How Commercial Banks Really Create Money (the Money Multiplier is a MYTH).

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This video explains why fractional reserve banking and the money multiplier theory are myths and how banks do, in fact, create money.

Yes, banks create money (through credit creation) but they do not do so by getting cash from you and then lending over and over till they reach the reserve requirement limit, as the money multiplier theory suggests. The reserve requirement is not a hard limit on money creation because central banks create new reserves to support healthy but cash strained banks. This is evident since, even though banks can technically ‘create money’, they can still fail because they do have to pay back that money. There are three other important soft limits on bank money creation. These are the public’s demand for debt, capital requirements, and liquidity concerns.

Narrated and produced by Dr. Joeri Schasfoort (University of Cape Town)

If you would like to go even more in depth. I suggest these excellent books:

- Where Does Money Come From?, excellent introduction on where money comes from by some of the leading forces behind the positive money movement.
- The end of alchemy, excellent book written by the former governor of the Bank of England: Mervyn King;
- Debt: The First 5,000 Years, historical account of debt as money;
- The New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance, interesting account on how bank money creation powered the Japanese economic miracle;
- Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, introduction to the popular Modern Money Theory (MMT), a macroeconomic school of thought with bank money creation at the heart of it.

For some of the footage used in this video, I make the following attributions:

- Wallstreet cc Vedevo
- NYC Times Square cc Vedevo
- City at night cc Vedevo
- Dollar printing cc Panning Vedevo
- Hong Kong street level cc Vedevo
- Banks in the clouds cc Pexels
- ECB construction video cc ECB
- Deutsche Bundesbank video cc Deutsche Bundesbank

[Artonox]

i love how this incorporates the facts of accounting in regards of bank and customer creating "debt" to each other.

[TheRepublicOfUngeria]

What is being obfuscated by our very language is: banks create credit, not currency. Credit is a claim on currency, not the currency itself. When a bank loans me $200k to buy a house, a real claim on real central bank currency must be transferred from me to the seller, either in the form of hard cash, or a claim on hard cash in a checking account. In exchange, I must retrieve $200k plus interest over the term of the loan by working for it, and giving the money I receive to the bank. In this way, banks don't really create money insofar as they create currency, banks create money insofar as they create future claims on currency: the central bank is still the one who creates the actual currency.

[malithdissanayake]

wow. just found out the truth about money creation and it's crazy. I don't know why I took so long to watch your videos even after subscribing your channel long ago. thanks for the video..! looking forward to your other videos. also your reference about the CORE is fantastic. The

[AvnerSenderowicz]

To complete the picture you should discuss how money gets destroyed.
It's often left out that when loans are repaid the reverse happens - money/credit that was initially created is now destroyed/removed from the economy.
What's left is the interest and whatever asset or enterprise the borrower purchased or created.

[DeFlekkie]

Hey Joeri!
Love your content, very happy it was recommended to me (1Dime brought me here initially).

I have been learning a lot about banking, central banking and Macroeconomics in general. And I really really appreciate you using your specialised knowledge and make it so accessible!

Thanks, keen to be watching more of your backlog and future videos 🙂

[ef]

Basically, banks do not lend you 'money', they buy and sell securities/ IOUs created by the 'borrower' when they sign the agreement that allows the bank to create the funds/credit. Your signature creates a promissory note, an asset to the bank.
Professor Richard Werner explains this also very well.

[stevenanderson]

Great video! It's taking too long for this explanation of money creation to become known. I was expecting, or maybe missed an additional constraint on banks creating money: Bank willingness to lend. It's rare, but after the GFC few banks were unwilling to lend, even at low interest rates, and it restricted the money supply.
Keep up the great work! You just got a new subscriber!

[ichweissesnicht]

I love you, man. Thank you soooo much for this video (and other videos on banking and central banking).
It breaks my heart seing all of those videos on Youtube with millions of views, just propagating the myth of the money multiplier and then the people in the comments thinking they learned how the world works, while they did the EXACT OPPOSITE of that.
Sadly, this myth is still dominating economic textbooks, universities and class rooms.
This video deserves a lot more views. God bless you.

[ProfAzimov]

Essentially, banks create money because they manipulate their ledger. When they give a loan, they change a few numbers on the bank account statements, and record on their spreadsheet that they owe bank account A $1M, and Bank Account A owes them $1M. When you want to spend your money, the bank debits a few digits off your end of the spreadsheet, and credits the account you pay. Since people accepts bank obligations at par to cash, the bank can create money by changing their spreadsheet to add points to someones account.

[GoooObama]

Many thanks, that was the most logical explanation and well explained too.

[willows]

Yes! Thank you for uploading your video.... So many people don't know about how lending process and money creation....

[tekudiv]

Thanks for explaining this! Much needed.

[ethan_udovich]

These videos are so level-headed and informative. You really know your stuff. How do you not have more followers??

[TobyUnravels]

Thanks.

I made a video on the outdated story some time ago.

This new way of looking things at is a breath of fresh air.

[SerifSansSerif]

that's not really much different than double entry accounting.

Debit your cash, credit your liability, money is created from nothing. (and gets destroyed when you remove cash to pay liabilities.)

[mislavgleich]

Thank you for pointing this out. Very informative video.

[kenethchua]

🎯 Key Takeaways for quick navigation:

00:00 💰 Understanding Money Creation
02:04 💵 How Banks Create Money
05:26 🕒 Timing and Money Creation
07:15 💳 Constraints on Money Creation
11:20 📚 Further Reading and Recap

Made with HARPA AI

[theosuellow]

This videos title is a bit clickbatey to my taste and is grounded in a very pedantic interpretation of most introductory econ textbooks. From econ class I always viewed the multiplier as a function of banks propensity to to give out loans and the reserve requirements merely as a, rarely binding, hard ceiling on what banks will be able to lend out. Whether you call it a bank reserve requiremets, capital requirements or dis/incentivicing loan creation by playing with the interest rate, the effect will be the same as that which you would get from varying reserve requirements. From a pedagogical standpoint I find it perfectly justified to explain the multiplier assuming banks are eager lenders bound only by reserve requirements and add a bunch of caveats about the different forms these lending limitations can take after a simplified understanding of money creation has been established. While I agree completely with everything contained in this video it gave me the false expectation that my understanding of economics was about to be shattered XD. I guess you cant make a living on youtube with nuance XD.
As an economics teacher I would actually stick to the way the multiplier is explained in most textbooks. Yes, its a simplification, but that is really all economics is.
Then in a second step you can add nuance to students understanding, explaining there is more than one way to get banks to hold higher reserves and that by increasing interest rates or capital requirements you can also elicit reactions in the ratio of loans to reserve holdings, in fact banks might constrain the multiplier entirely on their own because they are to afraid to give out loans in an otherwise auspicious monetary environment. I think only few actual economist ever took reserve requirements to be more than an, admittedly misleading, synonym of banks propensity to loan money

[federicobindi]

Great video! I'm member of Rethinking Economics at Università Bocconi in Milan, we'll share this on our social media!

[philipgardiner]

Great video! Just discovered your channel and the content is great. Pardon my ignorance but it’s one thing to have the reserve ratio of the bank at 0, but the central bank still creates the £1 out of nothing and lends that to the bank to dispense. Doesn’t that £1 have to be paid back to the central back (crucially) with interest?…where does that interest come from? From what I understand it’s an impossible equation.
Many thanks for reading and your response.