Money Creation and Banking Operation under the

Monetary Theory
●
17
deposit reserves, and other basic concepts and theories such as deposit deriva-
tion mechanism and financial intermediation. This theory has been widely 
discussed in the money and banking and economics textbooks and is fre-
quently quoted when people discuss the gap between deposits and loans and 
other practical financial issues. The long history of commodity money and 
the intuitional experience people get from daily life have contributed to peo-
ple’s misconceptions about money creation and banking operation; under 
these perceptions, there are fundamental problems with the foundation of 
the money and banking theory—the concepts and theories on money cre-
ation and banking operation. According to these theories, there is a neutral 
“fund” concept; banks are intermediaries of fund, and the banking system 
creates money through the cyclical process of absorbing deposits and granting 
loans. The fundamental principle on money creation and banking operation 
in the money and banking theory contradicts itself and can hardly explain 
the financial practice. This chapter starts with the basic accounting principle 
of bank loans and posits and explains the theory on money creation and 
banking operation under the credit monetary system. Banks’ lending activity 
creates money, and by lending money to clients, banks exchange claims and 
debts with their clients. Through such exchanges, banks get the claims of 
loans and clients get the claims of deposits, and clients pay the interest spread 
to get the claim on deposits that are accepted to others—the credit money. 
To create money by lending, banks need to hold base money, and therefore 
the banks have to retain base money to support money creation and that rule 
constitutes the core of banking operation. 

tải về 1.53 Mb.

Chia sẻ với bạn bè của bạn: