Bank lending creates deposits: Out of thin air, or because of double-entry accounting? A historical re-examination

Abstract

A recent literature in macroeconomics argues that instead of commercial banks taking in deposits from savers to fund loans, lending itself actually creates deposits. This outcome has been interpreted as lending creating deposits out of thin air or merely because of accounting. I argue that neither interpretation satisfactorily explains the outcome. Rather, I show that a hitherto forgotten explanation from two late nineteenth and early twentieth century scholars can easily demonstrate how lending creates deposits.