Articles by Richard Werner
Professor Werner Is a German academic, economist and professor at the University of Southampton. In 1991, he became European Commission-sponsored Marie Curie Fellow at the Institute for Economics and Statistics at Oxford. He became the first Shimomura Fellow at the Research Institute for Capital Formation at the Development Bank of Japan. His doctorate in economics was conferred by Oxford University.
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How banks create money
29th October, 2014
This paper presents the first empirical evidence in the history of banking on the question of whether banks can create money out of nothing.
The banking crisis has revived interest in this issue, but it had remained unsettled. Three hypotheses are recognised in the literature.
According to the financial intermediation theory of banking, banks are merely intermediaries like other non-bank financial institutions, collecting deposits that are then lent out.
According to the fractional reserve theory of banking, individual banks are mere financial intermediaries that cannot create money, but collectively they end up creating money through systemic interaction.
A third theory maintains that each individual bank has the power to create money ‘out of nothing’ and does so when it extends credit (the credit creation theory of banking).
The question which of the theories is correct has far-reaching implications for research and policy. Surprisingly, despite the longstanding controversy, until now no empirical study has tested the theories.
This is the contribution of the present paper. An empirical test is conducted, whereby money is borrowed from a cooperating bank, while its internal records are being monitored, to establish whether in the process of making the loan available to the borrower, the bank transfers these funds from other accounts within or outside the bank, or whether they are newly created.
This study establishes for the first time empirically that banks individually create money out of nothing.
The money supply is created as ‘fairy dust’ produced by the banks individually, "out of thin air".........
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Excerpt from Interview on RT
6th March, 2017
Even the mainstream textbooks on finance, banking, and macro monetary economics will show banks as financial intermediaries.
Banks are thought of as deposit taking institutions that lent money. The legal reality is banks don't take deposits and banks don't lend money.
So what is a deposit? A deposit is not actually a deposit, it's not a bailment, it's not held in custody. At law the word deposit is meaningless. The law courts and various judgements have made very clear [that] if you give your money to a bank, even though it’s called deposit, this money is simply a loan to the bank. So there is no such thing as deposit. The banks borrow from the public. That much we’ve established.
What about lending? Surely they’re lending money? No they don’t. Banks don’t lend money. Banks, and again at law it’s very clear, are in the business of purchasing securities. That's it.
So you say OK, don't confuse me with all that legalese I want a loan. Fine, here’s the loan contract, here’s the offer letter, and you sign. At law it’s very clear you have issued as security, namely a promissory note and the bank is going to purchase that. That's what's happening.
In layman's terms, that means that what the bank is doing is very different from what it presents to the public that it's doing. How does this fit together?
So you say fine the bank purchases my promissory note, but how do I get my money. I don’t care about the details, I just want my money.
The bank will say “you’ll find it in your account with us”. That will be technically correct. If they say we’ll transfer it to your account, that's wrong because no money is transferred at all, from anywhere inside the bank or outside the bank. Why, because what we call a deposit is simply the banks record of it's debt to the public. Now, it also owes you money [for the security it is purchasing from you] and its record of the money it owes you is what you think you're getting as money, and that's all it is.
That is how the banks create the money supply. The money supply consists of 97% of bank deposits and these are created out of nothing by the banks when they lend. This is because they invent fictitious customer deposits. Why? They simply restate, slightly incorrectly in accounting terms, what is an accounts payable liability arising from the loan contract, having purchased your promissory note, as a customer deposit. But nobody has deposited any money.
So the banks create the money supply by inventing these claims on themselves, these fictitious deposits..........
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Banks create money from nothing. And It gets worse.
January 3, 2017
Richard Werner, the German professor famous for inventing the term ‘quantitative easing’, says the world is finally waking up to the fact that “banks create money out of nothing” – but warns this realisation has given rise to a new “Orwellian” threat.
In an exclusive interview with The New Daily, Professor Werner says the recent campaigns around the world, including in India and Australia, to get rid of cash are coordinated attempts by central bankers to monopolise money creation.
“This sudden global talk by the usual suspects about the ‘need to get rid of cash’, ostensibly to fight tax evasion etc, has been so coordinated that it cannot but be part of another plan by central bankers, this time to stay in charge of any emerging reform agenda, by trying to control, and themselves run, the ‘opposition’,” he says.
“Essentially, the Bank of England and others are saying: okay, we admit it, you guys were right, banks create money out of nothing. So now we need to make sure that you guys will not be able to set the agenda of what happens in terms of reforms.”
Professor Werner (pronounced ‘Verner’), currently the Chair of International Banking at the University of Southampton, is one of the first academics in the world to bring attention to the fact that banks loan money into existence. He has been arguing this for more than two decades, and has published several papers on the subject.
The old theory, taught in high school economics classes and to university undergrads, is that banks receive deposits and loan out of a percentage of that money, while keeping some in reserve.
The truth, according to Professor Werner, is closer to the following: A bank receives $100 from a depositor, keeps that $100 in reserve, and then creates $9900 worth of new loans and deposits. It may also create $15,000 in new deposits through its lending.
This is a rough approximation. The main point is that the banks do not lend existing money, but add to deposits and the money supply when they ‘lend’. And when those loans are repaid, money is removed from circulation........