Keen is a great explainer:
The standard story: “Deposits create loans”
The standard explanation of how money is generated argues that banks can only create credit if the government “kick starts” the system, effectively by creating cash that a citizen then takes to a bank for safe-keeping. Once the citizen has deposited that government-created “fiat” money, the banking system can create additional credit-based money via what is known as the “money multiplier” (see Appendix A for details).
This story has the banker sitting anxiously, waiting for a customer to walk in the door and make a deposit of government-created cash, before the banker can then begin the credit money creation process. Once the essential deposit has been made, the banking system can weave its money multiplier magic; but without the deposit, the banker—and the banking system—is impotent.
Does that sound like banking to you? It barely has credence as a description of the 1960s, let alone today’s “would you like a $25,000 credit limit with that?” world of banking.
The real story: “Loans create deposits”
Think of your own credit card. If your balance is sufficiently below your limit, then you are completely at liberty to go to (say) Harvey Norman and buy a new widescreen TV. When you do, your debt to the bank is increased by the cost of the TV—and an equivalent amount of money is simultaneously created and deposited in Harvey Norman’s bank account.
There is absolutely nothing stopping you from doing that, right out to your credit limit (apart from personal financial prudence!), and the same observation applies to every other credit card holder in Australia. If we all went out and did something similar tomorrow, we would increase the money supply by over seven per cent overnight. Taking advantage of the loans that we have every right to take out (the gap between our credit card balances and card limits) instantly and simultaneously creates both new debt and equivalent deposits in the accounts of the lucky retailers who swiped our cards.
The same mechanism applies to the financial system in general: loan-issuing entities grant their customers the capacity to create both money and debt simultaneously, without the need for a prior deposit of money to set the process off.
So the great debt bubbles we’ve seen repeatedly in recent years represent a massive, and relatively sudden, increase in the money supply, all entirely without any participation of central banks or governments.
The difference between government issuing debt into the private economy is that government debt *never has to be paid back.* When the private banks demand repayment, the money supply is suddenly reduced. When they do it all at once, a catastrophic crash results.
Government never demands any such thing. Most of the money issued stays in circulation forever, except for small amounts paid in taxes. It seems to me, then, that the amount of government-issued money should match the amount of wealth produced by it, permanently, to allow for sales of that wealth. This would, of course, pretty much eliminate the private credit system, and it’s hard to see where this would be a bad thing.
pdf here: https://t.co/DHvYVvr3tx
Also check out the charts on page 18…