ABSTRACT
The previous chapter has described the important role of the banking system in supplying a nation's medium of exchange. In February 1999; for example, the United Kingdom's broad money supply (M4) was valued at £782.8 billion, of which only £22.6 billion was notes and coins held by the public. The remaining 97 per cent was made up of bank deposits created by financial institutions. There is a long-standing debate in the literature about whether this 'credit-money' (as bank deposits are often called, to distinguish them from 'commodity money' or 'fiat-money' issued by the state) can cause inflation, or whether it is always endogenously supplied by the banking system in response to demand. This chapter therefore explains how financial institutions create money, and examines the argument that credit-money expansion is always the result and never the cause of changes in the nominal value of economic transactions.' This second task is particularly important, since the remainder of the book will derive a contrary model in which the funding decisions of firms create the economy's stock of money in a way that can be inflationary unless disciplined by the central bank.
