Question

Banks creation of Money: Myths or Reality?

Answer 1

Banks create money when depositors' money is lent to the other person and another person deposit the same money to another bank. The process continues and money creation takes place in the economy. Here, money creation does not mean that a physical form of money is increased by the banks. Rather, it is the increased level of circulation of funds that has taken place due to depositing and borrowing process. Here, it is assumed that all funds borrowed will come to the banks and will not be kept at home. If some parts of the funds are kept at home, then the money creation process will be slowed and will not achieve the expected target level.

Hence, it can be said that money creation by banks takes place as a reality, but it is not an increase in the physical form of money, rather increased use, circulation of money and increased liquidity in the economy.