This may come as a surprise, but money and money creation have traditionally not been particularly central to economic theory. A popular idea in economics, called the neutrality of money, argues that while changes in the money supply will probably affect the price of stuff, they won’t have any effect on the really concrete things like jobs or salaries.¹ According to this theory, understanding money creation is important for understanding price changes but not much more.
This theory has been around for a long time, but today most economists aren’t quite convinced of it. Some say the money supply matters only for short-term things—like economic crises and recession —but others think it’s also important for long-haul questions like economic growth or development. This debate has lead to a big fight about whether the government can actually control the money supply or whether it is effectively controlled by private banks.
A lot of economists look at the way banks create money and don’t see much to worry about. Governments can limit how much banks can lend, so in one sense, they can effectively control how much gets put into the system. Or they could influence the interest rate—the cost of taking a loan—to convince fewer people to take out loans (as new loans create new money).
Other economists fear that the way we create money feeds the cycle of boom and bust. They argue that controlling the money supply isn’t nearly as easy as it sounds. Governments wanting to increase the money supply generally can’t force banks to lend out more money. And decreasing the money supply is just as tricky, as it means stopping banks from making profitable loans; something banks obviously don’t like and often find ways around.
Instead, these economists argue that the money supply goes up in good times, when people want loans, and down in bad times when they don’t—the fancy term for this is endogenous money. The latter case would be a serious problem for governments, who generally want to pump more money into the economy in bad times to get things going, and pull money out in good times to keep things under control.