Economic textbooks I’ve read all have a section of the money multiplier.
“In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money under afractional-reserve banking system.[1] Most often, it measures the maximum amount of commercial bank money that can be created by a given unit of central bank money. That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is a multiple of reserves; this multiple is the reciprocal of the reserve ratio, and it is aneconomic multiplier.[2]”
I’ve always taken it for granted. Now I see more and more articles like these ones
To what extent are they true and to what extent are they misleading? Is there any substance to these arguments that the money multiplier is a myth?
From what I gather, and I’m not an economist, what your source is calling a myth isn’t that the money multiplier, for economies with reserve ratios, represents some “maximum amount of commercial bank money that can be created”, it’s that this is a relevant metric and that the underlying mechanism is banks getting deposits and then making loans.
Well, they’re true, and they’re complete and utter bullshit. This is a result of what I call the Shell Game model of argument. Basically, the site you linked to takes a fine point of economics and wields it as a broad brush. The economists they quote complain that the money multiplier is inaccurately presented by populizers and online sources like Wikipedia, and has a very different effect on economic realities and policy from what the populizers imply. Not one of these experts actually claims, implies, or believes that the money multiplier doesn’t exist, or doesn’t matter. Yet that is what positivemoney.org and their ilk would have you believe.
This much is true: a naive presentation of the money multiplier gives the impression that banks have money, and then decide to lend it out, when in fact, the business reality is that banks lend money, and then acquire funds to maintain reserves. This is almost a distinction without a difference, but it’s a very potent difference in attitude, and it presents a very different problem for central bankers, who use their limited powers to very indirectly influence the actions of banks and other economic actors based on the effects they have on these same business decisions.
What the experts are saying is that the multiplier effect is completely real, but that the multiplier calculated from reserve limits does not represent a hard limit to money creation by bank lending. What the idiots are ignoring is that they still act as a brake. Yes, banks routinely lend in excess of reserve limits, but they do a lot of wheeling and dealing and central bank-wheedling to make it come out legal at the end of the day. As the amount of that activity they need to do increases, banks make policy adjustments to reduce it to tolerable levels – adjustments which reduce lending in, say, the next quarter or fiscal year. As a result, money creation slows down, and average real reserves increase.
It’s very much like the way stop signs work in California. People roll through them all the time, but that doesn’t mean that putting a stop sign at an intersection doesn’t do anything. The traffic engineers and lawmakers figure that turning Mr. Blow-through-the-intersection into Mr. Slow-down-a-lot is good enough, as long as he’s not running into anybody. Similarly, central bankers figure that as long as banks aren’t blowing past the reserve limits, flirting with them is OK as long as depositors always get their money.
" the underlying concept of the money multiplier is that in order to make loans banks first require people to deposit money. However, this is simply not true."
What the author is saying is that banks don’t operate in the way our textbooks say they do.
davidmich
The theoretical multiplier is based on the reserve ratio, but no one really cares about that. What the fed looks at is the ratio of the M1 money supply to the monetary base.