The assertion that banks create money is wrong, maybe it is your use of words. Through loans banks foster creation of wealth and expansion of the economy.
Yes, our quibble can be viewed as just one of terminology and for that I apologize
HOWEVER my definition and explanation of "money" IS the correct one. You will do yourself a favor to learn why; then you won't come across as ignorant.
Consider the U.S. in the early 19th century, when there was NO central bank . During the period 1811-1816 (between the First and Second Banks of the U.S.) or the period 1834-1861 (after 2nd Bank effectively ceased until before greenbacks were printed to pay for War) there were no banknotes printed by the U.S. government. OTOH, private banks were printing paper money; a merchant in St. Louis might honor a banknote from Philadelphia, though often at a hefty discount. These paper notes served the purpose of, and followed the definition of,
money and were useful as money since carrying the scarce metals gold or silver around would have been inconvenient. If the paper money was backed by precious metals in the bank's vault you MIGHT argue that to count the paper as additional money would be double counting. In fact, the money was NOT fully backed. (And there was almost no banking regulation.) The Philadelphia $1 bank note might buy only half of what a silver dollar would buy in St. Louis, but it was still money.
And that money was obviously created and printed by the private bank in Philadelphia.
If this is still unclear, I give up. I trust you can do your own Googling? The private bank can print all the "money" it wants, but it is irrelevant until it is put into circulation. That can happen in one of three ways: (a) someone deposits U.S.-minted gold or silver coins (or other valuable) and receives the bank-notes, (b) someone deposits paper money drawn on a correspondent bank, (c) a borrower signs a loan document. It is case (c) where the private bank creates money.
Recall that for many decades, the U.S. government printed no banknotes; it acquired the money it needed by minting metal coins (although it must acquire the metal), taxation, tariffs or, rarely, borrowing (e.g. for the Louisiana Purchase). Miners produced "money", one can argue with reason, when they took gold or silver out of the ground. Other money was created by private banks when they lent. Is there any dispute about this?
Now what about "central banks"? The 1st and 2nd Banks of the U.S. were
owned by private shareholders and operated on principles much like private banks — and indeed, given the shareholders, WERE private banks. Like the private banks, these banks issued paper banknotes, but generally trading at only small discount. A main difference is that while the retail bank might be lending to Farmer Joe, betting his corn crop comes in, the central bank will generally hold only high-quality debt paper, perhaps lending to government or other banks to improve liquidity. Note that money owed by one bank to another is generally NOT included in measures of money.
From the time of Abe Lincoln to the time of John F. Kennedy, the U.S. Treasury printed paper money, with a class clearly marked on each banknote showing whether it was fiat currency or backed by a precious metal.
It may be clearest to regard Federal Reserve banknotes as completely separate class of money, indeed simplest to treat it similarly to the banknotes created by private banks. Such banknotes have been issued since the time of Woodrow Wilson to the present, and no U.S.T. banknotes have been created since JFK or LBJ. Note that money created electronically by FRB has EXACTLY the same status as Fed Res banknotes. (Money is also created electronically by private banks in the normal course of business, specifically lending.)
In times of economic uncertainty, private banks are reluctant to make loans, the money supply shrinks. In a vicious cycle, recession begets credit tightening and vice versa. A central bank can take measures to encourage private lending, but any money created will be created by the private lenders.
Everything so far is clear-cut. Now let's consider where confusion arises. It is generally held that the FRB somehow controls the money supply, with open-market trading in (usually) high-quality debt paper, and by setting an advisory target for over-night "risk-free" money.
But as I have explained in excruciating detail, these manipulations do NOT "create money." — They certainly do not increase M1, M2 or M3 without further action by the private banking sector.
Can we split our difference and agree that
the private banking sector creates money, while the central bank attempts to target the quantity and interest rates of that private lending.
Beginning some two decades ago in Japan, "quantitative easing" by a central bank has been used with the hope of increasing lending by private banks: The central bank buys low-risk debt, e.g. U.S. Treasury bills, notes or bonds, hoping that the bank will replace that asset with a new loan to some entrepreneur. But even here, it is the private bank which creates new money! If the bank keeps its proceeds from the bond sale in an account at the FRB — recall that inter-bank paper is not counted as "money" — then no new money has been created. (And indeed it happens that much of this QE money is held by private banks in "excess reserve" accounts at the Fed.)
[off-topic?\ The interest rate for overnight and other future money went negative in Europe after the Crisis and was in danger of going negative in the U.S. This is one reason the FRB started paying interest on excess reserves. Yet, such interest DISCOURAGED private lending. You can see that central banking — almost regarded as a solved problem in the late 20th century — is already in treacherous uncharted waters.[/o-t]
Does this help?
~ ~ ~ ~ ~ ~
The way the U.S. government acquires money to spend is a completely separate topic. It can inflict taxes or tariffs, where money is sopped up rather thn created. It can borrow from private citizens: Since these funds would be in lieu of other spending or investment, again money is sopped up rather than created. If the government's IOUs end up in the hands of a U.S. bank, private or central, then money has been created, by the private or central bank respectively.
ETA: Perhaps many of you will think "Another bullshit long-winded post by Swammi the Dumbo."
But I've reread the article and I now think I did an unusually good job of explaining and clarifying the topic of money creation.
I refuted this in the post you quoted. Didn't you read it?
en.wikipedia.org
