full employment]], in the presence of technological progress) and "unproductive credit creation" (resulting in [[inflation]] of either the [[consumer price inflation|consumer-]] or [[asset price inflation|asset-price]] variety).<ref>{{cite book |last= Schumpeter|first= Joseph A.|date= 1996|orig-year=1954|title= History of Economic Analysis|publisher= Oxford University Press|isbn= 978-0195105599|author-link=Joseph A. Schumpeter}}</ref>

The model of bank lending stimulated through central-bank operations (such as "monetary easing") has been rejected by [[Neo-Keynesian economics|Neo-Keynesian]]<ref>{{cite book|last= Samuelson|first= Paul|date= 1997|orig-year= 1948|title= Economics|url= https://archive.org/details/economicsintrodu0000samu|publisher= McGraw-Hill Education|isbn= 978-0070747418|author-link= Paul Samuelson|url-access= registration}}</ref> and [[Post-Keynesian economics|Post-Keynesian]] analysis<ref name=kelton>{{cite web|last=Kelton, ''née'' Bell|first=Stephanie |url=https://ideas.repec.org/p/wpa/wuwpma/9805014.html |title=The Hierarchy of Money|date=1998 |publisher=[[The Jerome Levy Economics Institute]]|ssrn=96845}}</ref><ref name="mitch2009">{{cite web |url=http://bilbo.economicoutlook.net/blog/?p=1623|title= Money multiplier and other myths|last= Mitchell|first= William|author-link=Bill Mitchell (economist)|date= 21 April 2009|access-date=8 March 2018}}</ref> as well as central banks.<ref name="tucker2007">{{cite web |last=Tucker|first=Paul|url=https://www.bankofengland.co.uk/-/media/boe/files/speech/2007/money-and-credit-banking-and-the-macroeconomy.pdf|title=Money and credit: Banking and the Macroeconomy|date=2007 |publisher=Bank of England }}</ref><ref name=Disyatat>{{Cite web|url=http://www.bis.org/publ/work297.pdf|title=The bank lending channel revisited|last=Disyatat|first=Piti|date=February 2010|publisher=[[Bank of International Settlements]]|website=BIS Working Papers|language=en|access-date=8 March 2018}}</ref><ref group=note>"In reality, neither are[bank] reserves a binding constraint on lending, nor does the central bank fix the amount of reserves that are available. ... Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the [central bank]." McLeay et al. (2014)</ref>
The major argument offered by dissident analysis is that any bank balance-sheet expansion (e.g. through a new loan) that leaves the bank short of the required reserves may affect the return it can expect on the loan, because of the extra cost the bank will undertake to return within the ratios limits – but this does not and "will never impede the bank's capacity to give the loan in the first place". Banks first lend and ''then'' cover their reserve ratios: The decision whether or not to lend is generally independent of their reserves with the central bank or their deposits from customers; banks are not lending out deposits or reserves, anyway. Banks lend on the basis of lending criteria, such as the status of the customer's business, the loan's prospects, and/or the overall economic situation.<ref>{{Cite web |title=Money and Inflation|last=Wray|first=L. Randall|author-link=L. Randall Wray |url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1010331|date=1 September 2000|publisher=[[University of Missouri-Kansas City]]|language=en|ssrn = 1010331}}</ref><ref>BoE (2019): [https://www.bankofengland.co.uk/explainers/how-is-money-created How is money created]</ref><ref>Frank Decker, Charles A.E. Goodhart: ''Wilhelm Lautenbach’s credit-mechanics – a precursor to the current money supply debate'', Taylor & Francis, 2021, DOI=10.1080/09672567.2021.1963796.</ref>

==See also==
{{Portal|Money}}

* [[Commissary notes]]
* [[Commodity money]]
* [[Endogenous money]]
* [[Demurrage currency]]
* [[Fiscal policy]]
* [[Functional finance]]
* [[History of banking]]
* [[Monetary economics]]
* [[Monetary reform]]
* [[Monetary system]]
* [[Positive Money]] - a [[United Kingdom|UK]] non-profit advocating for money creation to be done by the governemnt for the [[public good]]
* [[Seigniorage]]
* [[The End of Alchemy]] - [[Mervyn King, Baron King of Lothbury|Mervyn King]] book depicting money creation as a financial form of [[alchemy]]
* [[The Age of Debt Bubbles]] - 2024 book on the money creation process

==Footnotes==
{{Reflist|group=note|2}}

==References==
{{Reflist}}

==Further reading==
*{{cite web |url= https://www.imf.org/external/pubs/ft/fandd/2012/09/pdf/basics.pdf|title=What Is Money?|last1= Asmundson|first1= Irena |last2= Oner|first2= Ceyda|date= September 2012|website= Finance & Development|publisher= [[IMF]]|access-date=8 March 2018 }}
*[http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm Federal Reserve historical statistics] (11 June 2009) {{webarchive |url=https://web.archive.org/web/20090605101615/http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm |date=June 5, 2009 }}
*{{cite book |last= Hegeland|first= Hugo |date= 1970|orig-year=1954 |edition=7|title= Multiplier Theory|publisher= Harvard University Press|isbn= 978-0678001622}}
*{{cite book|last=Mankiw |first=N. Gregory |author-link=N. Gregory Mankiw |title=Macroeconomics |publisher=Worth |year=2012 |edition=8th|isbn=978-1429240024 |pages=81–107}}

==External links==
*"[http://www.bis.org/publ/cpss55.pdf The Role of Central Bank Money in Payment Systems]", [[Bank for International Settlements]], August 2003
*[[Bill Mitchell (economist)|Mitchell, William]] (2009) "[http://bilbo.economicoutlook.net/blog/?p=332 Deficit spending 101: Part 1]"; "[http://bilbo.economicoutlook.net/blog/?p=352 Part 2]"; "[http://bilbo.economicoutlook.net/blog/?p=381 Part 3]"

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