Forbes: What Is Money And How Is It Created?

The question in the title is one that comes up from time to time here in the Forum. I was delighted recently to discover this discussion of it by my current favorite economist, Steve Keen, and I share it to substantiate my observation — often wrongly rebuked — that banks create money by making loans. But there is much more to the piece than that.

6 thoughts on “Forbes: What Is Money And How Is It Created?

  1. @Roberts

    ” . . . often wrongly rebuked?”

    Really? By whom. The monetary role of banks, reserve requirements and the velocity of money is taught on the first day of Macroeconomics 101. No one has ever rebuked you for stating things that are true. Not to my knowledge any way.

    Liked by 2 people

  2. It is important to distinguish between ‘creating money’ and ‘creating wealth’

    Wealth is created by moving resources to a more useful level. Money is a tool for exchanging wealth of unlike kind.


    1. RE: “It is important to distinguish between ‘creating money’ and ‘creating wealth’.

      You make an interesting point. Keen says much the same thing by emphasizing the utility function of token (worthless) money. The very fact that money is not a commodity is what distinguishes a barter economy from a monetary one.

      Still, we would commonly say that a person with lots of money is wealthy. This reflects our intuition that money has a store-of-value function such that creating money does in that sense create wealth. The problem with this way of thinking is that money is a very poor store of value. Inflation, deflation and pricing processes all affect the value of any given sum of money, adding or subtracting value quite uncontrollably.

      A resolution might be to see that the words wealth and health are related, as their histories show. You have to transform the world to make it a better place; otherwise you will live in conditions of dis- ease. Wealth really is created only by “moving resources to a more useful level.”

      When you have your health you have everything, as they say.


  3. “…nor can the Federal Reserve control bank lending,”

    But it does every single day by raising and lowering interest rates and printing money.

    I may be wrong (people have no problem telling me when I am), but my understanding of economics is that it is simply the study of the exchange of goods and services among people, companies and nations.

    Take out people and there is no economy.

    (Although, an argument could be made that nature is an economic system. A balance of exchange of prey and predation that if interrupted can bring catastrophic changes to an ecosystem. A “crash” in a manner of speaking.)

    More importantly, money in and of itself has little value except as a promissory note that allows the bearer to effectually exchange his wheat for my photos without the burden of me needing a silo. The bank is merely the holder of these notes until someone needs it again.

    Which, by extension, is the value of labor. Without labor, there is no need for money. On the other hand, labor is what moves those promissory notes around the economy. It allows Ford’s payroll to buy tickets on Southwest Airlines, whose payroll allows people to buy Fords, or build a house or buy knowledge (education).

    Labor is what gives money its value. We see that in studies that compare the man hours it takes to buy a car, or a meal, or a house, etc.

    So do banks create money? Or do they move it around as part of an economic system?

    I think labor creates “money”, which is merely the counting tool for determining wealth.

    Liked by 2 people

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