“ Since the United States came off the gold standard formally in 1971 – that is to say, after that there was not gold bullion worth one dollar backing every dollar bill.”
Wasn’t Breton-Woods already a fractional system? I don’t think there was ever $1 in gold for every $1 USD…
Yes, it was fractional (in the sense there wasn’t enough gold to redeem), but the peg held. Economies grow much faster than gold reserves! The US still has the most gold in the word by a vast margin.
>"So the dollar is only worth something because people agree it is."
The article was good, but that part is wrong. The dollar is worth something because you need it to pay taxes. You can squat in a tent in the woods and eat nuts and berries and not buy anything, but if you trade with anyone, they need dollars to pay the taxes on their income, even if it's just barter.
Both parties need to have a specific good or service the other wants for barter to be successful. Money, however, can serve as a medium of exchange eliminating that problem thereby being useful enough to let yourself get taxed for its use.
That's not a reason for the dollar to be worth anything. Pick any value for a dollar in terms of berries, and a 10% income tax will work out to be the same percent of your berries taken away during the trade. Similarly, you can pick any value of the dollar and the property taxes on your forest land will come out to the same number of berries. Since any dollar denomination works, the equation can't fix a value.
IMO, that doesn't matter, and OP is correct that taxes are what really drive the pump. If you owe $10 in tax, and all you have are berries, you have to sell the berries to get dollars to pay the tax. Your desire not to go to prison for tax avoidance thus creates demand for dollars.
You don't owe $10 in tax, you owe 10% in tax. 10% could be anything and doesn't fix a value for the dollar. The system you're describing is a dollar quota, not a tax, and I don't think that system has ever existed in a western democracy.
Seriously, just try to calculate the idealized value of $1 based on a single tax, perhaps a tax you pay. There's no way to come up with anything. The theory being advanced here does not stand up to even the simplest attempt to apply it!
(There might have been a cruel feudal lord that demanded one gold coin per annum on threat of imprisonment, but I haven't heard of him if there was.)
It's an interesting point you are making about percentages, and I'm trying to decide if you are confused or I am.
We seem to be in agreement that a dollar quota would create dollar demand, is that correct?
It seems to me that once the pump starts moving, it doesn't matter whether the government charges a percent or a fixed amount. But I think I agree with you that you can't start the pump by asking for a percent.
Makes me wonder if way down in the kernel code of the monetary system there's some kind of dollar quota, or alternatively if the current system booted off a dollar quota. Makes me think of a stamp tax or something like that.
There was never a dollar quota. They represented amounts of gold until Richard Nixon finished a process that had begun during the great depression and fully stopped honoring the right to exchange one for the other. That was the end of this system: https://en.m.wikipedia.org/wiki/Bretton_Woods_system
Since everyone was already exchanging in dollars at that time their value didn't drop to zero, although it has fell a lot since then for obvious reasons.
Since people don't really use dollars as a store of value on a large scale anymore (Bill Gates does not own billions of dollars, he owns billions of dollars worth of stocks land etc.) it's not as bad as it sounds.
The point is that the federal government chose dollars as the way to pay taxes, not berries. The value of the dollar is decreed by the government, it's not something everyone just agrees on.
Incorrect. If the currency is mandated to be acceptable for all debts, then there is a relationship between the total amount of currency in the country and the total value of tradeable assets within that country.
Needless to say that relationship is complicated, you can’t work it out on a napkin, but it’s a mistake to think it’s random.
> a 10% income tax will work out to be the same percent of your berries taken away during the trade.
The key point is that the government won't accept berries as payment of your taxes. You have to sell your berries to someone else for dollars, and then pay your taxes in those dollars.
It's basically correct if you peel back a few abstractions: Taxes must be paid in dollars in accordance with federal law. Federal law is established through elected representatives. The legislative process is a democratic republic's mechanism for coming to agreement on rules that affect society at large.
In other words, at some point in time a bunch of elected representatives agreed that the dollar would be worth something and codified that in law.
Congress shall have power to coin money, regulate the Value thereof, and of foreign coin, and fix the standard of weights and measures. ~ Art. I, sec. 8, cl. 5.
Congress shall have power to provide for the punishment of counterfeiting the securities and current coin of the United States. ~ Art. I, sec. 8, cl. 6.
Currency is a social phenomenon that has emerged in many places without a central goverment requiring tax payments though. I think the value of fiat money is more based on the overall strength stability of the government that says it is legal tender for all debts, rather than tax payments narrowly.
Yes, the Chartalist [1] view espoused by OP only applies to fiat currencies.
The basic chartalist money story is:
- Local warlord/chieftan/strongman wants to get government-type things done, e.g. build a road
- Warlord says "I will pay anyone 5 dogecoin per day for working on my road"
- The people say "who cares, we don't want your worthless dogecoin"
- Warlord says "Anyone who does not pay 20 dogecoins in tax by the end of the month will be killed"
Suddenly you have people working on the road. But not everyone wants to work on the road, some people need to do other things like farming food.
So the farmers trade food to the road workers in exchange for dogecoins so that the farmers can pay their tax.
And the farmer trades some extra dogecoins to the blacksmith for a new shovel. Now the blacksmith can pay his tax.
Etc. The imposition of the tax has created a Schelling point where dogecoins now function as a medium of exchange, unit of account (5 dogecoins == 1 day of manual labor), and store of value. i.e. a currency.
Another major (and not mutually exclusive) theory of money is that of credit. Let's say the farmer says "I'll give you a bushel of grain now in exchange for 100 dogecoins by the end of the month". Now the road builder has a debt to the farmer, and the farmer has an asset worth 100 dogecoins modulo the creditworthiness of the road worker. The farmer could trade this IOU to someone else as if it were dogecoins (again, modulo default risk), etc. You can build up the whole financial system from here.
I agree that taxation is part of money’s value, and there are also other factors. If money is backed by a commodity (i.e. gold) then part of its value comes from the value of the commodity.
For fiat currencies where new money is mostly created as debt, the common refrain is that its value is based on common trust. I think it’s more than that. Debt is an obligation between two entities regarding future outcomes - namely, the repayment of the loan plus interest. When looked at this way the value of money comes from humanities ability to affect future outcomes. If I take out a mortgage, the bank trusts me to repay based on evidence I’ve demonstrated, and I trust the bank due to the bank’s reputation, the laws that govern banking, etc.
I am not an economist and wouldn’t be surprised if these concepts are already in some theory I’m not aware of. I do think that the sentiment that money created out of nothing is not really correct - rather it’s money created out of expected future value.
This is wrong. Every country has taxes, but some money is more valuable than others. Argentina's currency devalued even though they raised their tax rates. When McDonald's agrees to sell their Big Mac for $5, they're backing the US dollar. When you agree to work 40 hours a week for a predetermined salary in dollars, you're backing the US dollar. It's the same when you pay for taxes, but it's not different from the previous examples.
This is a specious argument. Using your logic I could say that this is because everyone agrees to use it to pay taxes. Then further conclude that the government is only legitimate because people think it is and they have not deposed of it. Therefore both the dollar and the United States only exist with the consent of the people. ie, because people agree that it provides value.
However, what money actually represents is debt. This is the same with any asset class, but especially with a country's currency. If I have a goat, and you have a cow, and I want milk but you're not interested in what you have to trade I could issue an IOU, if for instance I have excess feed for my goats that I could trade in the summer. This sort of arrangement could be made in smaller communities, because breaking the social contract could have dire consequences. However, when you scale that up on a societal scale you begin to create a currency. The name of the currency doesn't really matter, honestly, it could be the dollar or bottle caps, as long as it's a currency that represents value to everyone. In a small community a hundred bottle caps could be worth the value of a pound of wheat, or 100 pounds of wheat.
How do you decide? Well it all comes down to the person who is buying the product, but then again, not really... It's also a social contract that people are making. The value is defined by making comparisons both by how useful the asset is, how rare the asset is, the demand for the asset, but how much people agree the asset is worth collectively and in order to make such a decision the people have to decide how much value a currency has when exchanging goods and services.
The same with any fungible asset - all value is created because people collectively decided to assign it this value. You can see this actively playing out in any asset class from housing, stocks, and cars, to things as trivial as magic the gathering cards, to things as important as the value of one's labor. When you're done at the end of a job someone will say to you "how much money do I owe you?" not "how much taxes do I pay you?" because therein lies the real value of a currency. The labor, and the asset that is being provided is the value, not the taxes. Without a common collectively agree upon asset that people can exchange then there is no way to exchange services without a bartering system.
The dollar's power is that universally everyone agrees that it has value. However, the dollar can still have power outside jurisdictions that don't pay taxes to the United States government. How does that square with your argument? Why does it have value? People in France are not paying taxes to the Government but they can freely trade Francs in exchange for Dollars. So it can't be taxes. If there is no currency that everyone agrees has a common value how do you pay taxes? How do you even decide what a fair tax value is? If I say tomorrow that the new currency is bottle caps, what is the fair tax rate? Well, the first question you would ask yourself is what is the value of a bottle cap? And thus you return to the beginning of this post, and society has to begin again to make another unspoken agreement about the value of a new currency. The value of a currency is again will be decided relative to the perceived value of the goods and services provided, and the agreed upon value of said currency.
In my imagination milk is worth 100 bottle caps, but you may disagree. Thus we barter, and therein lies the value of all currency. Bartering isn't gone, it's just invisible, or symbolic nowadays. So when you're in a business meeting trying to sell your next startup imagine how much milk you can buy, or whatever.
You've shown that money can exist in an economy without taxes. But the OP said that taxes value money. Without taxes, fiat money is just a worthless piece of paper. The milk IOU in your example is more valuable. It's the need to pay taxes that forces people to trade their useful milk IOU's for the otherwise worthless fiat currency. And that trade sets the price.
A dollar is worth something because the largest military in the world stands behind it, declaring that it is good for all debts public and private, and you better damned well take it.
It is incorrect to say the dollar is backed by nothing. It is backed by the threat of violence from the US government, and the US government is very good at violence.
The hyperinflation situation, like in Argentina or Zimbabwe occurs because the money floods into foreign exchange to buy imports from people who demand dollars. The exporting countries demand dollars because the dollar can be used to buy oil.
Oil being priced in dollar, or the petrodollar standard is due to America providing protection to various OPEC countries who in exchange keep all their reserves in dollars. This is somewhat of a more informal arrangement, but is the reason that countries that stop selling oil in dollars usually get in wars with the U.S (e.g Iraq, Libya, Russia).
Also. capital gains in foreign currency are not normally taxed. That and Argentina and Zimbabwe are horrible at collecting taxes.
Money is useful so you don't have to get paid in sacks of potatoes and big screen televisions and instead get an abstraction. Being able to manage the money supply instead of having a physical good (like gold) being money is also useful so you can appropriately manage export imbalances and costs across borders, etc.
Money is a lot better than the alternative... an "economy" based only on nepotism, power, and relationships.
> So let’s look at a dollar traveling through the system. The Fed decides that $1, yes one more dollar, needs to be added to the economy and then everything will be dandy. The Fed purchases a Treasury bill from Bank X for $1, putting $1 on the deposit side of X’s ledger (remember, no physical currency is involved here). Bank X, subject to a 10% reserve requirement, is then free to lend out, that is create deposits, representing up to $10. The Fed “created” $1 but the commercial bank, X, “created” $9.
I'm confused. This seems to imply that commercial banks can magically credit their customers with $10 just because they happen to have $1.
I'm not able to do that. If I want someone else to have $10, I have to hand or wire them $10 in currency.
But you can have fractional reserves without the ability to magically credit to customers more real dollars than you have.
If I take my customers' deposits and loan out 90% of the currency they gave me to other people, that's fractional reserve banking too.
At the beginning the author explicitly tells us that this "Wonderful Life" depiction of banking is NOT what actually happens. And then he seems to imply that, actually, banks just get to magically credit borrowers with 10x the deposits their customers give them.
Banks requirement is that they have 10% of assets on hand at any moment. So if you, or the federal reserve gives them a dollar, that means they can create a record of 9 dollars owed to other parties without being over levered. Remember that's what is being done here, numbers in ledgers are increased but nobody has to send a brinks truck to move pieces of paper or bullion.
I give you $10. You lend $9 to Joe. Joe takes that money and deposits it in your bank. So, now you have $19 in your bank. You lend Sally $8.1 of the $9 that Joe gave you. Sally deposits the $8.1 in your bank. Your bank now has $27 in deposits. Continue until you've basically got 10x what you originally had in deposits.
Economics textbooks used to explain it that way, with a "money multiplier". That is, in the limit, if you keep lending 90% of each deposit then you'll 10x the money supply.
The reality is that banks don't "shuffle around" dollars like this, they just make accounting entries in ledgers. The vast majority of transactions are between member banks, and they just use FedWire or whatever to securely move the numbers from one bank's ledger to another. If the bank needs "cash" (i.e. the numbers in the ledger are too low) because there happens to be more outflows than inflows on a particular day they just lend assets overnight or whatever.
I think much confusion comes from association with the word 'loan'. In reality, a bank 'loan' is actually an extension of credit.
You are indeed 'magically' credited, in an instant, with say $100 of new deposits which is a liability to the bank. Simultaneously the bank gains an asset: your signed promise to pay that $100 or otherwise forfeit equivalent collateral.
A key point here is that this new 'magical' deposit is not the same stuff as cash or reserves. It is confined to that particular institution. Nothing that is being 'magically' created can escape the bank. Only cash and reserves can do that.
Ok, but if the credit is say a mortgage for a property being bought, the seller still receives the money in full, no? I guess the idea that they fully cash it out is unlikely and so that scenario would indeed come from the reserve - and otherwise if they just deposit it, even if at another bank, then it's just updating some ledgers around (i.e. the ledgers of the two banks with each other)?
The only ledger that two different banks share is the ledger of reserves at the central bank. The bank deposit that is created through the mortgage process has no means of escaping the buyer's bank and into the seller's account -- it's an artifact of the contract between the buyer and their bank. The seller's account grows only in response to a bank-to-bank transfer of reserves or a huge cash withdrawal and deposit (which are essentially similar.)
> Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the interbank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States.
> The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons.
This is a very good point, and it really points to the changing role of banks over the ~500 year history of modern global-industrial society. Economics textbooks have not done a good job of staying current.
Basically, up to 0.9 dollar is lent to customer 1 with 0.10 in reserve who deposits in bank 2 .. who lends up to 0.81 to customer 2.. who deposits in bank….
So you end up with the “same” dollar being reused across the whole monetary system multiple times…
Makes sense but is completely wrong. A bank can credit customers with any size deposits at any time, though in reality they will only do so with an equal sized debit, and within the confines of regulation.
Yes. This is how banking has always worked, even before central banks. Being part of a central banking system basically just means that the liabilities (i.e. deposits) created by all the member banks are fungible.
But this can't be done with physical currency. If I have to make loans in physical currency, I can't magically loan out $10 the moment I receive $1. I literally do not have the money to do this.
Wasn't there ever a time when banking was done with physical currency? How did it work before electronic banking?
IOUs i.e. paper money. Transacting in hard currency is tedious and dangerous. A trustworthy bank is an absolutely essential component of anything beyond village-scale commerce.
Yes! As an example, if you borrow money from a bank to buy a house:
- the bank literally creates that money out of thin air to pay for the house.
- that is new money, and therefore the total money supply (of your entire currency) is increased.
- when you you make a mortgage payment, you are decreasing the total money supply.
All modern economies are built of this system.
To make things weirder, you need to repay to the bank more money than they lent you. If everybody wanted to repay their mortgages at once, there would not be enough money available to do this, without more money being created. (At least, I think that's how it works -- it's super confusing!)
The point is not that the bank magically credits someone with $10. The $10 figure is arrived at after a series of infinitely recursive loans and deposits.
If you deposit $10, you still have $10, it's just in a bank account. If the bank then lends out $9 of that and hands it to them, that person now has $9, and you still have $10 (in your account). Presto, now there's $19 of money available. Of course if you both want to spend your money at the same time, then the bank will have to go back to the fed and say oops! we're illiquid and need to borrow $9. And the fed will say, ugh, you should manage your capital better but here's a loan for $9.
The same process that's occurred here can be done recursively, i.e. the person who borrowed $9 can deposit it in another bank, who then loans out $8.10, and so on...
This works out such that for every real dollar d, the total money supply is (d / r), where r is the reserve requirement, in this case, 10%.
I get all of this at some level, but the piece I don’t understand is - where does the Treasury bill come from? Does the bank use its customers’ cash to purchase government securities, and then the Fed buys the government securities from the bank? It doesn’t seem like that step would be necessary (why can’t the bank just create money based on deposited assets and applicable reserve requirements?), so I assume I’m not thinking about this the right way.
Because they have deposits from 10 other customers from which they where allowed to lend only $9/10. The new dolar they get, allows them to lend the 10th dollar from each and still comply with the 10% reserve.
I deposit $100K in my account. The bank keeps $10K of it in its vault, and loans out $90K to you. You deposit the $90K in your account, and the bank keeps $9K and loans out $81K. Keep doing this over and over again, and ultimately the bank has close to $100K in its vault but all of us put together have $1M in spending money (numbers all inaccurate, but gets the point across).
So every dollar the fed creates out of thin air turns into $10 circulating through the economy because of fractional reserve banking.
Are you talking about physical paper currency? That’s totally a different issue. What happens if the original depositor deposited via a bank wire and you want to loan out $100 dollars in paper money? You just get some paper money from the FED. Same thing here.
>> Bank X, subject to a 10% reserve requirement, is then free to lend out, that is create deposits, representing up to $10. The Fed “created” $1 but the commercial bank, X, “created” $9.
> I'm confused. This seems to imply that commercial banks can magically credit their customers with $10 just because they happen to have $1.
Nope, it's actually incorrect: commercial banks can magically credit their customers with $10 even if they have $0 dollars. Canada (amongst many others) does not have reserve requirements:
> Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the interbank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States.
> The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons.
If a bank wants 'someone else' to have $10, such as a customer at an ATM or a different bank, they indeed must hand them literal cash or 'wire' them $10 of reserves.
Banks, through 'loans', don't create cash or reserves, they create local bank deposits. One flows freely around, the other is confined to a particular institution.
You are able to do almost exactly what a bank does: My holding a $50 IOU issued by you is like having a $50 balance in a chequing account. The only way I can 'transfer' that to someone else is either (1) having you give me literal cash that I can give them, or (2) forfeiting my IOU and having you generate one for someone else.
(1) Works because cash is universally accepted.
(2) Only works when the other party is part of your IOU club. Translated to the world of banking: they are a member of the same bank!
I think I get it now. The bank is able to "create" money because it is, in some sense, the sovereign issuer of its own internal "IOU" currency. It makes IOUs (deposit records) to track who has the right to draw currency from it, and it can create as many of these IOUs as it wants for any reason. And if you classify bank deposits as money, these IOUs count as money.
You've got it. They certainly don't create these IOUs for -any- reason (I'd wager there's legislation that strictly governs this.) In practice deposits (customer assets/bank liabilities) are created simultaneous to the customer handing over an asset of equal value: their promise to pay down the debt, such that the books balance.
A side note to think about: Although the memes might have you believe that 'money' is being 'printed' by the bank, in actuality the true creation is happening on the side of the customer whom, from nothing, manifests an asset into the world: their promise to pay. Intentional or otherwise the system obfuscates this fact.
Thank you, this is great. I am still a bit mystified for murky reasons I may be able to articulate better later... but feel much closer to understanding this than before :)
Yes, and in other countries, such as Australia, the fractional part of this has been abolished - eg, banks in Australia don't have to keep 10% in their vaults.
> I'm not able to do that. If I want someone else to have $10, I have to hand or wire them $10 in currency.
Sure you can, just write a post dated cheque, or any other sort of IOU. Whoever you give the cheque to can use it like money by endorsing it to somebody else. As long as you're trustworthy that cheque or IOU can circulate as money.
It's a post dated cheque. Usually those are written because you explicitly don't have $10 today, but expect to in the future.
In other words, exactly like the bank. They don't have $10 today, but expect to be able to produce it on demand because of the staggered nature of withdrawals.
I just wish the article would point out that bank deposits aren't the same as currency and are more like IOUs or post-dated checks.
I understand how it can be useful to call both currency and bank deposits money, but they're still different in some very important ways. If I give my friend a trillion dollar IOU, that's very different from (1) the government printing a trillion dollars in currency and writing people checks with it, (2) the central bank crediting a commercial bank with a trillion dollar deposit.
Actually I'm a little unsure what to think about the second one. Illuminating that one could help us get to the heart of the matter.
Secondly, if you dig a little deeper into the page you linked, you'll see it's because the system has changed around the banks and those specific requirements (to keep an account centrally, with the federal reserve, for a certain amount) are no longer considered useful.
I don't consider myself an expert on this, but waving this link around as if it means something, absent any context, is not particularly informative.
The best source I've come across on central banking and monetary policy is Nomi Prins' Collusion - in particular, because it doesn't just look at the Fed, but rather the top central banks of the world, from the USA to Europe to Japan to China to Brazil. They're all linked together to some degree via currency swaps and similar mechanisms. For example:
""On March 9, 2015, Draghi introduced yet another QE program, the Expanded Asset Purchase Programme (EAPP). This one would buy public sector securities, too. The program consisted of a third covered bond purchase program (CBPP3), an asset-backed securities purchase program (ABSPP). and a public sector purchase program (PSPP). It could have equally decided to buy scones and jam or croissants and butter - that would have spread money more directly into the real economy, at least as far as bakers and fruit farms were concerned. These purchases of public- and private-sector securities would run E60 billion per month." p226
That's a fundamental point - monetary policy alone doesn't decide outcomes, it's who benefits from a given monetary policy - and that's often determined by a government's fiscal policy, which is supposedly separate from a central bank's monetary policy: again, see Prins:
> "But in the bank's moment of peril, the Fed unleashed a global policy of injecting fabricated money into the worldwide financial system. This flood of cheap money resulted in the subsequent issuance of trillions of dollars of debt, pushing the global level of debt to $325 trillion, more than three times global GDP. By mid 2017, the total assets held by the G3 central banks - the US Fed, the European Central Bank (ECB), and the Bank of Japan (BOJ) - through conjured-money QE programs - had hit more than $13.5 trillion. The figure was equivalent to 17 percent of currency-adjusted global GDP."
> "Specifically, the largest private banks, including JPMorganChase, DeutscheBank, and HSBC, that inhaled this cheap money were not required to increase their lending to the Main Street economy as a condition of the availability of that money. Instead, the banks hoarded the cash. US banks colluded with the Fed to get that cash by stashing their bonds as 'excess reserves' (more reserves for emergencies than regulations required) on the Fed's books. And, because of the Emergency Federal Stabilization Act of 2008, they recieved 0.25 percent interest per year from the Fed on those reserves, too. Wall Street used its easy access to cheap money to increase speculation in derivatives and other complex securities. They used it to buy back their own shares, thus effectively manipulating their own stock - in broad daylight and with explicit approval from the Fed. In turn these banks dialed back their lending to small and midsized businesses, which hampered their growth potential."
> The bank has just converted a house, wood and nails and siding and dirt, into money.
This was a clever twist. But is it true?
The house existed and monies (in possession of others) also existed, so that house already had 'value' and fully convertible to money via a cash sale.
What has happened is that the bank, using hypothetical/projected money (i.e. mortgage payments), created money and purchased a valuable assembly of land, wood, and nails. It further has a buyer who must make regular payments of money (earned, not created, by working) until the banks hypothetical money is converted into actual money. And the buyer now is the owner of the house. This is when it works out. Here, the bank clears out its book of the fictional principle payed out, but now has interest payments as profit.)
When the buyer defaults, now the bank is the owner of a house, which it can sell and pocket the profit. (Remember, it only had $10k from the Fed, and say foreclosed and sold at $50k, so that's 40k).
So my Q which this article did not even touch on, is whether the Federal Reserve is a public entity (so its profits go to US treasury and not some island somewhere), and if it is not, why not? Why would a country's central bank not be owned by the people of that country? Why are these things so opaque and reluctant to have open books?
"Legal cases involving the Federal Reserve Banks have concluded that they are "private", but can be held or deemed as "governmental" depending on the particular law at issue. In United States Shipping Board Emergency Fleet Corporation v. Western Union Telegraph Co.,[5] the U.S. Supreme Court stated, "Instrumentalities like the national banks or the federal reserve banks, in which there are private interests, are not departments of the government. They are private corporations in which the government has an interest.""
>So my Q which this article did not even touch on, is whether the Federal Reserve is a public entity (so its profits go to US treasury and not some island somewhere), and if it is not, why not?
I believe you are conflating the Federal Reserve itself (the agency established by law that has a dual mandate to pursue price stability and full employment) and the Federal Reserve Banks (Richmond, Dallas, Minneapolis, etc.). The equity of the Federal Reserve Banks are owned by the commercial banks of the United States, and remit their profits to the US Treasury. Which seems consistent with the case you cite, where they’re private entities in some contexts (i.e., owned by private sector banks) but public entities in others.
> Bank X, subject to a 10% reserve requirement, is then free to lend out, that is create deposits, representing up to $10. The Fed “created” $1 but the commercial bank, X, “created” $9.
Please stop it with the reserve requirements. Canada (amongst others) hasn't even had them for for many, many years:
> Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the interbank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States.
> The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons.
See also the Bank of England's 2014 paper, "Money creation in the modern economy":
> The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
>Thus, when a bank has more liabilities than assets to a point below the required reserve percentage, 10%, it can borrow reserves from another bank and pay the interest rate set by the Fed for the benefit of doing so.
The US banks are currently lending out infinite money. There will be limits and cycles in terms of being able to lend out but you can lend out infinite and sell the liability.
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“ Since the United States came off the gold standard formally in 1971 – that is to say, after that there was not gold bullion worth one dollar backing every dollar bill.”
Wasn’t Breton-Woods already a fractional system? I don’t think there was ever $1 in gold for every $1 USD…
Current reserve requirements: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
The article was good, but that part is wrong. The dollar is worth something because you need it to pay taxes. You can squat in a tent in the woods and eat nuts and berries and not buy anything, but if you trade with anyone, they need dollars to pay the taxes on their income, even if it's just barter.
https://www.ato.gov.au/Business/GST/In-detail/Rules-for-spec...
Seriously, just try to calculate the idealized value of $1 based on a single tax, perhaps a tax you pay. There's no way to come up with anything. The theory being advanced here does not stand up to even the simplest attempt to apply it!
(There might have been a cruel feudal lord that demanded one gold coin per annum on threat of imprisonment, but I haven't heard of him if there was.)
We seem to be in agreement that a dollar quota would create dollar demand, is that correct?
It seems to me that once the pump starts moving, it doesn't matter whether the government charges a percent or a fixed amount. But I think I agree with you that you can't start the pump by asking for a percent.
Makes me wonder if way down in the kernel code of the monetary system there's some kind of dollar quota, or alternatively if the current system booted off a dollar quota. Makes me think of a stamp tax or something like that.
Since everyone was already exchanging in dollars at that time their value didn't drop to zero, although it has fell a lot since then for obvious reasons.
Since people don't really use dollars as a store of value on a large scale anymore (Bill Gates does not own billions of dollars, he owns billions of dollars worth of stocks land etc.) it's not as bad as it sounds.
Needless to say that relationship is complicated, you can’t work it out on a napkin, but it’s a mistake to think it’s random.
The key point is that the government won't accept berries as payment of your taxes. You have to sell your berries to someone else for dollars, and then pay your taxes in those dollars.
If a berry is worth $1, then a 10% sales tax on 10 berries is $1, which is 1 berry.
If a berry is worth $10, then a 10% sales tax on 10 berries is $10, which is 1 berry.
So what we see here is that the government is taxing 10% berry value at all the different values of a dollar.
https://www.irs.gov/publications/p525#en_US_2021_publink1000...
In other words, at some point in time a bunch of elected representatives agreed that the dollar would be worth something and codified that in law.
The basic chartalist money story is:
- Local warlord/chieftan/strongman wants to get government-type things done, e.g. build a road
- Warlord says "I will pay anyone 5 dogecoin per day for working on my road"
- The people say "who cares, we don't want your worthless dogecoin"
- Warlord says "Anyone who does not pay 20 dogecoins in tax by the end of the month will be killed"
Suddenly you have people working on the road. But not everyone wants to work on the road, some people need to do other things like farming food.
So the farmers trade food to the road workers in exchange for dogecoins so that the farmers can pay their tax.
And the farmer trades some extra dogecoins to the blacksmith for a new shovel. Now the blacksmith can pay his tax.
Etc. The imposition of the tax has created a Schelling point where dogecoins now function as a medium of exchange, unit of account (5 dogecoins == 1 day of manual labor), and store of value. i.e. a currency.
Another major (and not mutually exclusive) theory of money is that of credit. Let's say the farmer says "I'll give you a bushel of grain now in exchange for 100 dogecoins by the end of the month". Now the road builder has a debt to the farmer, and the farmer has an asset worth 100 dogecoins modulo the creditworthiness of the road worker. The farmer could trade this IOU to someone else as if it were dogecoins (again, modulo default risk), etc. You can build up the whole financial system from here.
[1] https://en.wikipedia.org/wiki/Chartalism
[2] https://en.wikipedia.org/wiki/Credit_theory_of_money
Any explanation of money should be required to refer to this concept
For fiat currencies where new money is mostly created as debt, the common refrain is that its value is based on common trust. I think it’s more than that. Debt is an obligation between two entities regarding future outcomes - namely, the repayment of the loan plus interest. When looked at this way the value of money comes from humanities ability to affect future outcomes. If I take out a mortgage, the bank trusts me to repay based on evidence I’ve demonstrated, and I trust the bank due to the bank’s reputation, the laws that govern banking, etc.
I am not an economist and wouldn’t be surprised if these concepts are already in some theory I’m not aware of. I do think that the sentiment that money created out of nothing is not really correct - rather it’s money created out of expected future value.
However, what money actually represents is debt. This is the same with any asset class, but especially with a country's currency. If I have a goat, and you have a cow, and I want milk but you're not interested in what you have to trade I could issue an IOU, if for instance I have excess feed for my goats that I could trade in the summer. This sort of arrangement could be made in smaller communities, because breaking the social contract could have dire consequences. However, when you scale that up on a societal scale you begin to create a currency. The name of the currency doesn't really matter, honestly, it could be the dollar or bottle caps, as long as it's a currency that represents value to everyone. In a small community a hundred bottle caps could be worth the value of a pound of wheat, or 100 pounds of wheat.
How do you decide? Well it all comes down to the person who is buying the product, but then again, not really... It's also a social contract that people are making. The value is defined by making comparisons both by how useful the asset is, how rare the asset is, the demand for the asset, but how much people agree the asset is worth collectively and in order to make such a decision the people have to decide how much value a currency has when exchanging goods and services.
The same with any fungible asset - all value is created because people collectively decided to assign it this value. You can see this actively playing out in any asset class from housing, stocks, and cars, to things as trivial as magic the gathering cards, to things as important as the value of one's labor. When you're done at the end of a job someone will say to you "how much money do I owe you?" not "how much taxes do I pay you?" because therein lies the real value of a currency. The labor, and the asset that is being provided is the value, not the taxes. Without a common collectively agree upon asset that people can exchange then there is no way to exchange services without a bartering system.
The dollar's power is that universally everyone agrees that it has value. However, the dollar can still have power outside jurisdictions that don't pay taxes to the United States government. How does that square with your argument? Why does it have value? People in France are not paying taxes to the Government but they can freely trade Francs in exchange for Dollars. So it can't be taxes. If there is no currency that everyone agrees has a common value how do you pay taxes? How do you even decide what a fair tax value is? If I say tomorrow that the new currency is bottle caps, what is the fair tax rate? Well, the first question you would ask yourself is what is the value of a bottle cap? And thus you return to the beginning of this post, and society has to begin again to make another unspoken agreement about the value of a new currency. The value of a currency is again will be decided relative to the perceived value of the goods and services provided, and the agreed upon value of said currency.
In my imagination milk is worth 100 bottle caps, but you may disagree. Thus we barter, and therein lies the value of all currency. Bartering isn't gone, it's just invisible, or symbolic nowadays. So when you're in a business meeting trying to sell your next startup imagine how much milk you can buy, or whatever.
It is incorrect to say the dollar is backed by nothing. It is backed by the threat of violence from the US government, and the US government is very good at violence.
Oil being priced in dollar, or the petrodollar standard is due to America providing protection to various OPEC countries who in exchange keep all their reserves in dollars. This is somewhat of a more informal arrangement, but is the reason that countries that stop selling oil in dollars usually get in wars with the U.S (e.g Iraq, Libya, Russia).
Also. capital gains in foreign currency are not normally taxed. That and Argentina and Zimbabwe are horrible at collecting taxes.
I remember when I decided to understand the monetary system: once, I pierced through its fake complexity, only disgust has been remaining since then.
Money is useful so you don't have to get paid in sacks of potatoes and big screen televisions and instead get an abstraction. Being able to manage the money supply instead of having a physical good (like gold) being money is also useful so you can appropriately manage export imbalances and costs across borders, etc.
Money is a lot better than the alternative... an "economy" based only on nepotism, power, and relationships.
I'm confused. This seems to imply that commercial banks can magically credit their customers with $10 just because they happen to have $1.
I'm not able to do that. If I want someone else to have $10, I have to hand or wire them $10 in currency.
Do commercial banks really get to do this?
If I take my customers' deposits and loan out 90% of the currency they gave me to other people, that's fractional reserve banking too.
At the beginning the author explicitly tells us that this "Wonderful Life" depiction of banking is NOT what actually happens. And then he seems to imply that, actually, banks just get to magically credit borrowers with 10x the deposits their customers give them.
I give you $10. You lend $9 to Joe. Joe takes that money and deposits it in your bank. So, now you have $19 in your bank. You lend Sally $8.1 of the $9 that Joe gave you. Sally deposits the $8.1 in your bank. Your bank now has $27 in deposits. Continue until you've basically got 10x what you originally had in deposits.
The reality is that banks don't "shuffle around" dollars like this, they just make accounting entries in ledgers. The vast majority of transactions are between member banks, and they just use FedWire or whatever to securely move the numbers from one bank's ledger to another. If the bank needs "cash" (i.e. the numbers in the ledger are too low) because there happens to be more outflows than inflows on a particular day they just lend assets overnight or whatever.
You are indeed 'magically' credited, in an instant, with say $100 of new deposits which is a liability to the bank. Simultaneously the bank gains an asset: your signed promise to pay that $100 or otherwise forfeit equivalent collateral.
A key point here is that this new 'magical' deposit is not the same stuff as cash or reserves. It is confined to that particular institution. Nothing that is being 'magically' created can escape the bank. Only cash and reserves can do that.
No, it is not. Relending customers' money hasn't been a thing for decades. Tobin called this the "Old View" in 1963:
* https://cowles.yale.edu/sites/default/files/files/pub/d01/d0...
> Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the interbank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States.
* https://www.pragcap.com/the-basics-of-banking/
> The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons.
* https://www.federalreserve.gov/pubs/feds/2010/201041/201041p...
https://www.investopedia.com/terms/m/multipliereffect.asp
Basically, up to 0.9 dollar is lent to customer 1 with 0.10 in reserve who deposits in bank 2 .. who lends up to 0.81 to customer 2.. who deposits in bank….
So you end up with the “same” dollar being reused across the whole monetary system multiple times…
I'm wondering if the author's explanation is just bad and I should stop trying to make sense of it.
Wasn't there ever a time when banking was done with physical currency? How did it work before electronic banking?
All modern economies are built of this system.
To make things weirder, you need to repay to the bank more money than they lent you. If everybody wanted to repay their mortgages at once, there would not be enough money available to do this, without more money being created. (At least, I think that's how it works -- it's super confusing!)
If you deposit $10, you still have $10, it's just in a bank account. If the bank then lends out $9 of that and hands it to them, that person now has $9, and you still have $10 (in your account). Presto, now there's $19 of money available. Of course if you both want to spend your money at the same time, then the bank will have to go back to the fed and say oops! we're illiquid and need to borrow $9. And the fed will say, ugh, you should manage your capital better but here's a loan for $9.
The same process that's occurred here can be done recursively, i.e. the person who borrowed $9 can deposit it in another bank, who then loans out $8.10, and so on...
This works out such that for every real dollar d, the total money supply is (d / r), where r is the reserve requirement, in this case, 10%.
So every dollar the fed creates out of thin air turns into $10 circulating through the economy because of fractional reserve banking.
> I'm confused. This seems to imply that commercial banks can magically credit their customers with $10 just because they happen to have $1.
Nope, it's actually incorrect: commercial banks can magically credit their customers with $10 even if they have $0 dollars. Canada (amongst many others) does not have reserve requirements:
* https://en.wikipedia.org/wiki/Reserve_requirement#Canada
> Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the interbank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States.
* https://www.pragcap.com/the-basics-of-banking/
> The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons.
* https://www.federalreserve.gov/pubs/feds/2010/201041/201041p...
See Cullen Roche's 2011 paper "Understanding the Modern Monetary System":
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
Interview:
* https://rationalreminder.ca/podcast/132
See also the Bank of England's 2014 paper, "Money creation in the modern economy":
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Banks, through 'loans', don't create cash or reserves, they create local bank deposits. One flows freely around, the other is confined to a particular institution.
You are able to do almost exactly what a bank does: My holding a $50 IOU issued by you is like having a $50 balance in a chequing account. The only way I can 'transfer' that to someone else is either (1) having you give me literal cash that I can give them, or (2) forfeiting my IOU and having you generate one for someone else.
(1) Works because cash is universally accepted. (2) Only works when the other party is part of your IOU club. Translated to the world of banking: they are a member of the same bank!
A side note to think about: Although the memes might have you believe that 'money' is being 'printed' by the bank, in actuality the true creation is happening on the side of the customer whom, from nothing, manifests an asset into the world: their promise to pay. Intentional or otherwise the system obfuscates this fact.
Sure you can, just write a post dated cheque, or any other sort of IOU. Whoever you give the cheque to can use it like money by endorsing it to somebody else. As long as you're trustworthy that cheque or IOU can circulate as money.
As long as I'm trustworthy and always have an actual $10 to back the IOU. Which the bank does not have to have, according to this article.
In other words, exactly like the bank. They don't have $10 today, but expect to be able to produce it on demand because of the staggered nature of withdrawals.
I just wish the article would point out that bank deposits aren't the same as currency and are more like IOUs or post-dated checks.
I understand how it can be useful to call both currency and bank deposits money, but they're still different in some very important ways. If I give my friend a trillion dollar IOU, that's very different from (1) the government printing a trillion dollars in currency and writing people checks with it, (2) the central bank crediting a commercial bank with a trillion dollar deposit.
Actually I'm a little unsure what to think about the second one. Illuminating that one could help us get to the heart of the matter.
Remember, the balance in your account is nothing more than the bank's record of its liability to you.
Ahahah it’s over
Firstly, it's not the whole picture - https://www.federalreserve.gov/supervisionreg/large-bank-cap...
Secondly, if you dig a little deeper into the page you linked, you'll see it's because the system has changed around the banks and those specific requirements (to keep an account centrally, with the federal reserve, for a certain amount) are no longer considered useful.
I don't consider myself an expert on this, but waving this link around as if it means something, absent any context, is not particularly informative.
* https://rationalreminder.ca/podcast/207
[0] https://www.federalreserve.gov/aboutthefed.htm
""On March 9, 2015, Draghi introduced yet another QE program, the Expanded Asset Purchase Programme (EAPP). This one would buy public sector securities, too. The program consisted of a third covered bond purchase program (CBPP3), an asset-backed securities purchase program (ABSPP). and a public sector purchase program (PSPP). It could have equally decided to buy scones and jam or croissants and butter - that would have spread money more directly into the real economy, at least as far as bakers and fruit farms were concerned. These purchases of public- and private-sector securities would run E60 billion per month." p226
That's a fundamental point - monetary policy alone doesn't decide outcomes, it's who benefits from a given monetary policy - and that's often determined by a government's fiscal policy, which is supposedly separate from a central bank's monetary policy: again, see Prins:
> "But in the bank's moment of peril, the Fed unleashed a global policy of injecting fabricated money into the worldwide financial system. This flood of cheap money resulted in the subsequent issuance of trillions of dollars of debt, pushing the global level of debt to $325 trillion, more than three times global GDP. By mid 2017, the total assets held by the G3 central banks - the US Fed, the European Central Bank (ECB), and the Bank of Japan (BOJ) - through conjured-money QE programs - had hit more than $13.5 trillion. The figure was equivalent to 17 percent of currency-adjusted global GDP."
> "Specifically, the largest private banks, including JPMorganChase, DeutscheBank, and HSBC, that inhaled this cheap money were not required to increase their lending to the Main Street economy as a condition of the availability of that money. Instead, the banks hoarded the cash. US banks colluded with the Fed to get that cash by stashing their bonds as 'excess reserves' (more reserves for emergencies than regulations required) on the Fed's books. And, because of the Emergency Federal Stabilization Act of 2008, they recieved 0.25 percent interest per year from the Fed on those reserves, too. Wall Street used its easy access to cheap money to increase speculation in derivatives and other complex securities. They used it to buy back their own shares, thus effectively manipulating their own stock - in broad daylight and with explicit approval from the Fed. In turn these banks dialed back their lending to small and midsized businesses, which hampered their growth potential."
https://nomiprins.com/books/
This was a clever twist. But is it true?
The house existed and monies (in possession of others) also existed, so that house already had 'value' and fully convertible to money via a cash sale.
What has happened is that the bank, using hypothetical/projected money (i.e. mortgage payments), created money and purchased a valuable assembly of land, wood, and nails. It further has a buyer who must make regular payments of money (earned, not created, by working) until the banks hypothetical money is converted into actual money. And the buyer now is the owner of the house. This is when it works out. Here, the bank clears out its book of the fictional principle payed out, but now has interest payments as profit.)
When the buyer defaults, now the bank is the owner of a house, which it can sell and pocket the profit. (Remember, it only had $10k from the Fed, and say foreclosed and sold at $50k, so that's 40k).
So my Q which this article did not even touch on, is whether the Federal Reserve is a public entity (so its profits go to US treasury and not some island somewhere), and if it is not, why not? Why would a country's central bank not be owned by the people of that country? Why are these things so opaque and reluctant to have open books?
"Legal cases involving the Federal Reserve Banks have concluded that they are "private", but can be held or deemed as "governmental" depending on the particular law at issue. In United States Shipping Board Emergency Fleet Corporation v. Western Union Telegraph Co.,[5] the U.S. Supreme Court stated, "Instrumentalities like the national banks or the federal reserve banks, in which there are private interests, are not departments of the government. They are private corporations in which the government has an interest.""
https://en.wikipedia.org/wiki/Federal_Reserve_Bank#Legal_sta...
I believe you are conflating the Federal Reserve itself (the agency established by law that has a dual mandate to pursue price stability and full employment) and the Federal Reserve Banks (Richmond, Dallas, Minneapolis, etc.). The equity of the Federal Reserve Banks are owned by the commercial banks of the United States, and remit their profits to the US Treasury. Which seems consistent with the case you cite, where they’re private entities in some contexts (i.e., owned by private sector banks) but public entities in others.
Please stop it with the reserve requirements. Canada (amongst others) hasn't even had them for for many, many years:
* https://en.wikipedia.org/wiki/Reserve_requirement#Canada
Relending customers' money hasn't been a thing for decades. Tobin called this the "Old View" in 1963:
* https://cowles.yale.edu/sites/default/files/files/pub/d01/d0...
> Business schools teach that banks obtain deposits and then leverage those deposits ten times or so. This is why we call the modern banking system a fractional reserve banking system. Banks supposedly lend a portion of their reserves. There’s just one problem here: banks are never reserve constrained. Banks are always capital constrained. This can best be seen in countries such as Canada, which has no reserve requirements. Reserves are used for two purposes—to settle payments in the interbank market and to meet the Fed’s reserve requirements. Aside from this, reserves have little impact on the day-to-day lending operations of banks in the United States.
* https://www.pragcap.com/the-basics-of-banking/
> The role of reserves and money in macroeconomics has a long history. Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons.
* https://www.federalreserve.gov/pubs/feds/2010/201041/201041p...
See Cullen Roche's 2011 paper "Understanding the Modern Monetary System":
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
Interview:
* https://rationalreminder.ca/podcast/132
See also the Bank of England's 2014 paper, "Money creation in the modern economy":
> The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Where did the author get this 10% number?
If you look at China it's 11%.
India is 4%
Hungary is 1%
Turkey is 25%
You might say, 'oh they mean USA'
But USA is at 0%. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
The US banks are currently lending out infinite money. There will be limits and cycles in terms of being able to lend out but you can lend out infinite and sell the liability.