Where does money come from?

This is the title of a guide to the monetary and banking system by English economists. It is a must read if you really want to understand how the system works, and what money is nowadays.

There is widespread misunderstanding of how new money is created. “Where Does Money Come From?” examines the workings of the monetary system and concludes that the most useful description is that new money is created by commercial banks when they extend or create credit, either through making loans or buying existing assets. In creating credit, banks simultaneously create deposits in our bank accounts, which, to all intents and purposes, is money.

Many people would be surprised to learn that even among bankers, economists, and policymakers, there is no common understanding of how new money is created. This is a problem for two main reasons. First, in the absence of this understanding, attempts at banking reform are more likely to fail. Second, the creation of new money and the allocation of purchasing power are a vital economic function and highly profitable. This is therefore a matter of significant public interest and not an obscure technocratic debate. Greater clarity and transparency about this could improve both the democratic legitimacy of the banking system and our economic prospects.

The basic analysis of “Where Does Money Come From?” is neither radical nor new. In fact, central banks around the world support the same description of where new money comes from. And yet many naturally resist the notion that private banks can really create money by simply making an entry in a ledger. Economist J. K. Galbraith suggested why this might be:

“The process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.”

This book aims to firmly establish a common understanding that commercial banks create new money. There is no deeper mystery, and we must not allow our mind to be repelled. Only then can we properly address the much more significant question: Of all the possible alternative ways in which we could create new money and allocate purchasing power, is this really the best?

View interviews with the authors of “Where does money come from?”: https://www.youtube.com/watch?v=l7L3ZtCSKKs

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