Lord Adair Turner, former Chairman of the Financial Services Authority made an excellent speech entitled “Credit, Money and Leverage: What Wicksell, Hayek and Fisher Knew and Modern MacroEconomics Forgot” last month. It is well worth a listen if you have 52 minutes to spare.

Speech – pdf 351.18 KB

Slides – pdf 874.55 KB

[sws_blockquote_endquote align=”” cite=”” quotestyle=”style02″] Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account. [/sws_blockquote_endquote]

[sws_blockquote_endquote align=”” cite=”” quotestyle=”style02″] Bank (and non-bank) credit creation can be thought of as one of two possible means to avoid a harmful deficiency in aggregate nominal demand which could arise in a pure metallic money system.[/sws_blockquote_endquote]

[sws_blockquote_endquote align=”” cite=”” quotestyle=”style02″]Bank credit creation, unlike government fiat money creation, entails not just the creation of new money and purchasing power, but also the creation of ongoing debt contracts, which themselves can have macroeconomic consequences.[/sws_blockquote_endquote]

[sws_blockquote_endquote align=”” cite=”” quotestyle=”style02″]Banks create credit, money and purchasing power: it therefore matters to whom and for what purposes credit is extended. [/sws_blockquote_endquote]

[sws_blockquote_endquote align=”” cite=”” quotestyle=”style02″]Standard undergraduate textbook discussions of banking and money still tend to propagate three myths/simplifications.
– First, that banks in sequence “raise deposits” from savers and then “make loans” to borrowers, ignoring their potential to create purchasing power ex nihilo.
– Second, that banks primarily lend money to firms/entrepreneurs to fund investment projects, allocating funds between alternative uses, largely ignoring the other potential functions and impacts of bank lending.
– Third, that the “demand for money” (i.e., for transactions money”) is a crucial issue, and can usefully be captured in the function f(i,y) ignoring the endogenous creation of short term financial assets as a result of credit creation, and ignoring the complexity of the varying features and degrees of “moneyness”.[/sws_blockquote_endquote]

[sws_blockquote_endquote align=”” cite=”” quotestyle=”style02″]Advanced macroeconomics textbooks are also largely silent on the role of banks as creators of money, and on the potential importance of the aggregate balance sheet level of resulting debt.[/sws_blockquote_endquote]