From: "Perry E. Metzger" <perry@piermont.com>
Date: Sat, 13 Apr 1996 01:56:55 +0800
To: Thomas Grant Edwards <tedwards@glue.umd.edu>
Subject: Re: Money supply is fake anyway
In-Reply-To: <Pine.SUN.3.91.960412002240.2926C-100000@kolo.isr.umd.edu>
Message-ID: <199604121257.IAA24747@jekyll.piermont.com>
MIME-Version: 1.0
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Thomas Grant Edwards writes:
> 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. 

Thats true. However, that isn't the same as "inventing" money. They
never give out money they don't have -- they can't.

> This loaning out of non-existant money inflates the money supply.

You made two magical jumps here. The first was the notion that they
are loaning out non-existant money. That is false. They only loan out
money that they have on hand, and the value of their assets in the
form of loans + reserves is always higher than the value of their
debts to depositors. It is true that they don't have the value of all
their assets on hand to give to creditors if they demand it, but then
again you probably don't have all your assets in a liquid form either.
The second magical leap you make here is that this is somehow
inflationary, which of course it isn't.

> There is far more money in demand deposits (i.e. figures on a computer)
> than there is currency (i.e. green stuff).

It is true enough that the total sum of demand deposits exceeds the
total value of outstanding currency. So what?

> 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. 

You are correct that the fed creates and destroys money. You are not
correct that ordinary banks do, or in your assertion that the fed
substantially controls the expansion of the money supply through the
discount rate.

Perry