What is currently taught?
Economics textbooks across the world, some of them first published in the 1960s, continue to teach students a model of the monetary system in which commercial banks act as intermediaries, that only move existing money around the system, like lubricant in a machine. Many economics courses rely on the models in these textbooks, without recognising the empirical evidence that undermines them. This gives an unbalanced view of the way the monetary system functions and of the role of banks in the economy.
How is money created?
As research from the Bank of England, Bundesbank and numerous academics has shown, banks are not intermediaries channelling pre-existing funds from savers to borrowers. Commercial banks create the vast majority of money in circulation. Unlike other financial institutions, they create money when they extend loans to borrowers. In the process of extending a loan, banks do not move pre-existing funds from any other account but newly ‘invent’ the money by crediting the borrower’s account. Therefore, banks’ lending is constrained by borrowers’ demand, profitability considerations and financial regulations, not by pre-existing funds (i.e people’s savings) nor by central bank reserves. This reality is in line with the credit creation or endogenous money theory, which is absent from most current economics textbooks and teaching.
Banks create credit, or wide money, they do not create money, or base money. M4 that is, not M0.
But apart from that here’s an A level revision text:
How Modern Commercial Banks Create Credit
Banks create credit by extending loans to businesses and households – pure and simple!
They do not need to attract deposits from savers to do this
When a bank makes a loan, for example to someone taking out a mortgage to buy a house, or a business taking out a loan to finance their expansion it credits their bank account with a bank deposit of the size of the loan/mortgage.
At that moment, new money is created!
“Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.”
If it’s in the A level syllabus then I think we can assume that it is being taught, no?