Not much more to it than that. Why is it the world’s end when a government prints money but fine when a banking system does it?
In: 9
The private banking system creating money certainly can be a problem. However it’s also a basic part of how modern economies work.
When you hear about central banks increasing interest rates, the main aim of this is actually to make lending more expensive, thus reducing the amount lent out and the amount of money created. This is commonly misunderstood (including by me until fairly recently).
In general: creating money is fine – in fact, expanding the money supply as the economy expands is generally considered to be really important. In a modern economy this is – with the big exception of quantitative easing – mostly done by private bank lending.
This lending is regulated by governments and influenced by the central bank rate, but within these limits banks have flexibility in how much they lend out. This is viewed as a good thing as banks are meant to respond to the market, which will demand more money as the economy expands.
Whether banks expanding the money supply is good or bad depends on the situation – just like expansion by the government. There are definitely cases where banks lend too much – for example if a big bubble is increasing demand for lending – and in these cases central banks may take action. On the whole, though, economists tend to view banks as less responsible for problems than governments (or at least, when they cause problems it’s ultimately the central bank’s fault for not raising interest rates).
Latest Answers