Alternative Theories
The above gives the mainstream economics theory of money creation. There are also a number of alternative heterodox theories of how money is created. Most notably post-Keynesian economics emphasizes endogenous money – that money is created by the internal workings of the financial system, rather than by external forces, such as policy actions of the central bank.
Heterodox theories of money creation include:
- Chartalism holds that high powered money is created when the state's monetary authority makes a loan or purchase, also bank lending creates deposits.
- Circuitist money theory, held by some post-Keynesians, which argues that money is created endogenously by the banking system, rather than exogenously by central bank lending. Further, they argue that money is not neutral – a fractional reserve banking system is fundamentally different from a barter system, and money and banks must be an integral part of economic models.
- Credit Theory of Money. This approach was founded by Joseph Schumpeter. Credit theory asserts the central role of banks as creators and allocators of money supply, and distinguishes between 'productive credit creation' (allowing non-inflationary economic growth even at full employment, in the presence of technological progress) and 'unproductive credit creation' (resulting in inflation of either the consumer- or asset-price variety).
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