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The Truth about Banks
Article

The Truth about Banks

Michael Kumhof and Zoltán Jakab
Finance & Development Magazine, 2016
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Editorial Rating

7

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  • Scientific
  • Background

Recommendation

In the wake of the 2008 financial crisis, economists and policy makers have resorted to banking regulatory reform in the belief that new rules will adequately safeguard the financial system. But that thinking lies in part on the conventional wisdom that banks act as conduits to transfer money from savers to borrowers. Yet banks actually create money, as economists Michael Kumhof and Zoltán Jakab explain in this timely commentary. Their viewpoint is not new, just forgotten since the 1930s, but it suggests a fresh approach to economic management. getAbstract recommends this scholarly article to experts in banking, finance and economics.

Take-Aways

  • Conventional economics assumes that banks use deposits to make loans, so policy makers have concentrated on trying to boost savings to finance economic growth.
  • But banks create money – through balance sheet entries – when they make loans.
  • This concept of “financing through money creation” has ceded place in economic theory to the “intermediation of loanable funds” view, which says banks channel savers’ deposits to borrowers’ loans.

About the Authors

Michael Kumhof is a Bank of England senior research adviser. Zoltán Jakab is an economist at the International Monetary Fund.

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