Money creation in the modern economy

Claims Supported by This Source

1. Section "Market forces facing individual banks": The moment a mortgage loan is issued, a new deposit is credited to the borrower's account. When the house is purchased, the deposit is transferred to the seller. The seller's account is often at a different bank than the buyer's, so the deposit moves to the seller's bank (Figure 2).
2. Same section: The buyer's bank first settles with the seller's bank by transferring reserves. Since banks make many loans every day, they would quickly run out of reserves if they covered all of them in this way.
3. Same section: Therefore, banks try to attract and retain liabilities to match their new lending (e.g., by attracting deposits created at other banks by raising deposit interest rates, or by borrowing from other banks). The cost of this is compared with the interest rate on loans, and both deposit and lending rates depend on the policy interest rate.
4. Same section: Lowering lending rates to attract borrowers while continuing to attract deposits by raising deposit rates can make the expansion of lending unprofitable. The competition for loans and deposits and the pursuit of profit constrain money creation by banks.
5. Abstract: Households and firms that receive money created by new lending may use it to repay existing debts, immediately destroying the money.

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