Commercial Banks



“Commercial banks have the power to create money out of nothing”.

This should be a relatively uncontroversial phrase to anyone who works in, or has any contact with, finance. The modern process of money creation involves not the firing up of a printing press, but the simultaneous creation of an asset (a loan) and a liability (a deposit) by a commercial bank. Anyone even remotely clued in on the loan making process knows this is how it happens. Commercial bank money accounts for 97% of the money in our economy, and the way it gets there is simply being willed into existence by the banks. Yet this statement is a massive turn off for people. Even those who, when pressed, admit that it’s true dislike it instinctively. So, why is this?

I’d offer a few reasons:

1. ‘Out of nothing’ sounds absurd. It’s the kind of criticism that evolution deniers will lodge (“You really think all these things just came out of nothing?”) and it does sound a bit nuts. We’re used to the idea that things are not created by will alone, but by some sort of effort or fabricated with some sort of process. Our conception of money as a commodity that is produced somewhere and then circulated means that this business of it being created just sounds wrong.

2. It is the sort of thing Goldbugs say. The internet especially is home to many people who believe (presumably because of a magpie-like love of shiny things) that the only real money is gold or other precious metals, and everything else is a cruel lie designed to steal the wealth of rugged individualists. Because these guys say that our lack of a gold-based currency means that civil society is about to collapse, and that’s a teeny bit nuts, we tend to shy away from sharing their positions.

3. It sounds like it’s too simple to be true. Credibility in finance is correlated in people’s minds with complexity. Using lots of fancy words tends to make us comfortable when we talk about financial matters.

These emotional reasons for rejecting a statement are important. People are not decision engines. We base our acceptance of views on more than objective facts, and it’s important to engage with emotional bias. However, this is not to say that we shouldn’t use catchphrases for fear of bias. Overcomplicating the issue reduces the emotional impact of a statement like the above, and emotional impact is needed in issues like this to even get people to start caring! Simple awareness of these kinds of critiques can allow someone proposing a radical but factually correct view to nip any emotional bias in the bud and point out to a detractor why he or she is rejecting the statement.


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