Tag Archives: economic depression

How Banks Create Money Out of Nothing, and Why It Matters

[This post replaces an earlier one, which does not properly reflect modern banking practice.]

coinsmedievalFor most people the question of where money comes from is probably a bit mysterious, that is if the question ever even occurs to them. They might recall that notes and coins are produced at a mint, owned by the government. However notes and coins comprise only a small percentage of the money circulating in a modern economy. The rest exists only as accounting entries in banks and other places. In other words it exists only as numbers in computers. How does all this money come into existence?

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Nature and Roles of Money and Banks

[This article is based on extracts from The Nature of the Beast: how economists mistook wild horses for a rocking chair eBook.  Guest-Posted on Steve Keen’s Debtwatch site 1 June.]

Any discussion of the nature and role of money in modern economies typically brings out a plethora of confusing or conflicting theories, claims and counter-claims about what money is, what role it plays, what dysfunctions it might be responsible for and how they might be fixed.  One common set of claims is that money is a unit if account, a medium of exchange and a store of value.  I argue the first property is a trivial one and the last is only true if the money is wholly or in part a real commodity, like a pig or some tobacco.

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