Talk:Money creation

From Wikipedia, the free encyclopedia

Contents

[edit] old text at top erroneously

This article needs substantial revision:

  1. Money is never created by printing. Money can be transformed into printed form by making a withdrawal at a bank, but it's not created that way.
  2. Banks don't make loans against reserves. New loans, and therefore new money, are created by banks as simple bookkeeping entries.
  3. Money is also created when the Fed buys treasury bonds.

See: http://landru.i-link-2.net/monques/mmm2.html —Preceding unsigned comment added by 203.118.155.104 (talk) 05:51, 30 January 2008 (UTC)


There are only a few ways money is created (at least in the US, or any economy with a central bank). Discussion in this article should be focused on these topics:

  1. Counterfeiting
  2. Printing money
  3. The Federal Reserve and should be discussed in that article
    1. buying/selling t-bills and t-bonds
    2. changing the federal funds rate (discount rate)
    3. and changing the reserve ratio

Finally... if a history of money creation is desired, discussion over the history of 'fractional reserve banking' could be discussed here or in that article.C. Nelson 03:27, 20 March 2006 (UTC)

I disagree with your list excluding the Money Multiplier mechanism, as it does create actual currency, although not in its minted or printed variety. But I do suggest that the article should be generalized to avoid being US-centric, therefore removing much of the Federal Reserve example and replacing it with a general example portraying the actions of a generic bank and possibly the underlying connections with a generic national central bank. Only afterward specific national differences can and should be discussed. manu3d 15:02, 26 November 2006 (UTC)


Money is not currency. You counterfeit and print currency, not money. The article is a good (if somewhat vague) intro to money creation. A very small portion of money is in the form of currency. The US Mint does not create money, it produces currency, a useful medium for small money transactions. This is why the Mint doesn't care that it costs more to make a penny than one cent. The penny can be used thousands of times in order to represent thousands of cents.
Ummm... perhaps you mean "Currency is not the only form of money. You counterfeit and print currency, which is one form of money." But in any case, this issue certainly hinges on what is defined as money.
Many would contend (such as Ludwig von Mises) that checks aren't money, but rather "money substitutes." This "money multiplier" effect basically consists of counterbalancing assets and liabilities listed in bank accounts. Now, besides paying with cash, you can pay by creating new obligations or canceling out old obligations. It doesn't necessarily result in ten times the amount of "money" freely circulating in the economy (with 10% reserve requirement) as most of the time the "money" stays right where it is, in the bank... and if it doesn't stay right where it is, if everyone in the country starts issuing checks left and right, up to the full balance of their accounts, then the smaller the banks' reserves, the more strain they're under, and the greater the likelihood that they'll fail to meet their obligations.
Without banks, in a little closed system between three friends who are completely broke, we can see "money creation" in effect, along with a "money multiplier." Al has no money, but he likes Betty's bike, so he offers to pay her later for a bike today. He doesn't even write her an I.O.U., he just says "I'll pay you later." Betty agrees. Now Betty has a 100 dollar asset, even though no one in the economy has any money! She decides to spend her money. She goes to Carl's shop and buys 100 dollars in groceries. He's glad for the business, as he too is flat broke. Betty doesn't pony up the cash right away, she just says "I'll pay you later," but Carl trusts her. Now Al, who has a carrot garden, brings in a heap of carrots to Carl's shop looking to make a deal. "I'll sell you these carrots for one hundred bucks," says Al. "Sure, I've got a hundred bucks coming to me real soon, so I'll settle up with you later." "Great, 'cause I need the money to pay for my bike." Now three people have a $100 asset each. True, they also have a $100 liability each, for a net balance of zero, but the economy is apparently working. Goods are being produced and taken to market. People are making exchanges, so that the people with differing values profit from the trade. They can all settle up as soon as someone issues an I.O.U., or settles their debt in another way, by an exchange of goods or services, and the settlement passes down the line. If there was a bank in the middle, then these people wouldn't have to trust each other, they'd just have to trust the bank, and the bank could make a profit on the difference between what they charge for loans and what they pay for deposits. Numbers would be juggled, and everyone would be happy until someone demanded cash. But the bank might easily placate them by issuing a check, taking it back in deposit, canceling a liability against an asset, and magically all the obligations and money substitutes disappear.zadignose 02:46, 23 August 2007 (UTC)
You have to see where the money originates. Nobody in your example has the right to create accepted currency. "I'll pay you later" is not a universally accepted currency and, eventually, has to be replaced with money. Money is created at the bank. What you describe in your post (including the example) is how money circulation would work, if banks were loan banks. But today, banks are a mixture of loan and deposit banks. To understand the distinction, look at the example of the goldsmiths in 17th century England (who were deposit bankers): If you were to deposit one pound of gold at a goldsmith, he would give you a piece of paper that is nothing more than a voucher (or receipt) that you redeem against the gold you have deposited. However, instead of going back to him and picking up the gold to pay somebody, you could just give them the voucher, which turns these vouchers into a form of paper currency. Soon, the goldmiths realized that only a small percentage of the gold was ever redeemed at any given time. So, they gave out additional vouchers and paid for a service with a voucher that represented the same gold that somebody already had a voucher for (Note: This is not the same "amount" of gold, it's the same gold!) So, if anybody deposited one pound of gold, they might give out, for example, 5 vouchers that each represented one pound of gold, and thereby increasing the money supply (the paper money in circulation) by the representation of 4 pounds of gold that didn't actually exist. In the 19th century, loan banks have been awarded the rights of deposit banks, which has led to the fractional reserve banking we know today. However, the fact that this is now legal doesn't make it less fraudulent.
What makes our system so complicated is that paper has now replaced gold (meaning: the gold standard has been abolished) and you have paper representing and "backing" paper (or numbers on a computer backing paper, if you will). Hence the importance of the distinction of what actually constitutes the "gold" and what the "voucher" (the "monetary base" and the "money supply" as they are called in England).
The Wiki page on central banks mentiones this under "reserve requirements": "The money deposited by commercial banks at the central bank is the real money in the banking system; other versions of what is commonly thought of as money are merely promises to pay real money. These promises to pay are circulatory multiples of real money".
The creation of money (for the purpose of this Wiki article) is an increase in money supply (as opposed to the "monetary base", i.e. the deposits at the central bank).
I highly recommend Murray Rothbard's book "The Mystery of Banking" (available here You might want to "Save target as..."). It explains the process of money creation very well, and also gives the example of goldsmiths in greater detail. Dngrs 08:21, 3 September 2007 (UTC)

[edit] Errors

In the last paragraph of "An example of the creation of new money in the USA" -- It says: the same process also runs backwards - Federal Reserve may sell Treasury securities it holds as assets to primary dealers, taking money out of circulation and reducing money supply. Should this not be buy. —Preceding unsigned comment added by Ossworks (talk • contribs) 15:40, 31 March 2008 (UTC)

No, it should be sell. It sells the securities for money (cash or reserves), which takes money out of circulation.--Gregalton (talk) 20:25, 31 March 2008 (UTC)

[edit] Added Discussions

We must add to the equation the currency drain ratio (the propensity of the public to hold cash rather than deposit it in the banking system),the clearing house drain (the loss of deposits from the system due to interactions between banks), and the safety reserve ratio (excess reserves beyond the legal requirement that commercial banks voluntarily hold - usually a very small amount). Also, most jurisdictions require different levels of reserves for different types of deposits. Foreign currency deposits, domestic time deposits, and government deposits often have different cash reserve ratios.

[edit] Disputed

See http://en.wikipedia.org/wiki/Talk:Fractional-reserve_banking

I agree with the dispute tag. This article goes completely against modern (post 1920) economic theory. Money is more than coins and banknotes, it includes electronic money, and bookkeeping entries - anything that represents a liability of the central bank. Not being allowed to talk about the Fed??!! Obviously something is wrong here Smallbones 15:01, 17 September 2006 (UTC)
Could you please explain your point of view and why do you assert that the article goes against post-1920 economic theory? manu3d 14:05, 26 November 2006 (UTC)

I agree with the dispute and suggest the author insert the word 'banknote' before the word 'money' to make the phrase 'banknote money' with the added rider about credit money which is a very significant proportion of money in use. IRG 23 November 2006

I also think that it is important that a discussion about credit card debt be included; I'm not sure if this is money "created" or if it is actually money held by and paid by the bank issuing the card, though. (Meathelmet, 11/26/06)

Credit Card Debt is just one facet of the Money Multiplier mechanism. I'd suggest to reframe the whole article and its examples from the point of view of a single bank dealing with individual customers, and then explain the bank's connection with a generic national bank along similar lines. Doing so, any kind of non-cash withdrawal (money transfers, plastic money) is properly contextualized. What you do think? - manu3d 12:42, 29 November 2006 (UTC)

--- Credit card debt is not -new- money and is therefore not created and should not be included.

What makes you say this? (And, please sign your comments). I just got a new credit card with a spending limit of £500. If I buy goods worth £500 why is that not new money? The receipts of the shops add up to an extra £500 which they would not have without my new credit card.--Janosabel 21:44, 11 July 2007 (UTC)
I must support Janosabel 100% here. Credit card debt is no different from any other kind of debt. The credit card company creates money which it is then generating revenue from. Standard money creation. MartinDK 10:34, 16 July 2007 (UTC)

9/8/07. I'm not an expert on this, but would it help this discussion to distinguish - as the govt. does - between M1, M2, and M3 "money supply" ? —Preceding unsigned comment added by 204.52.215.27 (talk) 15:42, 8 September 2007 (UTC)

[edit] Money Multiplier

In any fractional banking system this is the primary method of money creation. M1 (currency + demand deposits) is almost insignificant when compared with M2+. What does that have to do with the multiplier and the creation of money? The banks create money by loaning out excess reserves and the process repeats its self until (in a perfect world devoid of leakage etc..) the amount of money created is Deposit * (1/required reserve ratio). Further more, in addition to printing money, the central bank often uses drawdowns and redeposits. For example in Canada all of the Chartered banks hold accounts with the BOC, the BOC then deposits or withdraws money (which it can create) into these institutions and it cycles through the banking system. Curiously, Canada does NOT have a required reserve ratio as per the Banking act of 1992 -to compensate the BOC is the lender of last resort.

What i'm trying to say is that the money multiplying effect of the banking system IS the primary method of money creation.

== Agree with the dispute. Money as is known in all of economic science goes beyond the actual amount of minted or printed currency, and is defined as including money created by the system's banks. It is a bit of a semantic discussion, but the common use if the word money includes money created by banks. As in "how much money do you have?" when answered by "10,000 dollars", means your money in the bank, not the money in your pocket. (Financeeditor 00:40, 16 April 2007 (UTC))

[edit] Lets add more here

We don't see a discussion about "high powered money" that allows the creation "out of thin air", ten times the reserves depositied with the Fed as bank capital. This makes a multiplier approaching 100 times the orignial amount. Many deposits like checking accounts don't bear interest, plus bank float apears in two places at once and is counted twice as reserves for both banks. Through holding companies banks can eliminate the reserve requirements. under $2M requires no reserves. Under $45M requires only 3%. Coin, of course, is good money issued at no interest and doesn't count. We would have prosperity and little debt if it was all coin.

We have skipped entirely the discussion of the flip side when money is extinguished. When loans are repaid at comericial banks money dissapears. When the Fed gets repaid by the Government or when the Fed's Open Market Commitee sells bonds money disappears big time because commericial banks have to call laon to get their reserves in line. But wait, while the original pricipal money is gone, the obligation to pay the interest still exists. And guess what somebody forgot to create anymoney to pay the interest with. Seems like an ingenous way to collect all the wealth of the world to me.

There is a good video on the subject if you Google Money as Debt.

Let not forget all the other private money like travel checks, prepaid phone cards, Disney Dollars, etc. —Preceding unsigned comment added by 69.138.20.209 (talk • contribs) 05:16, 20 May 2007

I think following questions should be addressed in the article:

-who is the owner of the newly created money? -which fraction of the newly created money is equivalant to the obligation to pay back the interest? -when the economy is growing through the creation of profit, how this growth is distributed throught the money creation? or can be the total profit created in a certain period of time higher than the obligation to pay the interest?

[edit] money base

the article does not discuss who creates money, and how the regulation of the finance industry inluences this.

If all lending is forbidden, or if all lending need a 100% reserve, then 100% of the money creation is made by the government and the central bank who then have a monopoly on money emission.

If no reserve are required, if the financial market is loosely regulated, then private agents, bamks or investors, create money at will, close to 100% of the money creation is made by private agents.

PLease not that the government can still control the amount of private money creation through the interest rate policy.

I think it would be very interesting to provide historical data on the ratio Base money/other money agregates in the USA and other countries, so as to show how historically the states have progressively privatized the money creation business.

[edit] Article needs a major revision

This article is all about precious metal coins and bank notes, which account for less than 10% of the US money supply. The minting section has no relevance in today's world, e.g. what percentage of the face value of coins is in precious metal coins? In the US, I'd guess it rounds to 0.00%, and almost the same with almost all other countries. 0.00% times 10% = irrelevance. Smallbones (talk) 18:56, 9 January 2008 (UTC) Image:Components of the United States money supply.svg

[edit] On the example of how money is created in the US, and the precise point where money is created

(Cf. point 5 in the list, "This lending of money that it has on deposit is the precise point at which new money is created, because the depositor still has his money, ...")

The statement "the depositor still has his money" is in my opinion a kind of a short cut of the true fact. The depositor has NOT got the money anymore, rather he is in possession of the bank's promise to repay him money. (In case of a money transfer, the amount would have been deducted from the sender's bank's cash position.) Thus (net) money is not created, as the bank got in possession of the actual money, which is proven by the fact that the sum of total deposits and total loans in the list below that paragraph net out to the original depositted (physical) money.

It is of course true that by the prevailing mechanism implicitly the same money comes to use as collateral for loans of value a multiple times of the money's nominal value -- clearly increasing the buying power in the economy; this effect however is not appropriately coined as "money creation". (To give a further clearifying analogy: If a company owns 10000 USD and prepares a statement with many asset and liability positions, then even though the sum of absolute values of all these figures exceeds 10000 one would not say that the company has created money. These are just numbers.)

ThomasP, 24.3.2008 —Preceding unsigned comment added by 217.7.223.62 (talk) 16:31, 25 March 2008 (UTC)

[edit] Need for a Merge/Update/Mesh Between Different Articles

Both fractional reserve banking and Monetary policy of the USA have similiar information in this article:

I propose one of two options to remove duplication across articles:

  1. Delete these sections on this article and provide an appropriate link to the other articles
  2. Update the appropriate sections using the other articles information and replace the information with a link to this article.

I have already asked a question about this on the talk page of the fractional reserve banking article. --EGeek (talk) 00:06, 13 January 2008 (UTC)

[edit] Need clarification

Under: An example of the creation of new money in the USA

4. The government deposits the check in its own account.

Somebody needs to clarify "its own account" - which bank is this ?? —Preceding unsigned comment added by 65.202.103.25 (talk) 19:51, 29 April 2008 (UTC)