4 ms·

> Banks don't increase the total supply of money, all fraction reserve does is keep more of it in circulation. It doesn't increase currency (M0). But is there

by wisty 6y ago

> Banks don't increase the total supply of money, all fraction reserve does is keep more of it in circulation. It doesn't increase currency (M0). But is there 'money' in your bank account? They increase money by a slightly broader definition (accounts + currency). Even if you've got a narrower definition (and just want the physical paper to be defined as money, not entries in a database) then they don't increase the amount, but they greatly amplify its effect by increasing the velocity of circulation (which you did mention). One little bit of money is being thrown around between owners much faster, which effectively magnifies its impact.

sukilot 6y ago
Right, but people who get .ad that banks create "money" don't understand that "money" is not the same as "currency". Money is literally defined simply as "currency plus bank accounts" so obviously funding a bank account creates "money". Your post gets into the velocity and momentum of money, which is yet another concept.
- baobabKoodaa 6y ago
  No, there is no single, accepted definition of money. Money is not "literally defined as..." anything. For example, if you look at Wikipedia definitions for money, you will find multiple different definitions. The commonly used definitions seem to vary a lot by economic area.
  - deleted 6y ago
    [deleted]
  - jkhdigital 6y ago
    No, there is a definition: Money is a commonly accepted medium of exchange. The problem is not that there is no accepted definition of money, but rather that this definition actually encompasses a very broad class of assets, each of which has some interesting and unique characteristics that can be defined independently of the definition of money. Talking about "money" by itself is often not specific or helpful enough for the subject at hand. Mises does an excellent job of defining a taxonomy for money and money substitutes in his book The Theory of Money and Credit.
  - QuesnayJr 6y ago
    I think it's better to say that the boundary of "money" is a bit vague, and things vary in their "moneyness". So sometimes a broad definition is more appropriate, and sometimes a narrow one is more appropriate.
AmericanChopper 6y ago
What's _actually_ in my bank account is a mixture of cash, other peoples debt, and other assets, that all adds up to the value listed when I log in to check the balance. Part of the service the bank is offering me is that at any time I request, they will exchange all of that for its' cash value if I want to make a withdrawal. This is the bit that people contrive when they make silly claims like "banks can make money out of thin air". You bank balance of $x does not translate to $x of cash (physical money or not, is irrelevant) on the banks ledger, waiting for you to withdraw it. It translates to $x worth of cash + assets held by the bank. They do it by keeping enough money laying around doing nothing, to service those withdrawals. If all of a sudden huge amount of customers started making huge withdrawals, they wouldn't be able to service them, because they wouldn't be able to liquidate those assets immediately. If banks were actually creating money out of thin air, this wouldn't be possible, because they'd just be able to create some money out of thin air to service them.
- baobabKoodaa 6y ago
  If you go and read the article you will find that it agrees with everything you posted here, with the exception of your weird conclusion that "banks do not create money out of thin air". The article uses a simple example to illustrate that, using Eurozone M1 definition for money, loaning factually increases the amount of money which exists. Perhaps you are thinking of a different definition of money?
  - AmericanChopper 6y ago
    Because Eurozone M1 doesn't account for the debt that backs some of those balances. That's like suggesting you can increase your net worth by taking out a loan. You can increase the amount of money you have to spend right now by taking a loan, but you're not "creating net worth out of thin air".
    - baobabKoodaa 6y ago
      If you go and read the article, you will find that I use terms like "due to accounting conventions" or "economists decided to count these IOUs as money [but not some other IOUs]". Is there something in the article that you disagree with?
eru 6y ago
In earlier times in many jurisdictions banks could create bank notes, too. See eg https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... An advantage of that system was that banks did not lose reserves when customers withdrew money, ie converted deposits to cash. (The banks lost reserves when those notes were eventually deposited with rival banks who demanded settlement in underlying reserves.) Of course, even that system did not multiply the amount of reserves; you might call them M(-1), if you are so inclined. Historically the underlying base money was gold, but you could imagine a system with private bank notes built on top of the federal reserve dollar just fine. You can even leave physical Fed cash in circulation, too.

by wisty 6y ago

sukilot 6y ago

Right, but people who get .ad that banks create "money" don't understand that "money" is not the same as "currency". Money is literally defined simply as "currency plus bank accounts" so obviously funding a bank account creates "money". Your post gets into the velocity and momentum of money, which is yet another concept.

baobabKoodaa 6y ago
No, there is no single, accepted definition of money. Money is not "literally defined as..." anything. For example, if you look at Wikipedia definitions for money, you will find multiple different definitions. The commonly used definitions seem to vary a lot by economic area.
- deleted 6y ago
  [deleted]
- jkhdigital 6y ago
  No, there is a definition: Money is a commonly accepted medium of exchange. The problem is not that there is no accepted definition of money, but rather that this definition actually encompasses a very broad class of assets, each of which has some interesting and unique characteristics that can be defined independently of the definition of money. Talking about "money" by itself is often not specific or helpful enough for the subject at hand. Mises does an excellent job of defining a taxonomy for money and money substitutes in his book The Theory of Money and Credit.
- QuesnayJr 6y ago
  I think it's better to say that the boundary of "money" is a bit vague, and things vary in their "moneyness". So sometimes a broad definition is more appropriate, and sometimes a narrow one is more appropriate.

AmericanChopper 6y ago

What's _actually_ in my bank account is a mixture of cash, other peoples debt, and other assets, that all adds up to the value listed when I log in to check the balance. Part of the service the bank is offering me is that at any time I request, they will exchange all of that for its' cash value if I want to make a withdrawal. This is the bit that people contrive when they make silly claims like "banks can make money out of thin air". You bank balance of $x does not translate to $x of cash (physical money or not, is irrelevant) on the banks ledger, waiting for you to withdraw it. It translates to $x worth of cash + assets held by the bank. They do it by keeping enough money laying around doing nothing, to service those withdrawals. If all of a sudden huge amount of customers started making huge withdrawals, they wouldn't be able to service them, because they wouldn't be able to liquidate those assets immediately. If banks were actually creating money out of thin air, this wouldn't be possible, because they'd just be able to create some money out of thin air to service them.

baobabKoodaa 6y ago
If you go and read the article you will find that it agrees with everything you posted here, with the exception of your weird conclusion that "banks do not create money out of thin air". The article uses a simple example to illustrate that, using Eurozone M1 definition for money, loaning factually increases the amount of money which exists. Perhaps you are thinking of a different definition of money?
- AmericanChopper 6y ago
  Because Eurozone M1 doesn't account for the debt that backs some of those balances. That's like suggesting you can increase your net worth by taking out a loan. You can increase the amount of money you have to spend right now by taking a loan, but you're not "creating net worth out of thin air".
  - baobabKoodaa 6y ago
    If you go and read the article, you will find that I use terms like "due to accounting conventions" or "economists decided to count these IOUs as money [but not some other IOUs]". Is there something in the article that you disagree with?

eru 6y ago

In earlier times in many jurisdictions banks could create bank notes, too. See eg https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... An advantage of that system was that banks did not lose reserves when customers withdrew money, ie converted deposits to cash. (The banks lost reserves when those notes were eventually deposited with rival banks who demanded settlement in underlying reserves.) Of course, even that system did not multiply the amount of reserves; you might call them M(-1), if you are so inclined. Historically the underlying base money was gold, but you could imagine a system with private bank notes built on top of the federal reserve dollar just fine. You can even leave physical Fed cash in circulation, too.