econews. Much of the money circulating in the economy does not come directly from central banks printing banknotes. Commercial banks can create new money when they issue loans—a mechanism that, according to economist Richard Werner, has profound implications for inflation, housing prices, debt, and economic growth.
When we talk about “money,” we often imagine the cash printed by a central bank. But the modern financial system is far more complex than this simple picture suggests.
Economist and banking researcher Richard Werner explains that commercial banks do not simply collect existing money from depositors and lend it to someone else. Instead, when banks issue loans, they can create new deposits—and therefore new money—within the banking system.
But the more important question is: Where does that newly created money go?
When bank credit flows into productive activities, investment, and businesses, it can contribute to economic growth and expand the economy’s productive capacity. But when a large share of new credit is directed toward assets such as land and housing, it can push up asset prices and increase private debt without necessarily increasing real economic output.
This leads to a crucial question: It is not only how much money is created that matters, but who receives the credit and what they use it for.
Understanding this process can offer a different perspective on financial crises, housing bubbles, rising private debt, and the role of central banks.
In this talk, Richard Werner explores the mechanisms behind modern money creation and the enormous influence that commercial banks have on the economy—a system that is essential to understand if we want to understand how modern finance really works.