Money Creation: Misconceptions: Government Spending Creates Money
7 Pages Posted: 18 Apr 2013
Date Written: April 18, 2013
Abstract
It is sometimes stated that government spending leads to money creation, at the same time providing the banks with excess reserves, leading to further money creation. This is so, but the statement ignores the fact that the money stock (and reserves) was depleted when revenue was raised in order for the expenditure by government to take place. It is irrelevant that the monetary base is added to because money creation does not revolve around it. However, when government borrows by the issue of new government securities (bonds and Treasury bills) new money (bank deposits) is created to the extent that the government securities are taken up by the banks, and the funds borrowed are spent by government.
Keywords: Money, money creation, central banking, banking, monetary policy
JEL Classification: A22, E42, E51, E52, G21
Suggested Citation: Suggested Citation