Friday, 20 June 2014

Text books wrong on banking?

It has become fashionable recently to claim that economics text books describe basic banking operations incorrectly. Adair Turner makes this claim about 20 seconds into the video below.
Plus Turner’s claim seems to be endorsed by Positive Money (see below).

Turner says “If you pick up most undergraduate text books, how they describe the role of the banking system, they make two mistakes. First, they describe a system which takes money from savers and lends it borrowers, failing to realise that the banking system creates credit money and purchasing power ab initio, de novo….”.
Well that claim doesn’t tie up with the two first year economics undergraduate text books in MY POSESSION (about 600 pages each).
Ch 25 of “Principles of Economics” by Lipsey and Chrystal, ninth edition, published in 1999 says (p.433) “Today, just as in the past, banks can create money by issuing more promises to pay…”.
And on p.435 it says “When a bank makes a loan to a customer, it simply writes a larger balance into the customer’s account….”.
Another text book (“Economics” by John Sloman, 4th edition, p.533) says “Let us examine in a bit more detail the way banks create money. First it is worth noting that most bank managers would claim that they do no such thing. Their business is to balance their books: to lend out money that has already been deposited, not to create things out of thin air.”

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