I've been thinking about the credit theory of money lately and how it creates money. Since Banks look for sufficient reserves after extending a loan, and since the central bank always loans out money to banks that need more reserves, money seems to be created by banks extending loans to people/organizations. With this in mind, why do banks mess around with leveraging deposits to "multiply" the monetary base into M1, is it beneficial to minimize the amount of MB in circulation?

Maybe instead of having private banks (that require heavy government regulation anyway), the central bank could extend loans by printing more MB. The CB could lend at a risk-free rate of 0%, and any interest would be just to cover the risk. This way a 1:1 ratio could be maintained between total outstanding private debt and total dollars in circulation, which could be done by paying for old delinquent loans with interest revenues from paid-for loans.

The wikipedia page on money creation states that "The amount of money that is created [...] when a loan is issued is equal to the principal of the loan, but the money needed for paying the compound interest of the loan has not been created. As a consequence of this process, the amount of debt in the world exceeds the total money supply. Critics of the current banking system are calling for monetary reform for this reason." Maybe having an unlimited money supply (well, limited to the combined credit-worthiness of the population) in the way I described could be a solution to this problem?

I'm a blockchain software developer and I'm thinking of making a CreditCoin cryptocurrency that works in this way, with new coins being minted in exchange for a promise of monthly repayment (in the same coin) and with a built-in credit score system to determine individuals borrowing limits and interest rates. Of course the actual identity of the individual will have to be known as well to track credit score. To me, this seems like a cryptocurrency that has the potential to be much more stable than BTC or ETC or the others. BTC has proven to be very volatile even with high liquidity and a market cap of over 100 Billion dollars.

Why isn't this the way, say, the US government does things? Is it a viable alternative to the existing system? If not, why? Is it beneficial to minimize the MB?

If you don't have all the answers, a partial answer is fine. I'm no economist, just someone interested in macroeconomics, so take what I say with a grain of salt!

Edit: This seems to be an existing idea. The wikipedia page List of monetary reformers lists a group who are "Supporters of publicly issued money who oppose charging interest on issuance of money, formerly called 'Greenbackers' in late 19th century United States." There's also an organization called Positive Money advocating a system where "private banks would be deprived from their ability to create money." "Although Positive Money's proposal is similar to full-reserve banking or narrow banking, it differs in the sense that it would merge bank deposits and central bank money."

  • $\begingroup$ This would seem to be the same question as your previous, badly composed, badly received question. Please don't do that. $\endgroup$ – 410 gone Oct 19 '18 at 5:26
  • $\begingroup$ No that one is the same as this one. Any suggestions on how to improve composition and quality? $\endgroup$ – Jonah Oct 19 '18 at 15:34
  • $\begingroup$ We have lots of questions already on the money supply, on this system. I strongly recommend working your way through the best-voted answers. Money supply is complicated. Don't expect to understand it straight away. Many people have half an understanding, and confuse themselves. Bear in mind that the loanable funds explanation is just as true as the "banks create money" explanation. $\endgroup$ – 410 gone Oct 19 '18 at 15:54
  • $\begingroup$ And if you just want to make money from cryptocurrency, all you need is a good story and some gullible rich people. Forget about macroeconomics. $\endgroup$ – 410 gone Oct 19 '18 at 15:55
  • $\begingroup$ Haha true but cryptocurrency ICOs are not really legal anymore in the US (Nor have they ever really been. SEC is now coming down on people). I just want to make something free that gets popular. Yes I'm probably confused about something and was hoping that someone could explain my confusion at the very least. I have found similar questions like you said so maybe I'll link them as an answer or duplicate. $\endgroup$ – Jonah Oct 19 '18 at 16:59

Lending is a complicated process and it is far easier to buy treasuries secured by the government than to do it directly. Also the Bank has to request a loan. The government cannot easily force them.

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    $\begingroup$ what do you mean by "it is far easier to buy treasuries secured by the government than to do it directly"? Buying treasuries would be buying debt from the government. I'm talking about selling debt to the government. $\endgroup$ – Jonah Oct 17 '18 at 20:11

There are several reasons why the Federal Reserve would never make loans to individual people: (a) it does not have the resources needed to assess creditworthiness (that's what private banks do) (b) they consider themselves in the business of managing broad economic variables such as interest rates and the level of reserves, and not in the business of allocating credit. (c) only in exceptional circumstances do they take direct exposure to the credit of the private sector (eg following the 2008 credit crisis), and would not want to do this as a matter of course.

The CreditCoin idea seems open to abuse (you'll have a hard time tracking down delinquent borrowers). The types of people that like crypto don't like giving their identity and all the other info you'll need to make an accurate credit assessment.

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  • $\begingroup$ Makes sense, they really only give loans to banks. I agree, a user would probably have to get approved for a CreditCoin account similar to a credit card or bank account. Just a built-in credit score might not be enough. $\endgroup$ – Jonah Oct 20 '18 at 17:54

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