From what I understand, m1 money is just as liquid as m0 since an individual can withdraw it from the bank at any time and in any quantity (up to the amount (s)he deposited). Because of this I don't see the point of using the money multiplier effect to increase deposits instead of simply allowing the central bank to loan out money to individuals by printing more (since that's already what banks do with m1). If anything the current practice seems dangerous because there's always the chance of a bank run.

  • $\begingroup$ @EnergyNumbers no that IS how it works. M1 does not include savings accounts, only checking accounts, which have no withrawl limits. If you think I'm saying you can withraw more than you deposited, you misunderstand what I said. $\endgroup$
    – Jonah
    Oct 18, 2018 at 20:18
  • $\begingroup$ Why the downvote? $\endgroup$
    – Jonah
    Oct 18, 2018 at 20:30

1 Answer 1

  • With deposit insurance, worrying about bank runs is somewhat of an anachronism. It takes a really big policy mistake to cause one in modern financial systems. Although banks were caught up in the financial crisis, the problems largely originated in wholesale financing markets (interbank lending, bonds, asset-backed securities, money markets), which are not fractional reserve lending.
  • Very few political parties in most developed countries want the central government to take over lending decisions from banks. There are programmes where the government backstops the credit risk in lending (the CMHC mortgage insurance scheme in Canada is one example I am very familiar with), but we still usually have private banks administering the loans.

In any event, there seem to be a few similar questions on fractional reserve banking on this website.


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