# Re: Austrian & Keynesian Theories Vs. Mathematical Facts

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• Tue, Apr 20, 2010 - 05:00pm

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#### Re: Austrian & Keynesian Theories Vs. Mathematical Facts

[quote=rhare]

[quote=goes211]I am not 100% certain of this but I think in this case Thomas might be right.  My curent understanding is that commercial banks are the creators of almost all of the money in the system through loans.  They are not directly constrained by only loaning out deposits.  There is even a recent study ( I might have read about it on Steve Keen’s website but I am sure others can point you to it ) that showed that banks first create loans and then the required deposts follow some months later.[/quote]

I searched around for a paper, and perhaps you are referring to this paper.   I believe if you look at his examples you could get “loans create deposits” from the examples.  However, that is not what I get out of this paper. I believe he uses the starting point of loan creation to make the example simple.  What I get is that loans can create permanent “value”.  That is a loan that is used for productive use will result in more “value” in the system.  That value can be considered money because it could be encumbered for a future “loan”.

[/quote]

The point of that paper is that money is endogenously created in a debt-based money system, the majority of it is NOT created by the Fed. Private banks can issue as much credit as individuals and companies demand, and then go looking for reserves later from central banks or other banks/investors (in theory; in practice they don’t even do this sometimes). The reason why we are experiencing a recession right now is because of a debt deflation – when debt is destroyed, so is money – and that’s why prices fall, unemployment increases and consumer demand drops off.