From: Thomas Grant Edwards <tedwards@Glue.umd.edu>
Date: Sat, 13 Apr 1996 03:59:14 +0800
To: "Perry E. Metzger" <perry@piermont.com>
Subject: Re: Money supply is fake anyway
In-Reply-To: <199604111444.KAA20811@jekyll.piermont.com>
Message-ID: <Pine.SUN.3.91.960412002240.2926C-100000@kolo.isr.umd.edu>
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On Thu, 11 Apr 1996, Perry E. Metzger wrote:

> Thomas Grant Edwards writes:
> > Banks "invent" money on a daily basis.

> Really? Since when?

Since the invention of fractional reserve banking.  Banks loan out far
more than they have currency reserves.  This loaning out of non-existant
money inflates the money supply.  The trick of being a banker is loaning
out enough money to make a profit, while keeping enough currency on
reserve to pay people when they take money out of your bank. 

There is far more money in demand deposits (i.e. figures on a computer)
than there is currency (i.e. green stuff).  The ratio of demand deposits
to currency backing in banks is set by the government.  If everyone came
and took out all their currency for their demand deposits, banks would
fail right and left. 

The Federal Reserve also controls the expansion of the money supply by
buying and selling federal securities as well as setting interest rates on
its "loans of last resort" it makes to member banks. 

I don't consider the Fed a "conspiracy," as I believe that even in a
privatized money system, there would need to be flexible fractional
reserve banking to avoid damaging deflationary periods which come with
spurts of credit demand. 

Most of my free-market money buddies assure me that deflation in a
hard-money system is mainly a product of socialist spending policies
coming to an end, especially after a time of war.  I remain in belief that
even without massive government spending that hard currency would have
credit cycles that would lead to dangerous deflationary periods. 

As far as inflation, the Fed has managed to create the most massive 
inflationary period the U.S. has ever had.  

-Thomas