A bank manager tells you that she doesn't create money. She just lends the money that people deposit. Explain why she's wrong

Question

What will be an ideal response?

Answer 1

Though the manager does not see the entire process, nonetheless the loans the manager makes create more deposits and more money. Point out to the manager that when she makes a loan, the deposits at her bank initially increase. And, when the loan is spent, the recipient selling the goods or services that have been purchased will deposit part or all of the proceeds in his or her bank. When the recipient makes this deposit, the total amount of the nation's deposits increase and, because deposits are part of the nation's money, the quantity of money also increases. However, actions of other economic agents also affect the creation of money. For example, if people decide to hold less currency and more deposits, the immediate effect on the quantity of money is nil. But over time the quantity of money increases because banks gain more (excess) reserves, which are then loaned and then deposited, thereby creating additional deposits and increasing the quantity of money.