Posted by: Dirk | April 8, 2013

Modern (Endogenous) Money Mechanics, Chicago edition

Modern Money Mechanics is a text developed by the Federal Reserve Bank of Chicago. While I do not agree with many (most?) ideas of how the financial system works (like the last paragraph of the following quote), the idea of endogenous money which is created by banks is something that does appear in the text:

Who Creates Money?
Changes in the quantity of money may originate with actions of the Federal Reserve System (the central bank), depository institutions (principally commercial banks), or the public. The major control, however, rests with the central bank.
The actual process of money creation takes place primarily in banks.’ As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.
In the absence of legal reserve requirements, banks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago.

What is missing though is the fact that the government can create money, too. For more quotes by non-academics on the question of endogenous money creation I refer you to the Real World Economics Review and Positive Money.

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Responses

  1. […] That translates into: “One saves, the other needs money, which he doesn’t have (yet). That must be organized. That is called a bank.” Nice, but completely wrong. Here is a University of Chicago – the birthplace of monetarism – text: […]

  2. […] and their findings should not be believed without critical examination. The Bank of England is not the first to describe money creation by banks in these terms either. However, some central banks are still […]


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