Can Banks Individually Create Money Out of Nothing? - The Theories and the Empirical Evidence

dc.cclicenceCC-BY-NC-NDen
dc.contributor.authorWerner, Richard A.en
dc.date.accessioned2018-11-23T10:06:05Z
dc.date.available2018-11-23T10:06:05Z
dc.date.issued2014-09-16
dc.descriptionopen access articleen
dc.description.abstractThis paper presents the first empirical evidence in the history of banking on the question of whether banks can create money out of nothing. The banking crisis has revived interest in this issue, but it had remained unsettled. Three hypotheses are recognised in the literature. According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out. According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction. A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking). The question which of the theories is correct has far-reaching implications for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories. This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created. This study establishes for the first time empirically that banks individually create money out of nothing. The money supply is created as ‘fairy dust’ produced by the banks individually, "out of thin air".en
dc.funderN/Aen
dc.identifier.citationWerner, Richard A. (2014) Can Banks Individually Create Money Out of Nothing? - The Theories and the Empirical Evidence. International Review of Financial Analysis, 36, 1-19en
dc.identifier.doihttps://doi.org/10.1016/j.irfa.2014.07.015
dc.identifier.urihttp://hdl.handle.net/2086/17269
dc.language.isoenen
dc.peerreviewedYesen
dc.projectidN/Aen
dc.publisherElsevieren
dc.researchinstituteFinance and Banking Research Group (FiBRe)en
dc.titleCan Banks Individually Create Money Out of Nothing? - The Theories and the Empirical Evidenceen
dc.typeArticleen

Files

Original bundle
Now showing 1 - 1 of 1
Loading...
Thumbnail Image
Name:
IRFA 2014 Werner Can banks individually create money out of nothing.pdf
Size:
889.05 KB
Format:
Adobe Portable Document Format
License bundle
Now showing 1 - 1 of 1
No Thumbnail Available
Name:
license.txt
Size:
4.2 KB
Format:
Item-specific license agreed upon to submission
Description: