You’re right that I was being imprecise, though I think my meaning should have been clear from context and I still don’t understand what you were saying above. Re-reading my post, it seems obvious (to me at least) that I was referring to the non-base portion of the M1.
The M1 can’t possibly “take the place” of M0, as you suggested, because the demand deposit component of the M1 is itself a promise to pay M0 on demand. All private-bank-account money is a promise to pay, specifically a promise to pay monetary base.
Which is completely irrelevant to my point above.
If you show up to demand your money, they have to pay you. Whether something is called a “demand deposit” is just a label and doesn’t relate to anything I said. It’s somewhat harder to claim a savings account than to tap funds from checking, and claiming a CD early will mean you don’t earn any accrued interest as a penalty, but that doesn’t change anything I wrote above. They still have to pay you cash when you claim it. All of those broader private-bank-account kinds of money are promises to pay M0 on demand. If you show up to claim your CD and the bank is unable to meet its liability, then it’s insolvent. If an institutional investor shows up at Lehman for a repo redemption and Lehman can’t pay, then it’s insolvent.
You made a suggestion. You said you thought the M1 could “take the place” of the base. I don’t what you’re on about, since a big portion of the M1 is itself promise to pay base. I thought you might be referring to a Hayek-like theoretical system, but apparently not, and now I truly have no idea what point you were trying to make.
My point was that was that even without excess reserves, you can still have expansions and contractions of the money supply driven purely by economic factors.
MB is simply excess reserves plus legally mandated reserves. As long as you have a fractional reserve system, then by definition there will be mandated reserves. But it won’t be monetary base inasmuch as those reserves won’t be held by a central authority.
Your point was that you couldn’t have expansion of the monetary base without a central bank. Well, that’s sort of tautological since without the central bank there is no such thing as monetary base. But as a corollary you seemed to be saying that the money supply also had to be stagnant.
My point was that’s certainly not the case as other components will also expand and contract as warranted and needed by economic changes and necessity.
Banks can’t stretch their liabilities too far or the pressure extends past their ability to meet those obligations.
You seem to like very precise definitions, so I will point out that modern MB is not exclusively excess reserves plus legally mandated reserves. It also includes currency in circulation.
Gold and silver served as monetary base for the vast majority of financial history, even without central banks. We’re talking hundreds of years here.
The term wasn’t coined until later, but that’s because the term wasn’t needed. During most of bank history, essentially no one could conceive of any other system. Gold and silver were “real money” and bank liabilities were considered nothing more than promises to pay real money on demand. Originally, shiny metal was the only base money. Eventually it was supplemented with central bank money, with occasional periods of non-convertibility, and in the end the metal was supplanted entirely. That’s progress, and today base money is so strongly associated with central banks that it seems some people can’t imagine it any other way. But private-bank-money has always been a promise to pay something more fundamental: the base. And the most fundamental thing in the past – the historical base of the system – was precious metal. Saying that there was no monetary base without central banks sounds a little bit like saying that there was no gravity before Newton. I can’t see any possible purpose to such a definition.
With a fixed base – or a relatively slowly expanding base like gold, which can only increase as fast as miners pull it out of the ground – the expansion of the broader monetary aggregates will ultimately be limited.
Private-bank-money has always been a promise to pay the base on demand. In the past, this was a promise to pay gold or silver. If private bank liabilities consistently increase more quickly than the precious metals they need to make good their promises – if the fraction of base money reserves gets continually smaller for an extended period of time – then eventually the banks will be terribly over-leveraged and will no longer have enough reserves to meet their obligations when the crunch time comes. A financial panic will ensue. The 19th century United States is this very story, played out again and again. There were periods of inflation, yes, pumped up by expansions of private-bank-money and debt. And they were inevitably followed by deflationary panics and crashes when people started demanding that banks make good on their promises, by giving up their (originally) silver and (later) golden base. On net, the century was deflationary based on at least one available price index. The limited supply of the base constrained broader forms of money. (Strong growth also greatly increased the amount of real goods that the limited amount of money could buy, and so also pushed down prices.)
Inflation can happen without an influx of new base money, but only temporarily. Persistent inflation, as I said, requires a persistent influx of new base. There has never been an exception to this.
And to avoid any accusations that I’m making shit up, here’s a brief run-down.
Milton Friedman and Anna Schwartz in their Monetary History:
They were referring to the time after gold there, and clearly indicated that gold used to be the base of the system.
Philip Cagan on “High-Powered Money”, which used to be another term for the base:
Gold was clearly included, once upon a time. (Friedman and Schwartz also included gold as part of high-powered money, of course.)
Federal Trade Commission economist David Glasner at his blog:
I’m glad I dug up this one since his description so closely mirrors my own.
To emphasize this point again: it seems absolutely without any purpose or usefulness to have a notion of the base that excludes the role gold used to play. I’ve never heard of such a thing before. A central-bank-money-only definition applies for modern systems, of course, but to apply that definition to history in an exclusionary fashion is just completely bizarre.
You need to decide what time period you want to discuss and what type of money supply is going to be the subject of the discussion.
I’m talking about the present and about fiat money. That’s why I ignored the currency component of MB - it’s not relevant for virtually any discussion involving the money supply, at least not today. You don’t walk into an LBO with a truck load of cash, you walk in with negotiable instruments, EFT codes or whatever. Even as an individual buying a house or car, you walk in with paper such as a bank check.
If you then pose the hypothetical of what would happen to our current system in the absence of a central bank, I don’t think you can conclude that the money supply would be stagnant - and that’s simply because of the multiplier effect. You would have, just as we have had in the past, periods of boom and bust. There would be periods of unabated leveraging where fractional reserve lending caused a huge increase in the supply of money to the point where the eventual overhang of excess liquidity could no longer be sustained. That would be followed by hugely deflationary periods of deleveraging where the money supply would contract.
That is what would happen today in the absence of a central bank controlling the money supply just as this has happened throughout history even when paper money was supposedly backed by specie, but the conversion was not properly regulated or became untenable.
So the point is that monetary base is just one measure of the money supply that has no real import for the behavior of the money supply over all. There are many more factors that must be considered.
I was fully explicit about the time periods under discussion.
You’re ignoring what I have already written. The rest of your post is more of the same.
You have genuine knowledge but you lack a certain flexibility in description, which is why you’re falling into a habit of missing things that other posters have clearly stated.