‘Loans Create Deposits’ – in Context (An excellent summary of the Money Multiplier Fable, Endogenous Money, How the Banking and Monetary System actually operates, etc.)
There is a fantastic new post by JKH that spells out all of these topics and summarizes them nicely in one post. It is a long post and I won't quote the whole thing here. But I highly encourage you to follow the link and read the whole thing.
Understanding banking system operations is critical to understanding the monetary system.
‘Loans Create Deposits’ – in Context
February 19, 2013 By JKH
Loans create deposits. We’ve heard it many times now. But how well is it understood? The phrase is typically invoked accurately, in conjunction with a rejection of the ‘money multiplier’ fable found in economic textbooks. From an operational perspective, banks do not “lend reserves” to their non-bank customers. “Loans create deposits’ is an operation in endogenous money. And where central banks impose a level of required reserves based on deposits, the timing of the demand for and supply of reserves in respect of such a requirement follows the creation of the deposit – it does not precede it. The money multiplier story is bunk. And ‘loans create deposits’ is correct as an observation.
Read the whole post at: http://monetaryrealism.com/loans-create-deposits-in-context/