Explaining money creation by commercial banks: five analogies for public education

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    Educators and economists concerned with monetary reform face the extraordinary challenge of explaining to the public and its elected representatives not only what a reformed system would look like, but also how the current system works. Centrally, the point that in a modern economy money is largely created by commercial banks, as explained by the Bank of England recently (McLeay, Radia & Thomas, 2014b), is often met with incredulity: “What do you mean, created?” This paper introduces five easy-to-grasp analogies that educators and reformers may use to convey key money-creation concepts to a lay audience. The analogies offered include (1) money as patches in an expandable patchwork quilt that covers a nation’s real assets, (2) the money supply as water in a bathtub with a faucet and a drain, (3) money understood as debt in a model economy run by schoolchildren, (4) the misleading concept of a bank “loan” explained by reference to gold that a London goldsmith could have lent, and (5) the money-creating capacity of bankers’ clearing systems illustrated by the example of neighbors working for each other without money.
    TidsskriftReal-World Economics Review
    Sider (fra-til)92-111
    Antal sider20
    StatusUdgivet - 12 jun. 2015


    • Money
    • Money creation
    • Banks
    • Analogies
    • Heterodox economics
    • Monetary reform
    • Monetary policy
    • Finance
    • Money supply
    • Bank lending


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