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Do Banks or Government create money?
Both banks and the State (the national or federal government) create money . In a state money system, banks are dependent on government. Their IOUs (deposits created through lending) are promises to deliver the government’s currency (cash or reserves) on demand to the account holder.
Government is the sole issuer of currency. It does not “borrow” cash and reserves from the private sector. To the contrary, government is the original source of cash and reserves.
Bank loans create deposits. Borrowers draw upon these deposits to spend. In doing so, their spending creates income just as government spending does, and adds to the market demand for goods and services as well as enabling saving and tax payments.
Further Reading
Modern Money Basics
Money Creation in the Modern Economy (pdf)
Both banks and the State (the national or federal government) create money . In a state money system, banks are dependent on government. Their IOUs (deposits created through lending) are promises to deliver the government’s currency (cash or reserves) on demand to the account holder.
Government is the sole issuer of currency. It does not “borrow” cash and reserves from the private sector. To the contrary, government is the original source of cash and reserves.
Bank loans create deposits. Borrowers draw upon these deposits to spend. In doing so, their spending creates income just as government spending does, and adds to the market demand for goods and services as well as enabling saving and tax payments.
Further Reading
Modern Money Basics
Money Creation in the Modern Economy (pdf)
