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Preventing Banks from Creating Money

In: Trailblazing Visions of Money in Economic Theory

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  • Biagio Bossone

Abstract

This chapter presents, with minimal alterations, an early study conducted by the author of this book that investigates the longstanding proposal to restrict the scope of banking activities. The narrow-banking proposal, aimed at enhancing financial stability, would prohibit commercial banks from lending to the private sector and would bar non-bank intermediaries from funding investments with demand deposits. The chapter examines the existing literature, comparing narrow banking with contemporary banking theories, assessing its potential ramifications on finance and the real economy, and drawing relevant policy insights. The chapter reports the author’s early attempt to run empirical estimates of the economic costs of bank narrowness. The chapter ultimately argues against the adoption of narrow banking by highlighting its potential to restrict the fundamental money-creation capabilities of banks, which could lead to adverse effects on credit availability and economic growth.

Suggested Citation

  • Biagio Bossone, 2025. "Preventing Banks from Creating Money," Contributions to Economics, in: Trailblazing Visions of Money in Economic Theory, chapter 0, pages 179-208, Springer.
    • Handle: RePEc:spr:conchp:978-3-031-82544-6_8
    DOI: 10.1007/978-3-031-82544-6_8
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