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How money is created depends on how you define 'money': 1) If money is (cash) + (accounts at the central bank), then only the central bank can create it. 2) I
by OscarCunningham 4y ago
How money is created depends on how you define 'money':
1) If money is (cash) + (accounts at the central bank), then only the central bank can create it.
2) If money is (cash held outside banks) + (accounts at private banks), then it's created when private banks make loans.
However I think the main point is that saying 'private banks create money' makes it sound like they're getting something for nothing, when in fact this isn't true. Because (2) doesn't include cash held by a bank as 'money' you can't say a bank is losing money when it loans out some cash. But it's still losing an asset worth the same amount.
Personally I think (2) is a silly definition for most discussions.
Bank robber: Give me the money!
Bank teller: We don't have any money, only cash. But it will become money if I give it to you.
- JumpCrisscross 4y ago> (2) is a silly definition for most discussions This is commercial bank money. (The first is central bank money.) The latter is the only definition appropriate for most discussions. Nobody says Apple has no money because they don't have an account at the Federal Reserve.
- OscarCunningham 4y agoPeople say that Warren Buffet has lots of money, but I wouldn't call shares money either. EDIT: I'd say that in common parlence bank accounts are called 'money' because they're a claim on money (1) that the bank has to pay out on demand. But if you're calculating an aggregate then you shouldn't include both the claim and the thing it's a claim on.
- JumpCrisscross 4y ago> if you're calculating an aggregate then you shouldn't include both the claim and the thing it's a claim on It's all claims. We count both. But other than for international finance, high-powered money is irrelevant.
- lottin 4y ago> if you're calculating an aggregate then you shouldn't include both the claim and the thing it's a claim on This is why M1, which includes bank deposits, does not include bank reserves.
- kybernetikos 4y agoAll loans, even between private individuals increase the number of assets in the system, because as well as the cash that changes hands, a new IOU has been created, and that in itself is an asset. If the IOU is in the form of a number in a bank account, and you include private bank account balances as money (as most people do), then bam! money created. The magic status of banks just comes from counting private bank IOUs in the form of balances as money and not counting IOUs issued by private individuals as money.