The Nature of Banks and the Money Creation Process; Criticism of Common Views and Implications

Authors

1 Professor of Economics/ Tehran University

2 PhD Student of Economics/ Tehran University

Abstract

The financial crisis in 2008 attracted the attention of the economists and central banks to the deficiencies of the common views on the nature of banks and their role in economy. Since an important prerequisite for micro-prudential and macro-prudential regulation is macroeconomic modeling including the financial sector, consistent monetary and fiscal policy making, and a correct and complete analysis about the nature of banks and the banking system, the present paper uses a descriptive-analytical method to investigate the three approaches to it. Thus, the common views about banks (“financial intermediation” and “deposit multiplier”) are explained and criticized on the basis of monetary and accounting principles. Moreover, the correct view about the nature of banks ("money creation of individual banks") will be explained, citing the opinions of leading economists and central banks.
Analyzing the arguments offered in support of the “financial intermediation” and “deposit multiplier” views shows that the main roots of misunderstanding the nature of banks are: the notion about money being a sort of commodity, fallacy of composition and the confusion of microeconomic and macroeconomic arguments, neglecting the double-entry bookkeeping principles, failing to differentiate between the banks’ and the central bank’s balance sheet, and lack of attention to the implications of interest rates targeting policy by the central banks. Accordingly, some principles adhering to which can guarantee a correct analysis of banks is introduced, and some implications of “money creation” view about banks in Islamic banking, monetary policy, banking regulation and macroeconomic modeling is explained.

Keywords

References

1. توتونچیان، ایرج (1375)، اقتصاد پول و بانکداری، تهران: مؤسسه تحقیقات پولی و بانکی.
2.  ـــــــــــــ (1379)، پول و بانکداری اسلامی و مقایسه آن با نظام سرمایه‌داری، تهران: توانگران.
3. درودیان، حسین؛ دولت‌آبادی؛ سیدمهدی و سیدعلی روحانی (1396)، اعسار پنهان در نظام بانکی ایران: چیستی، ابعاد و ریشه‌ها، تهران: مرکز پژوهش‌های مجلس، شماره مسلسل 15514.
4. دولت‌آبادی، سیدمهدی (1395)، «ماهیت بانک و دلالت‌های آن برای مطالعات بانکداری اسلامی»، دوفصلنامه مطالعات اقتصاد اسلامی، دوره 8، ش16، ص 173−198.
5. سبحانی، حسن و حسین درودیان (1395)، «ارزیابی توجیه پذیری خلق پول به وسیله سیستم بانکی در نظام بانکداری اسلامی»، فصلنامه اقتصاد اسلامی، دوره 16، ش64، ص31−54.
6. صدر، محمدباقر (1388)، البنک اللاربوی فی‌الاسلام، ترجمه سیدیحیی علوی، تهران: دانشگاه امام صادقj.
7. صمصامی، حسین و فرشته کیانپور (پاییز و زمستان 1394)، «بررسی امکان خلق پول توسط نظام بانکی در نظام مالی اسلامی»، فصلنامه معرفت اقتصاد اسلامی، دوره 7، ش13، ص109−130.
8. موسویان، سیدعباس و حسین میثمی (1396)، بانکداری اسلامی، بانکداری مرکزی اسلامی و سیاست‌گذاری پولی و ارزی، تهران: پژوهشکده پولی و بانکی.
9. میرمعزی، سیدحسین (1384)، «الگوی ذخایر سپرده‌های بانکی در بانکداری اسلامی»، اقتصاد اسلامی، سال پنجم، ش17، ص45−74.
10. Abel, A., & Bernanke, B. (1992)‌, Macroeconomics, Adison-Wesley Publishing Company.
11. Barro, R. (1987)‌, Macroeconomics (second ed.), John Wiley & Sons.
12. Berry, S., Harrison, R., Thomas, R., & Weymarn, I. (2007), “Interpreting Movements In Broad Money”, Bank of England Quarterly Bulletin, Q 3.
13. Bindseil, U. (2004), “The Operational Target of Monetary Policy and the Rise and Fall of Reserve Position Doctrine”, European Central Bank Working Paper, No. 372, PP. 1-44.
14. Carpenter, S., & Demiralp, S. (2010), Money, Reserves, and the Transmission of Monetary Policy, Does the Money Multiplier Exist? Board of Governors of the Federal Reserve System.
15. Culbertson, J. (1958), “Intermediaries and Monetary Theory: A Criticism of the Gurley-Shaw Theory”, The American Economic Review, Vol. 48, No. 1, PP. 119-131.
16. Disyatat, P. (2010), “The Bank Lending Channel Revisited”, Bank for International Settlements, No. 297, PP. 1-35.
17. Disyatat, P., & Borio, C. (2009), “Unconventional Monetary Policies: An Appraisal”, Bank for International Settlements - Working Paper, No. 292, PP. 1-29.
18. Dudley, W. (2009), “The Economic Outlook and the Fed’s Balance Sheet: The Issue of "How" versus "When"”, Federal Reserve Bank of New York, Speech, July 29.
19. (2012, May), ECB Monthly Bulletin, European Central Bank.
20. Fama, E. (1980), “Banking in the Theory of Finance”, Journal of Monetary Economics, Vol. 6, Issue 1, PP. 39-57.
21. Fischer, S., Dornbusch, R., & Schmalensee, R. (1988), Economics (second ed.). McGraw-Hill.
22. Fox, L. (2005), The Federal Reserve System, Purposes and Functions, Board of Governors of the Federal Reserve System.
23. Goodhart, C. (2007), “Whatever became of the Monetary Aggregates?”, Peston Lecture in honour of Maurice, Lord Peston. London.
24. Gurley, J., & Shaw, E. (1955), “Financial Aspects of Economic Developmen”, The American Economic Review, Vol. 45, No. 4, PP. 515-538.
25. Gurley, J., & Shaw, E. (1960), Money in a Theory of Finance, Washington, D.C.: The Brookings Institution.
26. Jakab, Z., & Kumhof, M. (2015), “Banks are not intermediaries of loanable funds and why this matters”, Bank of England Working Paper, No. 529.
27. Keister, T., & McAndrews, J. (2009), “Why Are Banks Holding So Many Excess Reserves?”, Federal Reserve Bank of New York‌.
28. King, M. (2012), “Speech given by Governor of the Bank of England To the South Wales Chamber of Commerce”, October 23.
29. Klein, M. (1971), “A Theory of the Banking Firm”, Journal of Money, Credit and Banking, Vol. 3, No. 2, PP. 205-218.
30. Lindner, F. (2015), “Does Saving Increase the Supply of Credit? A Critique of Loanable Funds Theory”, World Economic Review, No. 4, PP. 1-26.
31. Mankiw, G. (2003), Macroeconomics (Fifth ed.), Worth Publisher.
32. Martin, A., McAndrews, J., & Skeie, D. (2013), Bank Lending in Times of Large Bank Reserves, Federal Reserve Bank of New York.
33. McLeay, M., Radia, A., & Thomas, R. (2014 Q1), Money creation in the modern economy. London: Bank of England Quarterly Bulletin.
34. Mishkin, F., Matthews, K., & Giuliodori., M. (2013), The Economics of Money, Banking & Financial Markets - European ed. London: Pearson Education Limited.
35. Phillips, C. A., (1920), Bank Credit, Macmillan.
36. Rule, G. (2015), CCBS Handbook – No. 32, Understanding the central bank balance sheet, London: Bank of England.
37. Samuelson, P., (1948), Economics, McGraw-Hill.
38. Samuelson, P., & Nordhaus, W. (1995), Economics (fifteenth ed.), McGraw-Hill.
39. Sheard, P. (2013), “Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves”,. Standard & Poors - Ratings Direct .
40. Smith, W. (1959), “Financial Intermediaries and Monetary Controls”,. The Quarterly Journal of Economics, Vol. 73, Issue 4, PP. 533-553.
41. Stiglitz, J., & Walsh, C. (2002), Principles of Macroeconomics (third ed.), W.W. Norton & Company.
42. Tobin, J. (1963), “Commercial Banks as Creators of Money”, Cowels Foundation Discussion Paper, No 159.
43. Turner, A. (2013), “Credit, Money and Leverage: What Wicksell, Hayed and Fisher Knew and Modern Macroeconomics Forg”, Conference on: “Towards a Sustainable Financial System”, Stockholm.
44. Werner, R. (2014), “Can banks individually create money out of nothing - The Theories and the Empirical Evidence”, International Review of Financial Analysis .
45. Werner, R., (2016)., “A Lost Century in Economics: Three Theories of Banking and the Conclusive Evidence”, International Review of Financial Analysis.
46. Woodford, M. (2010), “Financial Intermediation and Macroeconomic Analysis”, Journal of Economic Perspectives, Vol. 24, No. 4, PP. 21-44.

Files

Share

How to cite

Statistics