Modern Money Theory Versus Where Does Money Come From?

That video is correct; however, it has so far been impossible to get a straight answer from a Modern Money Theory (MMT) leader L. Randall Wray as to whether MMT agrees with that video's statements.

Examples of my attempts to get an answer:

My reply to: "Debt-Free Money: A Non-Sequitur in Search of a Policy," by L. Randall Wray

Part 1: My Questions to L. Randall Wray on the Money Multiplier

Part 2: My Questions to L. Randall Wray on the Money Multiplier

Tom1

Tom Usher

I grant you that the definition of the Money Multiplier is still up in the air there. The fractional-reserve banking manner of multiplying the deposits is the Money Multiplier, but Wray uses the term in a practical sense in that the Fed has created all the reserves but the money out in circulation hasn't multiplied 10-fold. Therefore, they call the method dead. They also say it's dead because the fractional-reserve way is not the only way money is created. The MMTers say that money (a loan) can be created before any deposits are made.

As you should see from my posts, I want to know whether the Fed enforces the 10% requirement. I believe it does.

I'm not sure exactly where L. Randall Wray and I are talking at cross-purposes. Randy has a way of writing as if readers are already supposed to know even though I don't think he does it intentionally.

Here's the introduction on the Wikipedia (which intro is pretty good):

In monetary economics, a money multiplier is one of various closely related ratios of commercial bank money to central bank money under a fractional-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 an economic multiplier.[2]

In equations, writing M for commercial bank money (loans), R for reserves (central bank money), and RR for the reserve ratio, the reserve ratio requirement is that R/M ≥ RR; the fraction of reserves must be at least the reserve ratio. Taking the reciprocal, M/R ≤ 1/RR, which yields M ≤ RX(1/RR), meaning that commercial bank money is at most reserves times 1/RR, the latter being the multiplier.

If banks lend out close to the maximum allowed by their reserves, then the inequality becomes an approximate equality, and commercial bank money is central bank money times the multiplier. If banks instead lend less than the maximum, accumulating excess reserves, then commercial bank money will be less than central bank money times the theoretical multiplier.

In the United States since 1959, banks lent out close to the maximum allowed for the 49-year period from 1959 until August 2008,[citation needed] maintaining a low level of excess reserves, then accumulated significant excess reserves over the period September 2008 through the present (November 2009). Thus, in the first period, commercial bank money was almost exactly central bank money times the multiplier, but this relationship broke down from September 2008.

As a formula and legal quantity, the money multiplier is not controversial – it is simply the maximum that commercial banks are allowed to lend out.[citation needed] However, there are various heterodox theories concerning the mechanism of money creation in a fractional-reserve banking system, and the implication for monetary policy.

Part 2: Modern Money Theorists Need Instructional Videos!

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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. Volunteerism: 2007 - present, president of the Real Liberal Christian Church and Christian Commons Project.
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