What was the nature of their innovation and how did it contribute to humankind? Professor Werner (born 1967) has given prominence to the fact that banks create money in the process of lending. He co-wrote “Where Does Money Come From?” (2011) and was an early inspiration for Positive Money, leading the Bank of England to establish the facts of “Money Creation in the Modern Economy”, the title of their 2014 article, which led all major central banks to suddenly confirm on their web sites that the majority of money, excepting cash, is indeed created by commercial banks. Since 1992, Werner has argued that “new money” (credit) is more important than “money”, as expressed in his Quantity Theory of Disaggregated Credit. This theory disaggregates the credit provided by banks into three kinds: Credit for financial transactions, such as the purchase of already existing assets (like real estate), which leads to price bubbles that often burst; credit for consumption, which leads to inflation in consumer prices; and credit for production, the only kind of credit that leads to BNP growth (which must be sustainable to deserve the name “production”). This theory identifies unrestrained bank lending for speculative purposes as the causal driver of the boom-and-bust cycles that leave neoclassical economists scratching their heads. In his comprehensive studies of Japan (“Princes of the Yen”, 2003; film, 2014), Werner has shown how Bank-of-Japan-controlled lending by commercial banks (that is, money creation) produced the 100-fold increase in Japanese BNP 1945-85, which was reversed in the 1989 crisis, leading Japan into the “lost decade.” Werner is the originator of the term “Quantitative Easing”, which he proposed for Japan some twenty years ago. However, he intended a meaning where QE would benefit the economy, not the banks, as QE is currently practiced. Werner champions a “New Paradigm for Macroeconomics”, the title of his 2005 magnum opus, in which the wide-eyed assumptions of the neoclassicals are replaced by a realistic theory of the powerful and creative role of credit and money in the modern economy.
Werner argued convincingly in a 2016 paper for "A Lost Century in Economics": The neo-classicals lost themselves in not-on-this-planet assumptions and mathematical abstractions devoid of reality, ignoring the key role of credit and money in the process.
I have found Richard Werner's work to be powerfully clear: it is due to him that the possibility of central banks and governments using credit guidance to direct the development of an economy is back on the table for discussion, and that community banking is gaining the importance that is needs.
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