Although the phrase ‘banks create money’ forms part of popular discourse, it has precipitated a factually incorrect understanding of a bank’s role in the money creation process. Bank money creation is the result of an underlying value-for-value exchange transaction; the bank facilitates the transaction, takes over responsibility for obligations created and records the money created—the bank is not the source of money creation. This has long been understood, even if it is not immediately evident, but contemporary explanations have confounded the issue. In exploring and explaining this fact, we clarify the bank’s primary function as financial intermediary between buyer and seller as opposed to borrower and lender. We also address a further problematic belief—that banks create money out of nothing. This opinion has gained popularity, fueling criticism of the banking system by the general public.
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