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You are right that no one knows the exact money supply. But banks printing money is a misconception. Private lenders "create" money by fostering trust - I have

You are right that no one knows the exact money supply. But banks printing money is a misconception. Private lenders "create" money by fostering trust - I have $N in the bank, even they also loaned 90% * $N to other people. Effectively the same money is counted many times. But they don't have the right to print money the way a central bank does. They can only re-loan money that was deposited by others ("inside money") whereas the central bank creates money truly at will ("outside money").

JumpCrisscross 7y ago
> they don't have the right to print money the way a central bank does Yes, they do. A dollar created by JPMorgan Chase out of a loan wires exactly the same as a dollar created by the Federal Reserve out of purchasing a Treasury. (They both look exactly the same in your bank account and withdraw exactly the same as cash.) Money supply is fascinatingly complex [1]. [1] https://en.wikipedia.org/wiki/Money_supply https://en.wikipedia.org/wiki/Money_supply
- kgwgk 7y ago
  But when they have loaned out as much as they can, they will only be able to loan more money if they get more deposits (or capital). [Edit: I failed to mentions other sources of financing, including from central banks as lenders of last resort. RobertoG is right.] They cannot create money at will as a central bank can. [Edit: the point stands, the intervention of central banks may be required to inject liquidity when the banks cannot create enough money by themselves and cannot find anyone willing to lend money to them.]
  - RobertoG 7y ago
    You are wrong. After creating money by giving loans, a private bank have to get reserves proportional to the money it has loaned. For this, they got to the inter-bank market or the central bank. The goal of the Central Bank it's to control the interest rate, not the quantity of money. If there are not enough reserves in the inter-bank market, and the Central Bank refuses to supply them, the interest rate will go up. So, if the Central Bank want to control the interest rate, it can't control the quantity of money and vice versa. Modern Central Banks target the interest rate, not the quantity of money. The quantity of money in the economy it's automatically regulated by the level of economic activity.
    - benj111 7y ago
      They target the interest rate buy printing money to buy bonds "The central bank influences interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at the central bank" https://en.m.wikipedia.org/wiki/Monetary_policy https://en.m.wikipedia.org/wiki/Monetary_policy
      - RobertoG 7y ago
        Nothing in your quote contradict what I said. Note that the Central Bank is not targeting the monetary base, but the interest rate.
        benj111 7y ago
        They target the interest rate through the monetary base. It is a means to an end. If you don't feel that quote clarifies feel free to read the rest of the section on monetary policy instruments.
        RobertoG 7y ago
        When they target the interest rate through the monetary base, they lost control of the monetary base. In other words, if they target the interest rate they can't control the monetary base, so, Central Banks don't control the quantity of money in the economy. If they choose to target the quantity of money in the economy, the tool that they have to use is the interest rate. So, they would lost control over the interest rate. Modern central banks target the interest rate: they sacrifice control over the monetary base. The central bank don't decide the quantity of money in the economy, they decide the interest rate. The implication is that they have to cover any necessary reserves by the private banks if they want to keep the interest rate in its target. So, yes, private banks create money when they lend and destroy money when the money is returned. And that's OK because that means that the quantity of money adapts to the activity of the economy.
        JumpCrisscross 7y ago
  - ajross 7y ago
    No, because the dollar they created and wired away based on the 10 cents of reserve they hold might be itself deposited. Or the 10 cents might be the deposit of a bank-created dollar. It's a feedback system, it doesn't strictly need a central bank to work.
    - kgwgk 7y ago
      That’s not how reserves work. In the US they can only be deposited at the Federal Reserve (the corresponding regional branch, in fact).
      - ajross 7y ago
        Not understanding the point. Money is fungible. If a bank gets $100 from somewhere, it has to deposit $10 to the corresponding regional branch of the Federal Reserve, but so what? There's no tracking of those specific dollars. They can deposit the ones they got that are "known" to be unreserved cash holdings or they can deposit ones that they just got from a wire transfer from a credit account issued by another bank. The feedback loop is the point, and it remains.
    - kgwgk 7y ago
      I’m sorry, it seems I misread what you wrote. That doesn’t contradict what I wrote. Yes, if the money created is in the end kept in the system as a deposit it enables new loans (but it is not necessarily so if the money goes to someone that uses it to cancel a loan of their own, for example). And due to the fractional reserve requirement the quantity of money cannot be increased without limit by commercial banks. That’s just a mathematical reality, notwithstanding the fact that it’s not usually a binding constraint.
      - ajross 7y ago
        Right, there's an asymptote that caps the maximum amount of money in a system based on some initial M1 and a reserve fraction. But in practice that doesn't get hit because not all money is lent, so per upthread I think it's perfectly reasonable to say that "banks create money" in the abstract.
  - fspeech 7y ago
    That is what is meant by interest rate targetting: the central banks guarantee to supply as much reserve as needed to maintain the interest rate target.
- comicjk 7y ago
  As long as everyone has confidence in Chase, yes, their accounts are money just like any other money. The difference arises when confidence fails - rare, but important for understanding the banking system. In this case, Chase can run out of money, but the Fed cannot, because they create money by different mechanisms. This is the distinction I'm trying to make.
rags2riches 7y ago
Banks do create money by lending. You should be able to educate yourself on this by a quick Google of the question "do banks create money". If you want to dive deeper in this fascinating topic, I can recommend Khan Academy: https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking https://www.khanacademy.org/economics-finance-domain/core-fi...
- kgwgk 7y ago
  Say you have $1. Your friend has no money, but needs some. You lend him your dollar. Have you created money?
  - rags2riches 7y ago
    Say I gave him an IOU for a dollar. When he goes to the supermarket, they will accept the IOU. So will the gas station, his landlord or anybody else he does business with. Their banks will also accept my IOUs. They have all accepted my IOUs before. They all have, or know people who have, converted my IOUs to hard cash before. The IOU is an account balance. Have I created money?
    - JumpCrisscross 7y ago
      > Say I gave him an IOU for a dollar...Have I created money? Technically speaking, yes! (Neat, huh?) If the IOU is accepted as currency, that is. You have rights to the original dollar and the borrower has rights to the IOU. Practically speaking, however, you haven't created money because nobody treats your IOU as money. (Side note: this isn't a stupid question and doesn't deserve to be downvoted.)
      - rags2riches 7y ago
        Yes, that was my point. To spell it out: the whole difference is who will accept the IOU. When everyone will, that's money.
  - b_tterc_p 7y ago
RobertoG 7y ago
When a bank is lending you money it's creating the money they deposit in your account. This process is totally independent of people saving money in the bank. The private bank is forced to search for a quantity of reserves proportional to the money it has created, but it does it a posteriori. The credit department only responsibility it's checking if loaning you money is a good business.
- comicjk 7y ago
  This is like saying that human exertion is independent of having to eat, because a person can go for a walk without first planning their next meal. This appears true on a small scale, but in the long run the inputs and outputs must balance. For really big transactions, it becomes obvious. If I borrow $1 trillion from a bank, and immediately transfer it out, the bank can't get that money a posteriori. It can't transfer more than it has. It needs to borrow the entire sum, plus the reserve cushion, from someone else - other banks, depositors, or the Fed. To be clear, I am in no way denying that bank lending increases the money supply. The contrast I'm drawing is with the Fed itself, which really can lend $1 trillion without getting it from anyone else.
  - rags2riches 7y ago
    Your analogy breaks down because my eating and walking will not transfer energy to another human. My own household experience with money and all analogies failed me when I first started thinking about these things. It only clicked once I started drawing up balance sheets. As for the giant loan and transfer, I think that might be cleared soon-ish and only settled, with an interbank or fed loan if needed, at a later point in time after netting with other transfers.
  - RobertoG 7y ago
    I think you are missing the point. If you move your loaned $1 trillion to another bank, your bank will have to find the reserves from other banks or from the Fed. If it find it in other banks, no new reserves have been added, so, certainly, new money is in the system without the central bank doing nothing. If it don't find the reserves in other banks at a good price, it will have to ask it to the Central Bank. Now, the Central Bank have two options, it can give the reserves to the bank or it can refuse. If it refuse the private bank have to get the reserves in the inter-banks system. It have to. Otherwise it would be breaking the law. So, it will be willing to pay anything necesary for the reserves. That will create additional demand in the reserves, and that mean that the interest rate will go up. If the central bank wants to keep the interest rate in its target range it has to (it has not other option) to give the reserves to the bank. Ergo, the central bank can choose the quantity of money in the system or the interest rate, but not both at the same time. Modern central banks target the interest rate. Ergo, all this quantity of money thing is nonsense.
kccqzy 7y ago
The vast majority of the money in circulation is not created by central banks but by commercial banks making loans.
- comicjk 7y ago
  Very true! I'm just trying to explain that there is a distinction between central banks and commercial banks, objecting to the statement `The central bank "prints" a lot [of] money, but so do private banks.` I think that the difference is important, because if one believes that a commercial bank can print fiat money the way a central bank does, then the idea of a bank run or bank collapse looks incomprehensible.

JumpCrisscross 7y ago

> they don't have the right to print money the way a central bank does Yes, they do. A dollar created by JPMorgan Chase out of a loan wires exactly the same as a dollar created by the Federal Reserve out of purchasing a Treasury. (They both look exactly the same in your bank account and withdraw exactly the same as cash.) Money supply is fascinatingly complex [1]. [1] https://en.wikipedia.org/wiki/Money_supply https://en.wikipedia.org/wiki/Money_supply

kgwgk 7y ago
But when they have loaned out as much as they can, they will only be able to loan more money if they get more deposits (or capital). [Edit: I failed to mentions other sources of financing, including from central banks as lenders of last resort. RobertoG is right.] They cannot create money at will as a central bank can. [Edit: the point stands, the intervention of central banks may be required to inject liquidity when the banks cannot create enough money by themselves and cannot find anyone willing to lend money to them.]
- RobertoG 7y ago
  You are wrong. After creating money by giving loans, a private bank have to get reserves proportional to the money it has loaned. For this, they got to the inter-bank market or the central bank. The goal of the Central Bank it's to control the interest rate, not the quantity of money. If there are not enough reserves in the inter-bank market, and the Central Bank refuses to supply them, the interest rate will go up. So, if the Central Bank want to control the interest rate, it can't control the quantity of money and vice versa. Modern Central Banks target the interest rate, not the quantity of money. The quantity of money in the economy it's automatically regulated by the level of economic activity.
  - benj111 7y ago
    They target the interest rate buy printing money to buy bonds "The central bank influences interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at the central bank" https://en.m.wikipedia.org/wiki/Monetary_policy https://en.m.wikipedia.org/wiki/Monetary_policy
    - RobertoG 7y ago
      Nothing in your quote contradict what I said. Note that the Central Bank is not targeting the monetary base, but the interest rate.
      - benj111 7y ago
        They target the interest rate through the monetary base. It is a means to an end. If you don't feel that quote clarifies feel free to read the rest of the section on monetary policy instruments.
        RobertoG 7y ago
        When they target the interest rate through the monetary base, they lost control of the monetary base. In other words, if they target the interest rate they can't control the monetary base, so, Central Banks don't control the quantity of money in the economy. If they choose to target the quantity of money in the economy, the tool that they have to use is the interest rate. So, they would lost control over the interest rate. Modern central banks target the interest rate: they sacrifice control over the monetary base. The central bank don't decide the quantity of money in the economy, they decide the interest rate. The implication is that they have to cover any necessary reserves by the private banks if they want to keep the interest rate in its target. So, yes, private banks create money when they lend and destroy money when the money is returned. And that's OK because that means that the quantity of money adapts to the activity of the economy.
        JumpCrisscross 7y ago
- ajross 7y ago
  No, because the dollar they created and wired away based on the 10 cents of reserve they hold might be itself deposited. Or the 10 cents might be the deposit of a bank-created dollar. It's a feedback system, it doesn't strictly need a central bank to work.
  - kgwgk 7y ago
    That’s not how reserves work. In the US they can only be deposited at the Federal Reserve (the corresponding regional branch, in fact).
    - ajross 7y ago
      Not understanding the point. Money is fungible. If a bank gets $100 from somewhere, it has to deposit $10 to the corresponding regional branch of the Federal Reserve, but so what? There's no tracking of those specific dollars. They can deposit the ones they got that are "known" to be unreserved cash holdings or they can deposit ones that they just got from a wire transfer from a credit account issued by another bank. The feedback loop is the point, and it remains.
  - kgwgk 7y ago
    I’m sorry, it seems I misread what you wrote. That doesn’t contradict what I wrote. Yes, if the money created is in the end kept in the system as a deposit it enables new loans (but it is not necessarily so if the money goes to someone that uses it to cancel a loan of their own, for example). And due to the fractional reserve requirement the quantity of money cannot be increased without limit by commercial banks. That’s just a mathematical reality, notwithstanding the fact that it’s not usually a binding constraint.
    - ajross 7y ago
      Right, there's an asymptote that caps the maximum amount of money in a system based on some initial M1 and a reserve fraction. But in practice that doesn't get hit because not all money is lent, so per upthread I think it's perfectly reasonable to say that "banks create money" in the abstract.
- fspeech 7y ago
  That is what is meant by interest rate targetting: the central banks guarantee to supply as much reserve as needed to maintain the interest rate target.
comicjk 7y ago
As long as everyone has confidence in Chase, yes, their accounts are money just like any other money. The difference arises when confidence fails - rare, but important for understanding the banking system. In this case, Chase can run out of money, but the Fed cannot, because they create money by different mechanisms. This is the distinction I'm trying to make.

rags2riches 7y ago

Banks do create money by lending. You should be able to educate yourself on this by a quick Google of the question "do banks create money". If you want to dive deeper in this fascinating topic, I can recommend Khan Academy: https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking https://www.khanacademy.org/economics-finance-domain/core-fi...

kgwgk 7y ago
Say you have $1. Your friend has no money, but needs some. You lend him your dollar. Have you created money?
- rags2riches 7y ago
  Say I gave him an IOU for a dollar. When he goes to the supermarket, they will accept the IOU. So will the gas station, his landlord or anybody else he does business with. Their banks will also accept my IOUs. They have all accepted my IOUs before. They all have, or know people who have, converted my IOUs to hard cash before. The IOU is an account balance. Have I created money?
  - JumpCrisscross 7y ago
    > Say I gave him an IOU for a dollar...Have I created money? Technically speaking, yes! (Neat, huh?) If the IOU is accepted as currency, that is. You have rights to the original dollar and the borrower has rights to the IOU. Practically speaking, however, you haven't created money because nobody treats your IOU as money. (Side note: this isn't a stupid question and doesn't deserve to be downvoted.)
    - rags2riches 7y ago
      Yes, that was my point. To spell it out: the whole difference is who will accept the IOU. When everyone will, that's money.
- b_tterc_p 7y ago

RobertoG 7y ago

When a bank is lending you money it's creating the money they deposit in your account. This process is totally independent of people saving money in the bank. The private bank is forced to search for a quantity of reserves proportional to the money it has created, but it does it a posteriori. The credit department only responsibility it's checking if loaning you money is a good business.

comicjk 7y ago
This is like saying that human exertion is independent of having to eat, because a person can go for a walk without first planning their next meal. This appears true on a small scale, but in the long run the inputs and outputs must balance. For really big transactions, it becomes obvious. If I borrow $1 trillion from a bank, and immediately transfer it out, the bank can't get that money a posteriori. It can't transfer more than it has. It needs to borrow the entire sum, plus the reserve cushion, from someone else - other banks, depositors, or the Fed. To be clear, I am in no way denying that bank lending increases the money supply. The contrast I'm drawing is with the Fed itself, which really can lend $1 trillion without getting it from anyone else.
- rags2riches 7y ago
  Your analogy breaks down because my eating and walking will not transfer energy to another human. My own household experience with money and all analogies failed me when I first started thinking about these things. It only clicked once I started drawing up balance sheets. As for the giant loan and transfer, I think that might be cleared soon-ish and only settled, with an interbank or fed loan if needed, at a later point in time after netting with other transfers.
- RobertoG 7y ago
  I think you are missing the point. If you move your loaned $1 trillion to another bank, your bank will have to find the reserves from other banks or from the Fed. If it find it in other banks, no new reserves have been added, so, certainly, new money is in the system without the central bank doing nothing. If it don't find the reserves in other banks at a good price, it will have to ask it to the Central Bank. Now, the Central Bank have two options, it can give the reserves to the bank or it can refuse. If it refuse the private bank have to get the reserves in the inter-banks system. It have to. Otherwise it would be breaking the law. So, it will be willing to pay anything necesary for the reserves. That will create additional demand in the reserves, and that mean that the interest rate will go up. If the central bank wants to keep the interest rate in its target range it has to (it has not other option) to give the reserves to the bank. Ergo, the central bank can choose the quantity of money in the system or the interest rate, but not both at the same time. Modern central banks target the interest rate. Ergo, all this quantity of money thing is nonsense.

kccqzy 7y ago

The vast majority of the money in circulation is not created by central banks but by commercial banks making loans.

comicjk 7y ago
Very true! I'm just trying to explain that there is a distinction between central banks and commercial banks, objecting to the statement `The central bank "prints" a lot [of] money, but so do private banks.` I think that the difference is important, because if one believes that a commercial bank can print fiat money the way a central bank does, then the idea of a bank run or bank collapse looks incomprehensible.