Central Banks Can Increase the Money Supply, Even If Banks Do Not Lend

By Thorsten Polleit

In today's fiat-money world, money is mostly produced through bank lending. Whenever a commercial bank provides credit to, say, consumers, firms, and government entities, it issues new money, thereby increasing the economy's money stock.

Economists from the Austrian School of economics call this kind of money production "money creation out of thin air," as the increase in money through bank circulation credit doesn't require the existence of real savings.

If money is produced through bank credit, one should expect a positive relation between changes in bank credit and changes in the money stock. Over longer periods there is detectable a positive and highly correlated relation between these two magnitudes.

Of course, any comovement of bank credit and the money stock wouldn't necessarily be "perfect" at all points in time. In fact, there might be periods in which bank-credit expansion can decouple from money growth.

For instance, banks can and do make clients shift from short-term deposits… (Read the full article)

Source: Mises.org