Bank Money Creation

Overview

Contrary to a common textbook picture in which banks merely lend out deposits savers place with them, most money in a modern economy is created by commercial banks themselves as a byproduct of making loans. As the Bank of England explained in a widely cited 2014 explainer, "whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."[1] In the UK, electronic bank-deposit money created this way makes up roughly 97% of the money supply, with cash issued by the central bank and mint accounting for the remainder.[2]

This matters for the Georgist case because bank lending is not spread evenly across the economy: it flows overwhelmingly toward real estate. The Great Mortgaging finding — that the mortgage share of bank lending in advanced economies roughly doubled, from about 30% in 1900 to about 60% by 2007 — shows that the "new money" commercial banks create is, in large part, credit extended against land and buildings.[3] Because land is fixed in supply, this credit creation tends to bid up land prices rather than expand the supply of land itself, a self-reinforcing loop that Josh Ryan-Collins and coauthors call the "land–credit feedback loop."[4]

Why It Matters

If the dominant channel of money creation is lending against land, then the banking system's ordinary operation — not merely speculative excess — has a structural tendency to inflate land prices and expand private debt in tandem. This connects bank money creation to the wiki's FIRE sector analysis and to the boom-bust cycle literature, where credit-financed land speculation is a recurring driver of financial instability. A land value tax, by taxing away the speculative capital gain in land, would reduce the collateral value that this credit-creation mechanism capitalises — though this is a Georgist policy inference rather than a claim made by the Bank of England or the standard monetary-economics literature cited here (rent-gradient caveat: the mainstream sources below describe how money is created and where it flows; they do not themselves argue for land value taxation).

See Also

• The Great Mortgaging — the long-run data on mortgage credit's rising share of bank lending
• The growth of modern banking is largely mortgage credit against land — the outcome page this concept underpins
• FIRE Sector — the broader finance/insurance/real-estate framing
• Josh Ryan-Collins · Rethinking the Economics of Land and Housing — the land–credit feedback loop
• Boom-Bust Cycle — the cyclical consequences of credit flowing into land

Sources

1. Michael McLeay, Amar Radia & Ryland Thomas (2014), "Money Creation in the Modern Economy," Bank of England Quarterly Bulletin Q1, pp. 14–27 — used for the mechanism by which commercial bank lending creates new deposits (money) (A-claim; quotation under 50 words). Bank of England
2. Positive Money, summarising Bank of England statistics and UK parliamentary evidence — used for the widely cited figure that commercial-bank deposits make up roughly 97% of the UK money supply, with central-bank-issued cash the remainder (B-claim; a standard, frequently repeated statistic rather than a primary dataset). Positive Money
3. Òscar Jordà, Moritz Schularick & Alan M. Taylor, "The Great Mortgaging," NBER Working Paper 20501, 2014 — used for the finding that mortgage lending's share of bank credit roughly doubled over the 20th century. See wiki summary. NBER PDF
4. Josh Ryan-Collins, Toby Lloyd & Laurie Macfarlane, Rethinking the Economics of Land and Housing, Zed Books, 2017 — used for the "land–credit feedback loop" framing connecting bank credit creation to land prices. See wiki summary.