Banking And Finance

Explaining money creation by commercial banks: Five analogies for public education

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Abstract
Educators and economists concerned with monetary reform face the extraordinary
challenge of explaining to the public and its elected representatives not only what a
reformed system would look like, but also how the current system works. Centrally,
the point that in a modern economy money is largely created by commercial banks, as
explained by the Bank of England recently (McLeay, Radia & Thomas, 2014b), is
often met with incredulity: “What do you mean, created?” This paper introduces five
easy-to-grasp analogies that educators and reformers may use to convey key moneycreation
concepts to a lay audience. The analogies offered include (1) money as
patches in an expandable patchwork quilt that covers a nation’s real assets, (2) the
money supply as water in a bathtub with a faucet and a drain, (3) money understood
as debt in a model economy run by schoolchildren, (4) the misleading concept of a
bank “loan” explained by reference to gold that a London goldsmith could have lent,
and (5) the money-creating capacity of bankers’ clearing systems illustrated by the
example of neighbors working for each other without money

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English

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