Gee’s Reviews > Where Does Money Come From?: A Guide To The UK Monetary And Banking System > Status Update

a paradox at the heart of our monetary system: it is the state that essentially determines what money is and underwrites its value and yet it is predominately commercial banks that create it. In deciding who receives credit, commercial banks determine broadly how it is spent within the economy; whether on consumption, buying existing assets or productive investment, their decisions play a vital macro-economic role

Schumpeter recognised that what is required is a credit theory of money rather than a monetary theory of credit. And, whilst no definition is perfect, Geoffrey Ingham’s conception of money, which follows Simmel, Keynes and Schumpeter, seems appropriate: money is “a social relation of abstract value defined by a sovereign unit of account”

Although possibly useful in other ways, capital adequacy requirements have not and do not constrain money creation and therefore do not necessarily serve to restrict the expansion of banks’ balance sheets in aggregate. In other words, they are mainly ineffective in preventing credit booms and their associated asset price bubbles