Finally, in a survey of the empirical literature, Peter Howells finds that: "The present state of empirical knowledge appears to confirm the hypothesis that loans cause deposits". (2005) In conclusion, the endogenous money theory sees causality in the banking system occurring in the following way:
Banks lend' creatingdeposits in the process.
* * The centralbank pro vides reserves to banks on demand, th us
This increases demandfor reserves in order to settle payments.
accommodating the bankingsector's fendingdecisions. The fundamental implication of the endogenous money theory is that it is the commercial banks, rather than the central bank, that determine the money supply. The central bank must facilitate the lending decisions of banks by providing sufficient reserves to ensure that all payments settle at the end of the day - for all intents and purposes it is the commercial bank tail that wags the central bank dog. This is the opposite of the money multiplier theory, which implies that the central bank decides the money supply and banks react passively, simply lending the deposits that they receive. Of course, there are limits to money creation, although as we will see in the following chapter, these limits tend to be self-imposed by the commercial banks rather than a result of oversight or controlby the Bank of England.
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