Sage Journals: Discover world-class research

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.

Keywords

banking Simon Newcomb Irving Fisher historiography rediscovery B31 M41

Get full access to this article

View all access options for this article.

References

American Accounting Association (AAA) (1950a) George Oliver May. Available at: https://aaahq.org/Accounting-Hall-of-Fame/Members/1950/George-Oliver-May (accessed 3 September 2025).

American Accounting Association (AAA) (1950b) Robert Hiester Montgomery. Available at: https://aaahq.org/Accounting-Hall-of-Fame/Members/1950/Robert-Hiester-Montgomery (accessed 3 September 2025).

American Accounting Association (AAA) (1950c) William Andrew Paton. Available at: https://aaahq.org/Accounting-Hall-of-Fame/Members/1950/William-A-Paton (accessed 3 September 2025).

American Accounting Association (AAA) (1951) Henry Rand Hatfield. Available at: https://aaahq.org/Accounting-Hall-of-Fame/Members/1951/Henry-Rand-Hatfield (accessed 3 September 2025).

American Accounting Association (AAA) (1956) Ananias Charles (A.C.) Littleton. Available at: https://aaahq.org/Accounting-Hall-of-Fame/Members/1956/Ananias-Charles-AC-Littleton (accessed 3 September 2025).

American Accounting Association (AAA) (1957) Roy Bernard Kester. Available at: https://aaahq.org/Accounting-Hall-of-Fame/Members/1957/Roy-Bernard-Kester (accessed 3 September 2025).

Andreau

(1999) Banking and Business in the Roman World. Cambridge: Cambridge University Press.

Angeles

(2019) On the nature of banks. Kyklos 72(3): 381–399.

Archambault

(2011) Earnings management among firms during the pre-SEC era: A Benford’s law analysis. Accounting Historians Journal 38(2): 145–170.

10.

Baker

(2018) The lack of impact of fair value accounting: A commentary on ‘fair value’ accounting as the normative Fisherian phase of accounting. Accounting History Review 28(3): 191–198.

11.

Barth

(2008) Global financial reporting: Implications for U.S. Academics. The Accounting Review 83(5): 1159–1179.

12.

Beck

Ioannidou

Perotti

, et al. (2024) Addressing banks’ vulnerability to runs, part 2: Policy options. In: Centre for Economic Policy Research (CEPR) VoxEU Column. Available at: https://cepr.org/voxeu/columns/addressing-banks-vulnerability-runs-part-2-policy-options (accessed 3 September 2025).

13.

Benford

(1938) The law of anomalous numbers. Proceedings of the American Philosophical Society 78(4): 551–572.

14.

Bigoni

Maran

Occhipinti

(2024) Of power, knowledge and method: The influence of Michel Foucault in accounting history. Accounting History 29(3): 344–387.

15.

Bryer

(2013) Americanism and financial accounting theory – Part 3: Adam Smith, the rise and fall of socialism, and Irving Fisher’s theory of accounting. Critical Perspectives on Accounting 24(7): 572–615.

16.

Caiani

Godin

Caverzasi

, et al. (2016) Agent based-stock flow consistent macroeconomics: Towards a benchmark model. Journal of Economic Dynamics and Control 69: 375–408.

17.

Campiglio

(2016) Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy. Ecological Economics 121: 220–230.

18.

Cardao-Pito

(2020) Enlightenment value theories and the three levels in fair value accounting. Accounting History 25(4): 625–635.

19.

Cardao-Pito

(2023) Prevalence of Fisher’s theory in mainstream accounting and economic research. Accounting History 28(2): 312–337.

20.

Cohen

(1992) Athenian Economy and Society: A Banking Perspective. Princeton, NJ: Princeton University Press.

21.

Colaw

(1894) Biography: Simon Newcomb, Ph.D., LL.D. The American Mathematical Monthly 1(8): 252–256.

22.

Collins

(2017) Using Excel and Benford’s Law to detect fraud. Journal of Accountancy 223(4): 44–50.

23.

Coy

(2025) What has changed since Silicon Valley bank collapsed? Not much. Available at: https://www.nytimes.com/2025/05/17/business/dealbook/runnable-funds-silicon-valley-bank.html (accessed 3 September 2025).

24.

Crawford

(2025) We’re still learning from Silicon Valley Bank’s failure. Available at: https://siepr.stanford.edu/news/were-still-learning-silicon-valley-banks-failure (accessed 3 September 2025).

25.

Deutsche Bundesbank (2017) The role of banks, non-banks and the central bank in the money creation process. Deutsche Bundesbank Monthly Report 69(4): 13–34.

26.

Diamond

Dybvig

(1983) Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91(3): 401–419.

27.

Donleavy

(2022) The nuances of fair value history: A rejoinder to Cardao-Pito. Accounting History 27(1): 153–170.

28.

Elwell

(2011) Brief history of the gold standard in the United States (CRS Report No. R41887). Available at: https://www.congress.gov/crs-product/R41887 (accessed 3 September 2025).

29.

Ensign

Eisen

(2023) First Republic Bank is seized, sold to JPMorgan in second-largest U.S. bank failure. Available at: https://www.wsj.com/finance/banking/first-republic-bank-is-seized-sold-to-jpmorgan-in-second-largest-u-s-bank-failure-5cec723 (accessed 3 September 2025).

30.

Federal Deposit Insurance Corporation (FDIC) (1984) Federal Deposit Insurance Corporation: The First Fifty Years. Washington, DC: Federal Deposit Insurance Corporation. Available at: https://www.fdic.gov/resources/publications/first-fifty-years/book/first-fifty-years.pdf (accessed 3 September 2025).

31.

Ferri

Lusiani

Pareschi

(2018) Accounting for accounting history: A topic modeling approach (1996–2015). Accounting History 23(1-2): 173–205.

32.

Financial Accounting Standards Board (FASB) (n.d.) Accounting Standards Codification (ASC). Available at: https://asc.fasb.org/ (accessed 3 September 2025).

33.

Fisher

(1911) The Purchasing Power of Money: Its Determination and Relation to Credit Interest and Crises. New York, NY: The Macmillan Company. Available at: https://books.google.com/books?id=YjcuAAAAYAAJ (accessed 3 September 2025).

34.

Fisher

(1922) The Purchasing Power of Money: Its Determination and Relation to Credit Interest and Crises. New York, NY: The Macmillan Company. Available at: https://books.google.com/books?id=pd5CAQAAMAAJ (accessed 3 September 2025).

35.

Fisher

(1935) 100% Money, 1st ed. New York, NY: The Adelphi Company. Available at: https://archive.org/details/100moneydesigned0000irvi (accessed 3 September 2025).

36.

Fleming

Graci

Thompson

(1990) Characteristics of the work of leading authors of The Accounting Review, 1926–1945. Accounting Historians Journal 17(1): 5–25.

37.

Gendron

(2018) On the elusive nature of critical (accounting) research. Critical Perspectives on Accounting 50: 1–12.

38.

Green

(2000) Locating sources in humanities scholarship: The efficacy of following bibliographic references. The Library Quarterly 70(2): 201–229.

39.

Grossman

Stiglitz

(1980) On the impossibility of informationally efficient markets. The American Economic Review 70(3): 393–408.

40.

International Accounting Standards Board (IASB) (2025) IAS 7: statement of cash flows. Available at: https://www.ifrs.org/ (accessed 3 September 2025).

41.

John of Salisbury (1664) Policraticus, sive De nugis curialium, & vestigiis philosophorum libri octo … Accedit huic editioni eiusdem Metalogicus …. Amsterdam: Ex Officina Viduæ Joannis Henrici Boom. Available at: https://books.google.com/books?id=7vQnOyA4BeEC (accessed 3 September 2025).

42.

Keister

McAndrews

(2009) Why are banks holding so many excess reserves? Federal Reserve Bank of New York: Current Issues in Economics and Finance 15(8): 1–10.

43.

Kelly

Rose

(2025) Rushing to judgment and the banking crisis of 2023. Federal Reserve Bank of Chicago Working Papers (2025-04): 1–54.

44.

Kent A - Clark Center for Global Markets (Clark Center Forum) (2023) Banks’ Business Model. Available at: https://www.kentclarkcenter.org/surveys/ banks-business-model/ (accessed 3 September 2025).

45.

Kumhof

Jakab

(2016) The truth about banks. International Monetary Fund: Finance & Development 53(1): 50–53.

46.

Macleod

(1855) The Theory and Practice of Banking: With the Elementary Principles of Currency; Prices; Credit; and Exchanges, Vol. 1, 1st ed. London: Longman, Brown, Green, and Longmans. Available at: https://books.google.com/books?id=e2jfeskvWQcC (accessed 3 September 2025).

47.

Mankiw

(2021) Principles of Economics, 9th ed. Boston, MA: Cengage.

48.

McGarry

(1955) The Metalogicon of John of Salisbury: A Twelfth Century Defense of the Verbal and Logical Arts of the Trivium. Berkeley, CA: University of California Press. Available at: https://archive.org/details/themetalogiconofjohnofsalisbury (accessed 3 September 2025).

49.

McLeay

Radia

Thomas

(2014) Money creation in the modern economy. Bank of England Quarterly Bulletin 54(1): 14–22.

50.

Merton

(1965) On the Shoulders of Giants: A Shandean Postscript. New York, NY: The Free Press. Available at: https://archive.org/details/onshouldersofgia0000mert_y7q6 (accessed 3 September 2025).

51.

Moore

(1988) Horizontalists and Verticalists: The Macroeconomics of Credit Money. Cambridge, UK: Cambridge University Press.

52.

Newcomb

(1881) Note on the frequency of use of the different digits in natural numbers. American Journal of Mathematics 4(1): 39–40.

53.

Newcomb

(1885) Principles of Political Economy. New York, NY: Harper & Brothers. Available at: https://archive.org/details/cu31924002739690/ (accessed 3 September 2025).

54.

Nobel Prize Outreach AB (2001) The Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel 2001. Available at: https://www.nobelprize.org/prizes/economic-sciences/2001/summary/ (accessed 3 September 2025).

55.

Oldroyd

Tyson

Fleischman

(2015) American ideology, socialism and financial accounting theory: A counter view. Critical Perspectives on Accounting 27: 209–218.

56.

Pennacchi

(2012) Narrow banking. Annual Review of Financial Economics 4: 141–159.

57.

Rendahl

Freund

(2019) Banks do not create money out of thin air. In: Centre for Economic Policy Research (CEPR) VoxEU Column. Available at: https://cepr.org/voxeu/columns/banks-do-not-create-money-out-thin-air (accessed 3 September 2025).

58.

Rossouw

Padayachee

Bordiss

(2015) Central banks and fractional reserve banking: Money creation out of nothing? African Review of Economics and Finance 7(2): 105–131.

59.

Sabbar

Xie

(2016) Language in the information-seeking context: A study of US scholars using non-English sources. Journal of Documentation 72(1): 103–126.

60.

Sangster

(2025) ‘Going digital’ – Its place in research into the history of modern accounting. Accounting History 30(1): 7–22.

61.

Schumpeter

(1954) History of Economic Analysis. New York, NY: Oxford University Press. Available at: https://archive.org/details/HISTORYOFECONOMICANALYSIS JOSEPHALOISSCHUMPETER/ (accessed 3 September 2025).

62.

Schumpeter

(2016) Bank credit and the “creation” of deposits. Accounting, Economics and Law: A Convivium 6(2): 151–159.

63.

Sheard

(2013) Repeat after me: banks cannot and do not “lend out” reserves. In: Standard & Poor’s Ratings Services RatingsDirect. Available at: https://www.hks.harvard.edu/sites/default/ files/centers/mrcbg/programs/senior.fellows/2019-20%20fellows/ BanksCannotLendOutReservesAug2013_%20(002).pdf (accessed 3 September 2025).

64.

Solow

(2007) Heavy thinker. The New Republic, 21 May 2007. Available at: https://newrepublic.com/article/61183/heavy-thinker (accessed 3 September 2025).

65.

Stiglitz

Weiss

(1981) Credit rationing in markets with imperfect information. The American Economic Review 71(3): 393–410.

66.

Swanson

(1977) Information retrieval as a trial-and-error process. The Library Quarterly 47(2): 128–148.

67.

Swanson

(1986) Undiscovered public knowledge. The Library Quarterly 56(2): 103–118.

68.

Tobin

(1963) Commercial banks as creators of “money”. In: Cowles Foundation Discussion Papers. Available at: https://elischolar.library.yale.edu/ cowles-discussion-paper-series/388/ (accessed 3 September 2025).

69.

Tobin

(2005) Irving Fisher (1867–1947). The American Journal of Economics and Sociology 64(1): 19–42. Reprinted from Eatwell, J., M. Milgate and P. Newman (eds.) The New Palgrave: A Dictionary of Economics. 1987, 2: 369–376. United Kingdom, London and Basingstoke: The Macmillan Press Limited; New York, N.Y.

70.

Tyson

Oldroyd

(2017) The debate between postmodernism and historiography: An accounting historian’s manifesto. Accounting History 22(1): 29–43.

71.

Von der Becke

Sornette

(2019) An asset-based framework of credit creation (applied to the Global Financial Crisis). Accounting, Economics and Law: A Convivium 9(2): 20150002.

72.

Werner

(2014a) Can banks individually create money out of nothing? – The theories and the empirical evidence. International Review of Financial Analysis 36: 1–19.

73.

Werner

(2014b) How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking. International Review of Financial Analysis 36: 71–77.

74.

Werner

(2016) A lost century in economics: Three theories of banking and the conclusive evidence. International Review of Financial Analysis 46: 361–379.

75.

Zeff

(2024) Tracing intellectual origins in accounting. Accounting Historians Journal 51(1): 111–125.

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

Abstract

Keywords

Get full access to this article

References