What’s the difference between $100 in cash and $100 in a checking account?

 They’re equally spendable and freely convertible from one form to the other. But the paper bill in your hand is an obligation of the federal government, while the electronic entry is an I.O.U. from your bank. 

Their interchangeability at a rate of one to one is not a fact of nature but a social construct. 

Now think about how money is created. Banks don’t need to wait for more deposits to arrive to make fresh loans. You go to your bank for a loan. The bank says OK. It goes into its computer and marks up your checking account by whatever amount you borrowed. Presto — new money. You owe it to the bank, and the bank owes it to you.

The government’s money used to be backed by real stuff like gold and silver. Now, as we know, paper money is backed by nothing more than fiat

Paul Sheard a new book.  titled “The Power of Money: How Governments and Banks Create Money and Help Us All Prosper.”

Sheard is worth listening to on this topic. I have followed his work since before 2013, when he wrote an entertaining correction of conventional wisdom titled “Repeat After Me: Banks Cannot and Do Not ‘Lend Out’ Reserves.”

Nick Estes, a subscriber to this newsletter who is a retired lawyer in Albuquerque, has made a hobby of collecting quotes from experts who have at least partially shared Sheard’s take on things. The citations go back more than a century and include more recent pieces from the Bank for International Settlements, International Monetary Fund, Deutsche Bundesbank, Bank of England and the Federal Reserve.

Sheard’s ideas overlap with Modern Monetary Theory, which holds that governments don’t need to worry about deficit spending unless it causes inflation. 

Anat Admati, She and Martin Hellwig, a German economist, wrote “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It,” which argues that banks rely too much on borrowed money.

 Sheard told me he agrees with Admati and Hellwig that banks should rely more on money from shareholders for financing and less on borrowings and deposits. 

Sheard argues that governments should coordinate fiscal policy (taxing and spending) with monetary policy (the raising and lowering of interest rates). 

Peter Coy 19 July 2023

Peter Coy - The New York Times (nytimes.com)

 

“The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It,”

About Banks at IntCom (internetional.se)

Banks create money when they lend. They also create money when they buy coffee machines

At the end of the transaction JP Morgan has a new coffee machine and Goodlife has $10,000 in its deposit account. 

Frances Coppola 3 September 2021

https://englundmacro.blogspot.com/2021/09/banks-create-money-when-they-lend-they.html

Gamla Mor Anna och bankernas affärsmodell

Englund: Gamla Mor Anna och bankernas affärsmodell (englundmacro.blogspot.com)