Question

A bank manager says that she does not create money but simply makes loans to her clients. Is she right? Why?

Answer 1

No, she is wrong because once the bank is making loans it is in reality creating money. In other words, money is created once the banks lend. According to the rules of double entry accounting as soon as banks create a new loan asset, an equal and opposite liability must be created by the bank through new demand deposit. Consequently, this demand deposit is included in central banks’ measures of broad money. Therefore, in this sense, we can say that when banks make loans they create money.