26 votes

Why do banks take deposits if they do not need them to make loans?

I think there are a few separate issues here. First, semantics: if an institute doesn't let you deposit money into your account, I think we'd be hard-pressed to call it a "bank". This really ...
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  • 385
14 votes
Accepted

How do reserves move between the 12 federal reserve banks?

This is surprisingly subtle. When, for instance, when bank A in the Richmond Federal Reserve district sends $1000 in reserves to bank B in the Minneapolis Federal Reserve district, reserves are ...
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12 votes
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Why is money in circulation a liability of the central bank?

Balance sheets always balance, so assets equal liabilities. Imagine a commercial bank goes to the central bank and wants cash. The central bank provides the cash, but asks for some of the commercial ...
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  • 1,047
11 votes
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Why hasn't Quantitative Easing surged inflation, or caused hyperinflation?

High-powered money is another term for the monetary base or MB. MB represents all money created by the government. However, that is not all the only source of money. Banks are allowed to create ...
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  • 1,070
8 votes

Why do banks take deposits if they do not need them to make loans?

This isn't the first time I've seen people claim that this Bank of England article says banks don't need to take deposits, but in fact the article actually says the opposite. In order to make loans ...
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8 votes
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Why are the financial intermediation theory of banking or fractional reserve theory of banking still accepted despite evidence to the contrary?

There are several reason for it. Please note the reasons are not necessarily listed in order of importance, the last point is actually most relevant answer to your question. The 'Evidence' You Cite ...
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  • 41.6k
7 votes

How do reserves move between the 12 federal reserve banks?

Clearing for the US Banks is done through the Automated Clearinghouse System which is operated by the Fed. For transfers of central bank money, which would include transfers between reserve banks, the ...
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  • 2,690
7 votes

Is it possible to have a modern economy without a central bank?

It surely is possible: For a long while, Gold was the basis for the value of money in many "modern" countries, leaving central banks with little room for policies.
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  • 10.4k
7 votes

Why should I get a bond with negative interest instead of having a bank deposit account either zero interest or positive interest

It makes little sense to me either, but here are some possible reasons for buying a bond with negative interest rates rather than depositing the same amount in a bank: The deposit-taking bank may go ...
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  • 4,694
6 votes

Why does any treasury / central bank hold gold?

It's a holdover from the old Gold Standards. Gold standard regulation required all banks, including the central bank to hold gold as a regulatory asset. In the last gold standard, the Bretton Woods ...
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  • 2,690
6 votes

Central Banks and Price Stability

Your question has been addresses in different ways. Kydland and Prescott (1977) argue that a central bank should follow defined policy rules instead of active stabilization methods because the latter ...
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  • 316
6 votes
Accepted

What prevents a bank from simply going into their computer system and adding some zeros to their bank account?

Double entry book keeping. If we take the example given here, of the Greek Central Bank (bank nerd trivia - interestingly the GCB is a commercial bank, listed on the Greek Stock Exchange), ...
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  • 2,690
6 votes

How is monetary policy fair in the current economy?

The description you're providing of how interest works is based on a couple of fairly common misunderstandings about how the system actually works, so lets clear that up first. Fractional reserve ...
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  • 2,690
6 votes
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How can the HKMA peg the Hong Kong dollar at 7.8 HKD/USD for so long?

To maintain the currency peg, the Hong Kong Monetary Authority (HKMA) has to buy HKD and sell USD when the currency comes under depreciation pressure and sell HKD and buy USD when the currency comes ...
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  • 1,047
6 votes

Are quantitative easing and helicopter cash really different tactics? And how does QE relate to Modern Monetary Theory?

What is QE: QE is simply an asset purchase by central bank. As explained by Fed St. Louis QE is defined as: large-scale asset purchases—in the hundreds of billions of dollars range—of, for example, ...
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  • 41.6k
6 votes

Why do banks take deposits if they do not need them to make loans?

I think this perhaps seems/reads like a theoretical chicken-and-the-egg scenario, but IMO it's not really. The reality is just that fiat currency is like magic, and created out of nothing. Rather ...
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6 votes
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Did Capitalism and Adam Smith Support a Central Bank?

Does Adam Smith ... support a Central Bank/Federal Reserve? Adam Smith was firmly in favor of central banking (although not necessarily in the same way as understood today). In Chapter 3 Book 4 of ...
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  • 41.6k
6 votes
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Do governments have to pay interest on government debt held by the central bank?

Yes, the government has to pay interest on debt even if it is held by the central bank. That is true at least for major modern central banks. For example, from a press release from the US Federal ...
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  • 894
5 votes
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How is the interest on fractional reserve money creation paid?

Repayment of interest does require an expansion of the money supply, but not in a way that is inflationary. Consider first the way that commercial banks make loans. The whole purpose of loans is to ...
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5 votes

How is the interest on fractional reserve money creation paid?

The key thing to note is that the interest paid does not simply accumulate at the bank. Nobody runs a business in order to just make a big pile of money to keep in a safe. The banks spend the money ...
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  • 992
5 votes
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What did the Swiss National Bank use to purchase EUR while pegging the Franc to the Euro?

This quotation by Michael Bordo, Owen F Humpage, and Anna J Schwartz (2012) was the richest description I could find on how the SNB achieved the floor: In March 2008, the Swiss National Bank eased ...
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  • 15.9k
5 votes
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What does a central bank guarantee against its currency?

Most central banks do not provide guarantees on their currency to the public. In fact it can be argued that historically they were never fully guaranteed as most central banks issued more receipts ...
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  • 1,070
5 votes

Why should I get a bond with negative interest instead of having a bank deposit account either zero interest or positive interest

@Henry gives a good answer with lots of interesting reasons. However, there are lots macro-model setting where the demand for risk free assets is positive, even when the interest on savings is ...
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  • 15.9k
5 votes

Would capitalism without banks work?

Under most capitalism-like systems, companies are funded in two ways. One is debt with positive interest, the other is by selling equity to shareholders. If you could effectively prohibit debt, then ...
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  • 1,346
5 votes
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Would capitalism without banks work?

You ask: "what would happen if every country in the world were to make a law that would make it illegal to lend money at a positive rate of interest?" We know what happens, because we've already seen ...
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  • 7,992
5 votes

World GDP increase

Am I correct to assume that the increase in GDP is exclusively caused by inflation? No. World GDP increases when the world produces more in one year than it did the year before. Inflation means (...
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  • 5,404
5 votes

Why don't central banks just donate money to their poor citizens, rather than QE?

Most federal banks don't have the legal authority to do this, but the notion is definitely sometimes discussed, often under the informal name "helicoptering money". Former Fed Chairman Ben Bernanke ...
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  • 690
5 votes
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How does the Federal Reserve unwind the asset purchasing scheme announced in response to the 2020 Coronavirus Pandemic?

The unwind depends upon what the central bank did. If the central bank did a repurchase agreement (“repo”) or lent against assets for a fixed time, the agreement automatically unwinds at the term of ...
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5 votes

Why do banks take deposits if they do not need them to make loans?

Banking is confusing, and a lot of explanations apparently make things worse. In this case, ignore whatever you read, and go back to first principles. By definition: balance sheets must balance. ...
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5 votes

Do governments have to pay interest on government debt held by the central bank?

This may vary from country to country, but in most countries government pays interest de jure but not de facto as all major central banks send their profits (including profits made from interest ...
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  • 41.6k

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