Banking: Intermediation or Money Creation
M. Ricks, What’s at Stake in Debates over Bank Money Creation Mechanics?

January 23, 2020

Morgan Ricks, Vanderbilt University

“[T]he familiar controversy as to how and by whom bank-deposits are ‘created’ is a somewhat unreal one.” So wrote John Maynard Keynes near the start of his 1930 Treatise on Money.[i] Keynes asked whether deposit balances can be created “actively” by banks or only passively by depositors “on their own initiative.” He thought it was obvious that banks can create deposit balances actively, albeit only within practical limits. Keynes acknowledged that active deposit creation—i.e., crediting deposit accounts in the process of lending or investing—tends to “diminish the reserves” of the bank as newly created balances are “paid away to the customers of other banks.”
More Banking: Intermediation or Money Creation
M. Ricks, What’s at Stake in Debates over Bank Money Creation Mechanics?