Abstract: The propositions of "deposits create loans" and "loans create deposits" are the important foundation of mainstream monetary theories. There are some scholars from British and China, including Josh Ryan-Collins, Guofeng, and so on, who believed that the theory that "deposits create loans" was fundamentally wrong. They emphasize that their framework is based on a solid research foundation and point out that the currency for deposits was the product of loans, which means loans precede deposits and banks could create credit indefinitely. This article traces to origins for the theory of "loans create deposits" and points out its errors. The concept of "loans create deposits" was proposed more than 400 years ago in writings by John Law, but it is not in accord with the implicit mechanisms of the credit money creation and the double entry bookkeeping of balance sheet. Commercial bank loans are based on the premise that there is money to be loaned; under the condition that there is no money to be loaned, the loan contract is just a blank letter. In the process of granting loans, the money should be transferred from the deposit account of the commercial bank in the central bank to the deposit account of the customer at the commercial bank. From the perspective of capital flow, this is the process of "deposits creating deposits". The initial entry of RMB into the market is the result of the exchange of border region currency and old currency, so the initial credit currency does not come from loans. In terms of the balance sheet of the central bank, "issuing currency", collecting "deposit money", and absorbing excess deposit reserve, are important sources of funds. With sufficient fund sources, we can effectively "allocate funds" in ways such as loans, discounts, open market operations, etc. All these operations are based on real capitals, rather than "loans creating deposits" which is fabrication. The debate between "deposits creating loans" and "loans creating deposits" is unsolvable in theoretical logic. To unravel this deadlock, we need to return to the historical starting point. The initial entry of the Chinese yuan into the market was through the exchange of border currency and old currency, and the initial credit currency did not come from loans. The emergence of bank notes was based on the preparation of precious metal currency, not from loans. If banks can create loans out of thin air, there will be no bankruptcy of Silicon Valley Bank in the United States, and there will be no U.S. financial crisis in 2008. At the same time, many financial theories will become invalid, such as interest rate theory, commercial bank management theory, balance sheet theory, monetary policy theory, exchange rate theory and so on.

Key words: balance sheet, credit money creation, bank operation