We have featured the paper by Dr. Richard Werner and the power of banks to create money out of thin air, and interest has been stirred, but not all our readers are familiar with the discipline and its terminology in which the discussion is taking place. In the following, the wording has not been changed from the original but certain portions have been ‘cherry-picked’ in order to make clearer. Emphasis has been added throughout.
Abstract 1. Introduction Thanks to the recent banking crises interest has grown in the details of how banks operate. In recent decades, the empirical and institutional micro-structure of how banks operate had not been a primary focus of attention by investigators. This lack of interest may partly be due to the predominance of the hypothetico-deductive* research methodology in economics, which begins by posing axioms and assumptions. Such a theoretical and hypothetical framework has also been the basis for bank regulations. As is well known to historians, reality may be less logical and rational than the designers of theoretical constructs may envisage. This is known in other areas of finance, where market and investor behaviour often does not conform to the precepts of theoretically posed ‘rational agents’. By contrast, an inductive approach begins by establishing the empirical facts.