From: "Perry E. Metzger" <perry@piermont.com>
Date: Wed, 17 Apr 1996 10:39:24 +0800
To: Thomas Grant Edwards <tedwards@glue.umd.edu>
Subject: Re: Money supply is fake anyway
In-Reply-To: <Pine.SUN.3.91.960416114925.6156C-100000@kolo.isr.umd.edu>
Message-ID: <199604162053.QAA15518@jekyll.piermont.com>
MIME-Version: 1.0
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Thomas Grant Edwards writes:
> If the Fed was the only organization that create or destroyed money
> (through sales and purchases of federal securities), then the money supply
> could be finely controlled.  The reality is that the money supply can only
> be slightly controled by the Fed. 

You are confusing "Money Supply" with "Money". "Money Supply" is a
technical term and it doesn't even have a single definition -- there
are M1, M2, M3...

If you meant the activities of banks lead to expansion of the amount
of demand deposits in the world, yes, you are correct. However, at no
time do commercial banks loan out money that they do not have on
hand. If they give you a loan for $100, they have $100 available and
they can expect that if you don't deposit the $100 with them, that
they will have the $100 to give to the bank that you deposit the check
in. Now, because of fractional reserve banking, a bank will only have
a fairly small percentage of deposits in cash, but that is different
from a bank loaning out money that it doesn't have or creating
money. Only the fed gets to create money.

Perry