Theres a Federal Reserve branch in Chicago. Heres a study on their site: https://chicagofed.org/digital_assets/others/events/2013/international_conference/tuner_adair_international_2013_stockholm.pdf “This insight is fundamental. Banks do not, as too many textbooks still suggest, take deposits of existing money from savers and lend it out to borrowers: they create credit and money ex nihilo – extending a loan to the borrower and simultaneously crediting the borrower’s money account. (Exhibit 1) That creates, for the borrower and thus for real economy agents in total, a matching liability and asset, producing, at least initially, no increase in real net worth. But because the tenor of the loan is longer than the tenor of the deposit – because there is maturity transformation – an effective increase in nominal spending power has been created. Paul Krugman has recently argued against the idea that this creation of purchasing power makes banks special, citing the argument which James Tobin set out in his paper “Commercial banks as creators of money”. Tobin argued that there remains a crucial distinction between fiat money (which cannot be destroyed except by governments running fiscal surpluses and withdrawing money from circulation) and deposit money (which having been created through credit extension will only remain in the system if private agents are willing to hold it rather than to pay down debt). Tobin was clearly right to stress that there are important differences between fiat (outside) and deposit (inside) money. But in Section 4 (iii) (text and footnote 17) I argue that the requirement for deposits to be voluntarily held does not undermine the argument that banks’ ability to create credit/money and purchasing power is fundamental to macro-economic dynamics. …...in a brilliant insight Wicksell considers what would occur if the banking system were organised as “one Bank”. The answer, in a system where all payments were giro payments, is that there would be no freely arising incentive to hold money reserves at all, since all payments out of one customer’s account in the “one Bank”, would have to show up as deposits of another customer in the same bank.”
Posted on: Fri, 21 Mar 2014 14:00:02 +0000