The Role of Banks in the Economy and Analysis of Their Effects on Monetary Expansion with the Balance Sheet

There is a long-standing debate in the literature about the role of banks in the economy. In contrast to orthodox economics, which argues that banks are financial intermediaries, the post-Keynesian view argues that banks have the power to create money. In fact, the idea that banks have the power to create money is not limited to the post-Keynesian view. For a century or more, beginning in the early 1900s, economists recognized that banks had the power to create money. This paper aimed to question the role of banks in the financial system. In order to achieve this aim, the relevant literature has been examined in a way that covers a wide historical time. This paper is based on post Keynesian assumptions on the subject. The paper concluded that banks are not intermediary institutions in the financial system, on the contrary, they have the power to create money, considering the literature findings, explanations of central banks, balance sheet analyzes and the Turkish banking accounting framework.