Prof Richard Werner, Director of the Centre for Banking, Finance and Sustainable Development, University of Southampton, author of “New Paradigm in Macroeconomics” gave a talk at Just Banking Conference in Edinburgh on 20th April on how to make banks socially useful:
Empirically, it had been found that banks are special. Their function cannot be easily replaced by other financial players or markets. Banks must have a kind of monopoly power compared to other financial institutions.
But economic theory could not explain why.
Here is why.
Banks are special, because they can create new money ‘out of nothing’ = credit creation.
This explains why banks are special: They are not (just) financial intermediaries. They have a license to ‘print money’ by creating credit. There is no such thing as a ‘bank loan’. Banks do not lend money, they create it.
“…it proved extraordinarily difficult for economists to recognise that bank loans … create deposits. In fact, throughout the period under survey they refused with practical unanimity to do so”
Schumpeter (1954)
Download the Richard Werner’s presentation here.
