Question

Do you consider a commercial bank ‘creator of money’ in the economy’?

Answer 1

Commercial banks play the important role of 'money creator' in the economy. They have the capacity to generate credit through demand deposits. These demand deposits make credit more than the initial deposits.

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Answer 2

The primary function of commercial banks is money creation in an economy. In the history of commercial banks, bankers know that the depositors would not be withdrawing all of their funds at a particular time.

This is why, they create credit in the form of much higher demand deposits than their cash reserves. Commercial banks issue loans on the basis of their demand deposits, even if only a fraction of the amount is with them as cash reserves.

In this way, they contribute to increasing the flow of money in an economy.