Part 3: "Money-Multiplier Myth" Inconclusive

Part 1
Part 2

Tom Usher

Tom Usher

As of this post and for whatever reason, L. Randall Wray hasn't replied. I was, however, pointed to this blog post, written by Bill Mitchell:

I'd seen it. Here's my take on it.

"... the reserve position per se will not matter." That would be true only if the Fed chooses not to apply penalties (which the post says itself) or take further actions if the bank in question shows insolvency.

The post is only arguing chronology without proving that reserves are not required.

He said, "...the latter will then seek funds to ensure they have the required reserves in the relevant accounting period." That's been my point. They are required to have the reserves during the accounting period unless the Fed grants them a waiver.

He further states, "Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank." However, that's either poorly thought out or poorly constructed. "...reserves after the fact" doesn't nullify reserves even though he said extending loans "is unrelated to the reserve position of the bank."

"The major insight is that any balance sheet expansion which leaves a bank short of the required reserves may affect the return it can expect on the loan as a consequence of the "penalty" rate the central bank might exact through the discount window. But it will never impede the bank's capacity to effect the loan in the first place." If the Fed were to examine a bank and find it too troubled, that bank would not necessarily be allowed to continue borrowing.

"Banks clearly do expand the money supply endogenously – that is, without the ability of the central bank to control it." That's true only within narrow confines. The Fed can reduce total reserves while still requiring the reserve ratio concerning all loans made. I have seen nothing that generally refutes this.

See this:

... the overall level of bank reserves in the banking system is determined by the Federal Reserve. While it is true that an individual bank may decrease its excess reserves by making loans, that does not hold true for the banking system as a whole. Keister and McAndrews put it this way in a Federal Reserve Bank of New York Staff Report (No. 380, July 2009):

The general idea here should be clear: while an individual bank may be able to decrease the level of reserves it holds by lending to firms and/or households, the same is not true of the banking system as a whole. No matter how many times the funds are lent out by the banks, used for purchases, etc., total reserves in the banking system do not change. The quantity of reserves is determined almost entirely by the central bank's actions, and in no way reflect the lending behavior of banks.


It appears that defining the terms and including what is being alleged concerning them is the initial problem. If one accepts the MMT premises, then I wouldn't say the MMT logic is flawed. I'm just not comfortable at this point with assigning the Money Multiplier the narrow definition and conceptual limitations Bill has assigned it. Demand deposits do spread through the system as a result of loans, banks do lend against those spreading deposits, and reserves are still required (at least in the US). "The Money Multiplier as deposit institution pre-existing reserves appears not to be the sole method by which the supply increases" might be a better way of putting it rather than saying the Money Multiplier doesn't exist at all. In any case, it exists after the fact where reserves are required during the accounting period. Even Bill says that.

Anyway, I was glad to re-read Bill's post.

Part 4


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  • Tom Usher

    About Tom Usher

    Employment: 2008 – present, website developer and writer. 2015 – present, insurance broker.

    Education: Arizona State University, Bachelor of Science in Political Science. City University of Seattle, graduate studies in Public Administration.

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