Kreditschoepfung

What Is Kreditschoepfung?

Kreditschoepfung, often translated as "credit creation" or "money creation," refers to the process by which commercial banks expand the money supply in an economy by issuing new loans. This fundamental concept within monetary policy and macroeconomics illustrates how bank lending, rather than just the printing of physical currency, significantly contributes to the overall volume of money circulating. When a commercial bank grants a loan, it typically creates a new deposit in the borrower's account, which effectively creates new money in the financial system.

History and Origin

The origins of modern credit creation are deeply intertwined with the development of fractional reserve banking. Historically, goldsmiths and early bankers would accept deposits of precious metals, issuing receipts for them. Over time, they observed that not all depositors redeemed their gold simultaneously. This insight led them to lend out a portion of the deposited gold, creating new claims (loans) against a fraction of the actual physical reserves. This practice evolved into the modern banking system where banks hold only a fraction of their deposits as reserves and lend out the rest, thus creating new money through the lending process. Early forms of credit and banking are noted to have developed across various civilizations, with modern banking systems becoming more formalized over centuries.²⁹

Key Takeaways

• Kreditschoepfung is the process where banks create new money through lending activities, not just by circulating existing funds.
• It operates within a fractional reserve banking system, where banks hold only a portion of deposits and lend the rest.
• This process significantly influences the overall money supply and affects factors like inflation and economic growth.
• Central banks influence Kreditschoepfung through tools like reserve requirements and interest rates.

Formula and Calculation

The extent of Kreditschoepfung in a fractional reserve system can be understood through the concept of the money multiplier. This theoretical multiplier indicates the maximum amount of money that a banking system can create from an initial deposit, given the reserve requirement.

The formula for the simple money multiplier ((m)) is:

$m = \frac{1}{RR}$

Where:

• (m) = Money Multiplier
• (RR) = Reserve Requirement Ratio (the fraction of deposits banks must hold in reserve)

The total potential increase in the money supply due to an initial deposit ((\Delta MS)) can be calculated as:

$\Delta MS = Initial \, Deposit \times m$

For example, if the reserve requirements are 10% (0.10) and an initial deposit of $1,000 is made, the money multiplier would be (1 / 0.10 = 10). This means the banking system could theoretically expand the initial $1,000 deposit into up to $10,000 of new money.

Interpreting Kreditschoepfung

Understanding Kreditschoepfung is crucial for comprehending how modern economies function. It highlights that the money supply is not static or solely controlled by government printing presses but is largely dynamic, influenced by the lending decisions of commercial banks and the demand for credit. A high rate of Kreditschoepfung, driven by robust lending, can stimulate economic growth by increasing investment and consumption. Conversely, a slowdown in credit creation can hinder economic activity. The process also underscores the importance of bank liquidity and public confidence in the banking system, as a bank run could severely disrupt the credit creation mechanism.

Hypothetical Example

Imagine a new customer deposits $1,000 cash into Bank A. If the central bank has a reserve requirements of 10%, Bank A must keep $100 in reserve but can lend out the remaining $900.

1. Bank A lends $900 to Company X. This $900 is deposited into Company X's account, possibly at Bank B. The money supply has now increased by $900 (the new deposit at Bank B).
2. Bank B, receiving the $900 deposit, must keep $90 (10% of $900) in reserve and can lend out $810.
3. Bank B lends $810 to Individual Y. This $810 is deposited into Individual Y's account, perhaps at Bank C. The money supply has increased by another $810.

This cycle continues, with each subsequent loan and deposit creating new money, albeit in smaller increments. The initial $1,000 cash deposit can, through this process, lead to a much larger expansion of the total money supply.

Practical Applications

Kreditschoepfung is a core mechanism through which monetary policy is implemented by central banks. By adjusting tools such as the federal funds rate (which influences other interest rates), reserve requirements, and engaging in open market operations, central banks aim to influence banks' lending behavior and, consequently, the pace of credit creation. For instance, lowering interest rates or reserve requirements encourages banks to lend more, accelerating Kreditschoepfung and expanding the money supply to stimulate economic activity. The Federal Reserve, for example, employs various policy tools to influence the availability and cost of money and credit, directly impacting the process of credit creation within the economy.²⁸,²⁷,²⁶ This process is integral to the functioning of the global financial system, as highlighted by institutions like the International Monetary Fund.²⁵,

Limitations and Criticisms

While Kreditschoepfung is vital for economic dynamism, it is not without limitations and criticisms. A primary concern is the potential for excessive credit creation, which can lead to rapid inflation if the supply of money grows too quickly relative to the supply of goods and services. Furthermore, unchecked Kreditschoepfung can fuel asset bubbles and contribute to financial instability, as seen in periods preceding financial crises when rapid credit expansion often leads to unsustainable debt levels.²⁴,²³,²² The concept also faces scrutiny regarding the role of banks, with some arguments suggesting that banks' ability to create money out of nothing grants them undue power and contributes to systemic risk. This inherent ability for banks to expand the money supply means regulators must carefully monitor credit risk and apply prudential measures to prevent over-lending and ensure financial stability.²¹

Kreditschoepfung vs. Geldmenge

While closely related, Kreditschoepfung (credit creation) and Geldmenge (money supply) represent different aspects of monetary economics. Kreditschoepfung describes the process by which new money enters the economy, primarily through bank lending and deposit creation. It is the active generation of new purchasing power. In contrast, Geldmenge refers to the total amount of money circulating in an economy at a given time. This includes physical currency, demand deposits, and other liquid assets. Kreditschoepfung is a significant driver of changes in the money supply; an increase in credit creation directly leads to an expansion of the money supply. However, the money supply also includes money not created through new loans, such as existing currency in circulation or government spending.

FAQs

How does Kreditschoepfung impact everyday individuals?

Kreditschoepfung directly affects the availability and cost of credit for individuals and businesses. When banks are actively creating credit, it's easier and often cheaper to get loans for homes, cars, or business investments, stimulating spending and economic activity. Conversely, a contraction in credit creation can make borrowing difficult and more expensive.

Can Kreditschoepfung occur without physical money?

Yes, predominantly. In modern economies, Kreditschoepfung primarily involves the creation of digital money through bank deposit accounts, rather than the printing of physical currency. When a bank approves a loan, it credits the borrower's account electronically, effectively creating new balances that can be spent.

What is the role of the central bank in Kreditschoepfung?

The central bank influences Kreditschoepfung by setting monetary policy tools like interest rates (e.g., policy rates that affect bank borrowing costs) and reserve requirements. By adjusting these tools, the central bank can encourage or discourage bank lending, thereby controlling the overall pace of credit creation and managing the money supply to achieve economic goals such as stable prices and full employment.

What is quantitative easing in relation to Kreditschoepfung?

Quantitative easing is a monetary policy tool used by central banks to increase the money supply and encourage lending, particularly during economic crises or periods of very low interest rates. It involves the central bank buying large quantities of government bonds or other financial assets from commercial banks. This injects liquidity into the banking system, increasing banks' reserves and their capacity to extend new loans, thus promoting Kreditschoepfung.¹, ²³, ⁴, ⁵, ⁶, ⁷⁸, ⁹¹⁰, ¹¹, ¹², ¹³, ¹⁴¹⁵, ¹⁶, ¹⁷, ¹⁸, ¹⁹