Money Creation by Banks

This chapter further elaborates on the role of banks as money creators and focuses on two aspects of bank money: its creation process and the extraction of seigniorage by banks being able to create money at a lower cost than its value. The chapter reviews the growing body of literature surrounding banks as money creators, while recognizing the notable lack of research focused specifically on bank seigniorage. It delves into how banks generate money and the constraints they encounter through the payment systems where they operate, alongside the rules and technologies they must adhere to within their operational frameworks. Additionally, seigniorage is scrutinized in light of its differences from profits gained through traditional financial intermediation. The chapter reflects on the broader implications of these mechanisms, asserting the critical nature of bank seigniorage in understanding the economic landscape, ultimately linking these dynamics to broader concepts of material and financial productivity within contemporary economies. The chapter concludes by discussing policy measures to eliminate, mitigate, or redistribute seigniorage across the economy.