Prof. Richard Werner exposes the truth: banks create money, not lend deposits. A critical look at the financial sector's power and paths to stable growth.
The Money Machine Unveiled: Prof. Werner’s Insight into the Banking System
Por: Carlos Santos
It is a widespread notion that banks act simply as intermediaries, accepting deposits from savers and lending those existing funds to borrowers. This long-held belief, which permeates much of mainstream economic thought and public consciousness, often obscures the true, fundamental operation of the banking and financial sector. Here, I, Carlos Santos, aim to shed light on this critical subject, drawing deeply from the profound, evidence-based explanations offered by economist Professor Richard Werner. Werner's work fundamentally challenges the prevalent narrative, revealing how the system truly functions as a powerful, autonomous creator of money, not just a conduit for existing savings. My purpose is to present this complex, often deliberately opaque reality in a clear, accessible, and critical manner for everyone reading this post on Diário do Carlos Santos.
Challenging the Orthodox Financial Narrative
Professor Werner, a distinguished figure in banking and development economics, meticulously dismanthes the popular "financial intermediation theory" of banking. This theory, which posits that banks merely transfer loanable funds from one party to another, is essentially a misconception. The actual mechanism, as demonstrated by Werner’s empirical research, is far more potent and has profound implications for economic stability, growth, and inequality. Werner asserts that commercial banks are the creators of the money supply when they issue loans. They do not lend out money they already possess or funds deposited by savers; they conjure new money into existence through a simple accounting entry. This core distinction is key to understanding modern finance.
🔍 Zoom na realidade
The reality of money creation is a stark contrast to the common perception. When a bank grants a loan—say, for a mortgage or a business expansion—it simultaneously credits the borrower's deposit account. This credit is not a transfer of existing funds from another customer’s account; it is new digital money brought into the economy. This process is a public privilege granted to private institutions via the banking license. The critical implication of this is that the aggregate money supply in the economy is primarily determined by the banks’ lending decisions.
Werner's extensive work, including his book Princes of the Yen, reveals that the destination of this newly created money is paramount. When banks predominantly allocate credit for non-productive purposes, such as speculative real estate purchases or financial asset trading, it leads to asset price bubbles, financial instability, and increased wealth disparity. Conversely, when credit is directed toward productive investment in the non-financial sector—funding small and medium-sized enterprises (SMEs) for capital expenditure, for instance—it fosters real economic growth and job creation without generating harmful inflation. The power to create money is thus the power to direct the economy, and its current misallocation is the fundamental flaw in the modern financial architecture. Werner advocates for a decentralized system of numerous small, locally accountable banks to ensure credit is channeled productively.
📊 Panorama em números
The sheer magnitude and velocity of money creation highlight the scale of the financial sector's impact. Data consistently shows that the overwhelming majority of the money supply in modern economies—around 97% in many developed nations—is bank money, created through bank lending, not physical currency issued by the central bank. The central bank primarily controls the base money (reserves and physical currency), which is a small fraction of the total.
For a clearer picture, consider the allocation of bank credit. Studies, including those cited by the Bank of England and researchers aligned with Werner’s findings, often indicate that a disproportionate amount of new bank credit in recent decades has been directed towards the financial and real estate sectors, rather than new business investment. For example, in the UK, it has been noted that the small and medium-sized enterprise sector consistently struggles to secure adequate bank financing, a critical component of economic dynamism. The result is an economy stuck with cycles of speculation and debt accumulation rather than genuine capital formation. This structural bias in credit allocation is a numbers-driven crisis.
💬 O que dizem por aí
The prevalent discourse surrounding banking often operates within the confines of the outdated intermediation theory. Financial commentators and political leaders frequently discuss the importance of "saving" to fund "investment," a narrative that fundamentally misunderstands the money creation process. This flawed perspective leads to ineffective and sometimes counterproductive policy prescriptions, such as prioritizing austerity measures over targeted credit expansion for productive uses.
However, a growing body of work from academics and institutions is aligning with Professor Werner's insights. The International Monetary Fund (IMF) and even central banks like the Bank of England have published papers acknowledging that banks primarily create money through lending, a significant departure from decades of official economic teaching. This shift is crucial, as it validates the critical perspective that the true problem is not a lack of savings, but the quality and direction of the credit creation process. The key takeaway from this evolving conversation is that if policy makers continue to believe in the intermediary model, their solutions will consistently miss the mark, perpetuating the cycles of boom and bust.
🧭 Caminhos possíveis
The path toward a more stable, equitable, and growth-oriented financial system, as outlined by Werner, involves several strategic shifts. The foremost proposal is the radical decentralization of the banking system. By breaking up the dominant, large banks into a network of smaller, regional, and locally accountable community banks, the incentive structure changes. Small banks are naturally more inclined to lend to local SMEs and for productive projects that genuinely benefit the community because they are directly accountable to their locality.
Another crucial pathway involves reforming monetary policy to directly address the allocation of credit. Instead of focusing solely on interest rates—a blunt tool that primarily impacts non-productive credit and financial speculation—policy should aim to channel newly created money into the productive economy. This could involve regulatory measures that incentivize or require banks to maintain a certain ratio of productive business lending. Ultimately, the goal is to dismantle the power of a centralized banking cartel that preferentially funds speculative activities and restore the public privilege of money creation to serve the broader public good.
🧠 Para pensar…
The profound realization that banks create the majority of the money supply forces a critical reassessment of our economic philosophy. If money is created ex nihilo (out of nothing) by private banks through the act of lending, then the very concept of national debt and public finance takes on a new meaning. When a government borrows from private banks, new money is created, increasing the national debt without necessarily leveraging existing savings. This challenges the political rhetoric that often portrays public debt as a finite resource constraint, akin to a household budget.
Furthermore, this mechanism compels us to consider the ethical dimensions of money creation. Who should hold the privilege to create something so fundamental to society? Professor Werner suggests that because money creation is a public function, it must be governed in the public interest. The current system, where private profit motives dictate the allocation of a public resource (money), inevitably leads to systemic imbalances. It's time for a societal introspection on whether we want an economy driven by speculative finance or one that prioritizes genuine, productive, and sustainable development.
📚 Ponto de partida
For those embarking on the journey to truly grasp how the financial world operates, the work of Professor Richard Werner is an indispensable starting point. His seminal contributions moved beyond mere critique to provide empirical validation of the credit creation theory of banking. His 2014 paper, which presented the first empirical proof that banks individually create money out of nothing when they grant a loan, stands as a milestone in economic thought.
Beyond this, examining the publications from central banks, particularly the Bank of England's Quarterly Bulletin articles on money creation, offers further confirmation of this reality, albeit often framed within a less critical context. Readers should also explore the history of banking crises, such as the Japanese "Lost Decades" detailed in Werner’s Princes of the Yen, which illustrate the catastrophic consequences of credit misallocation for asset price speculation. This body of literature provides a robust foundation for anyone wishing to move beyond the simplistic myths of financial intermediation.
📦 Box informativo 📚 Você sabia?
You may not be aware that the concept of a bank creating money is not a modern innovation, but a reality that was acknowledged by economists and bankers centuries ago. It was only in the 20th century, following a concerted effort by central banks to establish a simplified and more controllable public narrative, that the financial intermediation theory gained prominence in academic and public spheres. This narrative effectively masked the immense power and responsibility inherent in the act of private bank lending.
This shift in understanding allowed large financial institutions to operate with less public scrutiny regarding their systemic role as money creators. The idea that "deposits fund loans" made banks appear benign and simply service-oriented, when in fact, their operations—creating new debt and new money simultaneously—are at the very heart of the business cycle and financial stability. The deliberate obscuring of this fact is what makes Professor Werner’s clear articulation so vital for democratic oversight of the financial sector.
🗺️ Daqui pra onde?
Understanding the mechanism of money creation is not merely an academic exercise; it is the crucial step toward informed action and demand for systemic reform. The current trajectory, characterized by high levels of debt and recurring financial crises, is the logical outcome of a system where money creation is controlled by a few large entities prioritizing short-term profit over long-term productive investment.
From this point, the path involves public engagement and demanding accountability. Citizens and policymakers must advocate for the restructuring of the banking sector towards smaller, locally focused institutions that are inherently incentivized to foster sustainable growth. It also requires a deeper integration of credit creation analysis into macroeconomic models and monetary policy—a shift from merely adjusting interest rates to actively managing the quantity and quality of bank credit. Only by addressing the mechanism of money creation can we truly build an economy that serves the many, not just the few.
🌐 Tá na rede, tá oline
"O povo posta, a gente pensa. Tá na rede, tá oline!"
The discussion surrounding Richard Werner's work is robust across online forums, social media, and independent financial blogs. The public's appetite for a more truthful explanation of the banking system is evident in the viral spread of his lectures and interviews. The concept of Fractional Reserve Banking versus Credit Creation Theory is a constant point of debate. Many users who initially learned the mainstream narrative express shock and realization upon encountering Werner's empirical evidence.
Online discussions often highlight the practical implications, with users sharing personal experiences of struggling to secure loans for productive small businesses while witnessing massive credit expansion for speculative asset bubbles. This collective digital dialogue is vital. It is eroding the old, obfuscating narratives and creating a demand for transparency and reform that traditional media outlets and established institutions are slowly being compelled to acknowledge. The network is driving the knowledge revolution.
🔗 Âncora do conhecimento
To delve further into the structural issues of financial systems and how these dynamics specifically affect entrepreneurs and the creation of value, you will find an enriching and comprehensive analysis. For a master reality of earning with blogs in 2025, which touches upon the intersection of finance, economics, and digital wealth creation, please clique aqui to continue the reading and explore these crucial topics.
Reflexão final
The most powerful lesson offered by Professor Werner is that the modern financial system is not an inevitable, immutable force of nature, but a structure designed by human beings that can be—and must be—redesigned. The power to create money is the power to shape society, and its current misapplication is the primary driver of our financial and economic instability. By understanding that banks do not intermediate but create, we move from being passive participants in a confusing system to becoming informed advocates for a decentralized, productive, and ultimately more just financial order. The truth is the first step toward true economic empowerment.
Featured Resources and Sources/Bibliography
Werner, Richard A. (2014). Can banks individually create money out of nothing? The theories and the empirical evidence. International Review of Financial Analysis, 36, 1–19.
Werner, Richard A. (2003). Princes of the Yen: Japan's Central Bankers and the Transformation of the Economy. M.E. Sharpe.
McLeay, Michael, Radia, Amar, & Thomas, Ryland. (2014). Money creation in the modern economy. Bank of England Quarterly Bulletin, Q1.
Kumhof, Michael, & Jakab, Zoltán. (2016). The Truth About Banks. Finance & Development, International Monetary Fund.
⚖️ Disclaimer Editorial
This article reflects a critical and opinionated analysis produced for Diário do Carlos Santos, based on public information, news reports, and data from confidential sources. It does not represent an official communication or institutional position of any other companies or entities mentioned here.
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