Karl-Theoor zu Guttenberg and Richard Werner write: By extending credit, banks actually create 97% of the money supply. Given that a dollar in new bank loans increases the money supply by a dollar, banks are not financial intermediaries; they are money creators.

The growing recognition of banks’ true function will be a game-changer in areas like monetary policy and financial regulation, enabling officials to tackle effectively problems like recurring banking crises, unemployment, and underdevelopment. But it will take time to be fully accepted – not least because it challenges a fundamental tenet of traditional economics. Indeed, according to this new paradigm, savings, while useful, are not an essential prerequisite to investment and thus to economic growth. The United States, which experienced a prolonged period of growth without savings, is a case in point.  How Banks Can Make Money