In the Bank of England's Quarterly Bulletin, 2014 Q1, McLeay, Radia, & Thomas write a pair of articles titled:

I believe they subscribe to what Werner (2014) calls the credit creation theory of banking. From their Overview:

In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.

These two articles were published in the BoE's Quarterly Bulletin, so I had initially assumed that what they were saying was the mainstream/widely-accepted/orthodox view. On further reading (e.g. of Werner, 2014), I discovered though that this might not be so and am now slightly confused as to what, if any, the mainstream view is.

My main question is this: Is the above description of money creation largely accurate?

Follow-up questions: Does this description differ from what is written in most textbooks and academic papers and books? (And if so, why? Is it because the above description is a relatively recent development? Or the above description has been true for a long time now, but has simply not been incorporated into textbooks and economists' models?)

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    $\begingroup$ That's not a theory, that's how banking and money work in practice. Banks create money when they issue loans, and destroy money when the loans are reimbursed. That's not a theory, that's bank accounting & how money creation works in practice $\endgroup$
    – Hector
    Feb 22, 2019 at 8:25
  • $\begingroup$ "The reality of how money is created today differs from the description found in some economics textbooks" -- this process is often explicitly stated in most macroeconomic textbooks or at least implied (through concepts such as the money multiplier and reserve ratios) -- nothing is new about this. Like the other comment states, it's not a theory. It's a practical fact that is well known and nobody is trying to hide it. $\endgroup$
    – WorldGov
    Apr 4, 2019 at 12:13
  • $\begingroup$ I don't see where either BoE publications endorse Werner, either explicitly or implicitly. That seems to be your jump to certain conclusions. $\endgroup$ Apr 6, 2019 at 11:07
  • $\begingroup$ I think the problem here is that there is no single “orthodox” view that has never changed. There are old textbooks that have money multiplier theories that contradict McLeay et al. (but I don’t have any examples), but the point is that those are old textbooks. Not sure whether anyone who studies in this area would endorse the textbooks over the views in McLeay et al. now. $\endgroup$ Apr 9, 2019 at 10:57

3 Answers 3


The monetary base (MB) contains what might be called "public money creation", Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions), Notes and coins in bank vaults (vault cash), and Federal Reserve Bank credit (required reserves and excess reserves not physically present in banks). The broadest available government measured US monetary measure is M2, which does not contain all the elements of MB, but still is an approximation of the total of private and public money creation, which includes currency, plus time, savings, and demand deposit accounts. So, what is MB/M2? What fraction of money is created by the government of the total?

enter image description here FRED: (Monetary Base; Total)/(M2 Money Stock*1000)

The answer is less than half. Crudely, money is mostly privately created in the US. The "out of nothing" aspect of your question is more complex. In my personal view, and I guess that's only an opinion, is that because banks are government regulated and insured institutions, forced to back each loan with reserves, and regulated to have capital for each of those loans, they cannot really be said to make this private money out of nothing.


The BoE links you've posted make a distinction between "base money" and "broad money". Here's a figure from your first link:

enter image description here

An obvious fact in it is that credits to consumers are part of the "broad money" only.

There is nothing terribly controversial about broad money, except that might not have an universally agreed definition

The European Central Bank considers all monetary aggregates from M2 upwards to be part of broad money.[2] Typically, "broad money" refers to M2, M3, and/or M4.[

OECD defines "broad money" as: all banknotes and coins; bank deposits not considered long term, i.e. with an agreed maturity of up to 2 years; bank deposits redeemable at notice of up to 3 months, and similar repurchase agreements; money-market fund shares or units; and debt securities maturing within a period of up to 2 years. The typical OECD notation for "broad money" is M3

Still, the exact definitions of monetary measures depend on the country. The terms will usually be more exactly defined before a discussion, whenever it is not sufficient to assume a wider definition. For the Bank of England, the "inescapable conclusion" is that "there can be no unique definition of 'broad money' and any choice of [a] dividing line between those financial assets included in, and those excluded from, broad money is to a degree arbitrary, and is likely over time to be invalidated by developments in the financial system." Generally, "broad money" is more a term and less a fixed definition across all situations.

"Base money" is also called "narrow money". As for the more technical M-terms

Different measures of money supply. Not all of them are widely used and the exact classifications depend on the country. M0 and M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. The exact definitions of the three measures depend on the country. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice.

The BoE publication from which I took the figure is basically trying to explain these notions "for dummies".

As for Werner, it is indeed unhelpful to simply call "broad money" just money. Of course, that's par for the course given his "pixie dust" conclusions. If they were universally accepted, you probably wouldn't see the base/broad money distinctions in the official publications, but for now they exist. It is incorrect to say BoE endorses Werner; even those "for dummies" BoE publications you linked don't advance the pixie dust theory.

Werner's theory is basically attacking the received fractional reserve theory, an important part of which states:

In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can limit the process of [broad] money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals. However, rather than directly controlling the money supply, central banks usually pursue an interest rate target to adjust the rate of inflation and bank issuance of credit.

Werner's argument seems to be that somehow [all?] this regulation fails in practice, so commercial banks can create their own [broad] money like pixie dust. It sounds a little far fetched.

One critic or Werner says (not in an academic publication though):

Finally, his empirical test is flawed, as was his previous one. His credit creation theory of money [...] cannot be demonstrated by making a single small loan to a virtual customer of a given bank.

Finally there is a BoE working paper (by Jakab and Kumhof), i.e. not official BoE position that is apparently sympathetic to Werner. But you haven't mentioned this paper... I found it via the same critic of Werner.

And from the criticism of this latter paper, here's a reiteration of the orthodox view:

In fact, nobody has ever denied the endogenous money creation inherent to the money multiplier [=fractional reserve] model. But this endogenous creation of deposit liabilities (inside money) is constrained by the exogenous variable of the availability of reserves (outside money), as I explained in this post. Is there a fixed limit in the absence of reserve requirements? No. But in this case banks estimate the amount of precautionary reserves and secondary reserves (i.e. mostly highly-rated/high-quality liquid securities they invest in for margin and liquidity management) they need. Apart from asset quality considerations (and other exogenously-defined factors like banking regulations), nothing prevents a bank from expanding its loan book, and hence its liabilities, ad infinitum. Except the threat of illiquidity.

Also, the general idea of endogenous broad money creation (i.e. pixie dust by the commercial banks) is not terribly new

Endogenous money is a heterodox economic theory with several strands [...]

The keyword there for the purpose of your question being heterodox.

As for the McLeay paper (your 2nd link), it's hard for me to say what is their position exactly. On one hand, they hat-tip "There is a long literature that does recognise the ‘endogenous’ nature of money creation in practice. See, for example, Moore (1988), Howells (1995) and Palley (1996)." And on the other hand they have a loong discussion of the limits to broad money creation, including "(iii) The ultimate constraint on [broad] money creation is monetary policy". Their argument seems to be that the control is less direct than expected, but it doesn't seem that it's entirely endogenous to the commercial banks, although I may be misreading them. In any case, this "ultimate constraint" sounds more than "pixie dust" to me. YMMV; maybe you should ask a separate question about the theory advanced in the McLeay paper.

And I'm apparently not the only one confused about the message of McLeay's paper.

Finally, there is the role of reserve requirements and capital requirements to consider. They can act as additional brakes on broad money creation.

  • $\begingroup$ Do you know of any literature around money creation in shadow banking? (i.e. un-regulated non-commercial banks) -- Repo is in M3, for example. I thought you had a lot of interesting points about endogeneity of money creation. I'm very, very interested in this topic. $\endgroup$
    – David
    Apr 3, 2020 at 2:52
  • $\begingroup$ @DavisClute: not off the top of my head, no. It would make a good (separate) question here though, I think. $\endgroup$ Apr 3, 2020 at 2:55

I disagree with some aspects. Firstly money abstractly can be several different things. I consider this as axiom to modern economics until convinced otherwise. The central bank in most economy only actually "prints" new money via its bond coupon payment. This is never balanced and only net credit to money supply.

Actually it may be slightly more complicated. But I assume as key axiom that when a bond is issued, the coupon payment or interest is net credit to the money supply. This is different then special, inter government bonds used by the government and these special bonds are not subject to a open market. These are ideally paid back from tax revenue.

So the bond coupon say 2.9% over 30 years on the principal barrowed is new money. The original principal is actually short term debit from the money supply until it is paid back. And the interest finally, a net addition to the money supply.

The primary area of disagreement I have is this. Under normal circumstances you have steady growth. For example consider China's and worlds use of the usd. Each year new entities enter the global exchange of goods and services using the dollar. Theoretically at some point the integral amount of dollars is not enough, an extreme example would be say you had 20 cars and I have 1000 computers, we each have 2 dollars, now John, born yesterday would like to sell his fathers supply of apples but has no dollars. I want apples, have too many computers and could use a car. But at todays prices I can only buy two apples. Clearly now the currency is no longer a useful tool in the real economic situation in which people can create value out of virtually nothing, improve their poor situation, and all in a beneficial, cooperative economic strategy.

Ideally the money is a tool which must be periodically maintenance to serve the natural economic trade, which transcends the money supply. If it is not there becomes a very natural economic force to bypass it. This is generally seen as the money losing its integrity, forcing, alternative money (oh hey there bitcoin), stealing and things perceived as crime, but are really just attempts to bypass problems with a broken tool, and proceed freely and economically.

Additionally governments have admitted to tightening the money supply in what the call monetary policy. So that if the real, underlying economics get tight, like computers, cars, and apples drying up, they can create a perceived relief from such recessions and prevent depressions.

So we can see that under these assumptions the money supply is one factor in the big economic picture the others are typically much more important, like education levels, natural resources, carrying capacities, energy, population and what not.

Now inside this big complex real economy, you have a the ability to net produce money in very small window where a non government loan is created inside your window, and paid back outside of it. This is then virtually creation of money. Examples of this might be taking on debt as a ceo then retiring.

There are many obvious problems with this. Typically there is more interest then can be repaid, and default OR essentially freely giving money back becomes necessary, also is coupled with economic forces for currency to lose integrity, or a shift to alternate currency. This is interesting economic phenomena in its own right, a general breakdown in cooperative strategy and move to non cooperative. It is not clear which is the cause or effect. But it appears to happen naturally with out choice.

This is a good picture of todays money usd which is mostly created by debt from private banks instead of by the government. It essentially relegates private and corperate banks to do what fed has done in the past. Several things are clear, the debt levels and unwillingness of the central banks to print money, instead turning to corporate bank lending- is unprecedented. Oddly enough while democratic presidents have typically been seen as progressive, modern thinkers, they have set the precedence of extremely tight monetary policy, often operating on the money supply produced under republican administrations. One can argue about the humane effects of monetary policy on the poor. Prisons overflow, homelessness rises, and apparently all at the cost of choking the economy incase of recession. If then, the let off has any real effects is debatable as well.

There are some negative effects of regulation of money supplies. This is primarily inflation. In many economic models inflation does occur, as a result of growing economy. An example of this is the Euro. With Brexit the E.U. would experience a shrinking number of economic players using the euro for trade, as such we have seen negative bond rates over there to prevent inflation, possibly literally learning Euros if that is the method used to destroy bills removed from circulation.

In today's times it is in my opinion we are heading to tougher times and uncertainty in the big economic picture. We have climate change, end of Moores Law, which has fueled the boom of the 90s. But even coming from the Reagan/Vulcan era 14% bond coupons, there were still problems. I view it as testing the waters and the powers which make such decisions thought, (from a long term 100 year outlook) they weren't impressed by semiconductors and that we were shakey in the knees. And quickly pulled back.

It is difficult to know and interpret the vast economic signs and clues but here today after a modest pop up to 3-4% the 30 year declines ounce again towards 2% remaining flat, among the blatant debt, poverty we just have to keep in mind how complex the world is and realize we probably don't understand everything.

  • $\begingroup$ The assumptions made by "Werner 2014" are preposterous. The objections i have raised are mathematical fact. Private and corporate bank debt can not regulate the money supply in place of government central bank in which a finitely divisible currency is used and economic growth is to occur. Without default or giving away money in a manner which is not economical. This is provable mathematical fact. $\endgroup$ Apr 4, 2019 at 8:14
  • $\begingroup$ Also typed from my phone, as usual touch screen has garbled much of it, I don't have time or concern to fix it, so there you go, the answers are all there for anyone willing to read. Which judging by "Werner 2014" there are none so it doesn't even matter. $\endgroup$ Apr 4, 2019 at 16:09
  • $\begingroup$ I don't see how a CEO taking a loan and then retiring is money creation, any more than any other loan is. (All loans create money, what's special about the CEO retirement scenario?) $\endgroup$ Mar 17, 2023 at 15:08

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