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As the other commenter implied, in a fractional reserve banking system (where banks lend any amount > 0, and are not just acting as vaults), banks do indeed cre

As the other commenter implied, in a fractional reserve banking system (where banks lend any amount > 0, and are not just acting as vaults), banks do indeed create money [0]. Printed dollars are necessary in an amount proportional to economic activity, and the sum of printed dollars is only loosely related to the total money supply as it affects the macroeconomy (and is becoming less relevant every year). [0] https://en.wikipedia.org/wiki/Money_multiplier https://en.wikipedia.org/wiki/Money_multiplier

Gabriel_Martin 5y ago
From your link, wouldn't: "the multiplier being the maximum amount of commercial bank money created by a given unit of central bank money" be interpreted to mean that as soon as central bank monetizes it's debt, i.e. the money is initially created, it inherently is equal to a certain amount of commercial bank money, as long as it doesn't remain unlent? So it's not really the new creation of money, but rather the realization of it's value, upon being lent by a bank?
- lend000 5y ago
  I'm not sure if I'm interpreting you correctly, but I think the answer is no. It's best to think of it as the creation of new money, which cannot significantly be reversed. The way the Fed prints money is by buying Treasuries, which increases the money supply in two ways: 1. It allows the government to spend more money, which ends up going to a bunch of places that can't be "unspent" (government worker salaries, contractors, equipment, etc.). That money goes into various banks and ends up getting irreversibly multiplied. 2. In order to fill bids for Treasuries, the Fed front-runs other market participants with artificially low interest rates (below market), forcing other major Treasury participants (like banks) to lower their commercial interest rates in order to do something with their deposits, resulting in more borrowing. It should also be noted that the Fed sets the Fed Funds Rate, but my understanding is that this has a less pronounced effect. And it sets the minimum fractional reserve ratio, which as of COVID, is ZERO (infinite multiplier potential, although most big banks are pretty conservative with their reserves. Although IMO they do not need to be, since the odds of a run on the bank in an approaching-cashless society is nil).
  - Gabriel_Martin 5y ago
    The run-proof nature of an 'approaching-cashless society', is a facet of this I'd never considered, I suppose the point is that it'd be infinitely propped-up thanks to be so detached from any real world asset. I'll have to learn more about the other points and their relationships to money creation and supply though. I'd never thought about the reversibility of money, outside of normal means of destroying it, and I'm not completely sure if I understand it well enough to agree or disagree. That said I feel like if there's a context for these creations (or maybe realizations) that reminds me of a kind of monetary inertia and that puts me on the fence still. Always so much to learn about this kind of stuff :)
spiralx 5y ago
There is no fractional reserve system or money multiplier in the modern economy though, those concepts only really apply to commodity money, not fiat money. You even say banks create money by lending, which is not how a fractional reserve system works :) A bank with zero deposits can still lend money, although they might have a problem if people want to withdraw physical currency... https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- lend000 5y ago
  No, the concept still applies. Your link is attempting to describe nuance, but comes across as misleading. The multiplier is an upper bound on money creation by banks, and it does not specify a timeline. That's a fact. Obviously, not every bank loans all the way to the minimum reserve ratio (for example, currently, the reserve ratio is zero in the US, which makes for a poor denominator). Nor does every recipient of proceeds from a loan put all of that money into a lending bank. However, the money supply is still increased via lending. The increase from the issuance of a loan is immediately reflected in total deposits. What your link is stating is that central banks respond dynamically to the total number of bank deposits, and apply other policies (such as influencing interest rates) against that number directly, which can overpower the effect of the multiplier, if the central bank chooses. However, it does not nullify it, and it very much depends on a central bank taking that action. Your link also mentions regulations which may be specific to the UK about how banks lend, but the underlying principle of money creation remains unchanged.

Gabriel_Martin 5y ago

From your link, wouldn't: "the multiplier being the maximum amount of commercial bank money created by a given unit of central bank money" be interpreted to mean that as soon as central bank monetizes it's debt, i.e. the money is initially created, it inherently is equal to a certain amount of commercial bank money, as long as it doesn't remain unlent? So it's not really the new creation of money, but rather the realization of it's value, upon being lent by a bank?

lend000 5y ago
I'm not sure if I'm interpreting you correctly, but I think the answer is no. It's best to think of it as the creation of new money, which cannot significantly be reversed. The way the Fed prints money is by buying Treasuries, which increases the money supply in two ways: 1. It allows the government to spend more money, which ends up going to a bunch of places that can't be "unspent" (government worker salaries, contractors, equipment, etc.). That money goes into various banks and ends up getting irreversibly multiplied. 2. In order to fill bids for Treasuries, the Fed front-runs other market participants with artificially low interest rates (below market), forcing other major Treasury participants (like banks) to lower their commercial interest rates in order to do something with their deposits, resulting in more borrowing. It should also be noted that the Fed sets the Fed Funds Rate, but my understanding is that this has a less pronounced effect. And it sets the minimum fractional reserve ratio, which as of COVID, is ZERO (infinite multiplier potential, although most big banks are pretty conservative with their reserves. Although IMO they do not need to be, since the odds of a run on the bank in an approaching-cashless society is nil).
- Gabriel_Martin 5y ago
  The run-proof nature of an 'approaching-cashless society', is a facet of this I'd never considered, I suppose the point is that it'd be infinitely propped-up thanks to be so detached from any real world asset. I'll have to learn more about the other points and their relationships to money creation and supply though. I'd never thought about the reversibility of money, outside of normal means of destroying it, and I'm not completely sure if I understand it well enough to agree or disagree. That said I feel like if there's a context for these creations (or maybe realizations) that reminds me of a kind of monetary inertia and that puts me on the fence still. Always so much to learn about this kind of stuff :)

spiralx 5y ago

There is no fractional reserve system or money multiplier in the modern economy though, those concepts only really apply to commodity money, not fiat money. You even say banks create money by lending, which is not how a fractional reserve system works :) A bank with zero deposits can still lend money, although they might have a problem if people want to withdraw physical currency... https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

lend000 5y ago
No, the concept still applies. Your link is attempting to describe nuance, but comes across as misleading. The multiplier is an upper bound on money creation by banks, and it does not specify a timeline. That's a fact. Obviously, not every bank loans all the way to the minimum reserve ratio (for example, currently, the reserve ratio is zero in the US, which makes for a poor denominator). Nor does every recipient of proceeds from a loan put all of that money into a lending bank. However, the money supply is still increased via lending. The increase from the issuance of a loan is immediately reflected in total deposits. What your link is stating is that central banks respond dynamically to the total number of bank deposits, and apply other policies (such as influencing interest rates) against that number directly, which can overpower the effect of the multiplier, if the central bank chooses. However, it does not nullify it, and it very much depends on a central bank taking that action. Your link also mentions regulations which may be specific to the UK about how banks lend, but the underlying principle of money creation remains unchanged.