44
votes
Accepted
If no one knew about inflation, would inflation take place?
In this case, I think it is best explained without any economics jargon.
If your thought experiment is taken to the extreme and no one knows about the money, it would literally imply that the money ...
- 4,008
27
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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23
votes
If no one knew about inflation, would inflation take place?
Yes and there is a real-world historical example.
Inflation is the term given to a natural phenomena where an overabundance of resources in human societies leads to the devaluation of such a resource ...
- 331
14
votes
Is the Federal Reserve issuing money in a fair way?
Normative questions require a standard of fairness in order to then be analyzed and answered with some degree of "objectiveness" so that the answer is not just a declaration of philosophical-...
- 33.4k
14
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Why doesn't the government create money, spend it for free without interest, and recollect it with taxes?
Why doesn't the government create money, spend it for free without interest, and recollect it with taxes, you ask. Well, it does. That's exactly what public investment & spending, and the taxation ...
- 8,123
13
votes
When a stock market crashes, how does money just disappear?
Stocks are not money.
The valuation of a company - the market captialisation - is the number of shares multiplied by the share price.
The share price is the price people are willing to trade at ...
- 938
13
votes
Accepted
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 ...
- 1,087
9
votes
Accepted
Is the Federal Reserve issuing money in a fair way?
The Fed introduces money in the economy through the banks via the mechanism of fractional-reserve banking, as you mentioned in your article.
This means the Fed is then allowing the banks to provide ...
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8
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Why is the money supply perfectly inelastic?
The Fed controls the nominal money supply as they are the only ones who can add or remove money from the economy by printing it. Real money supply is only affected by increases or decreases in ...
- 954
8
votes
Why are there (still) coins?
In 2013 researchers at the Federal Reserve Board published a paper {link} considering the costs and benefits of replacing \$1 bills with \$ coins.
Here are the takeaways from their executive summary: ...
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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 does the inflation not follow the money supply?
This is because classical economic theory absolutely does not say that:
inflation occurs when the money supply is increased faster than the economic growth.
Even in most basic 101 models inflation ...
- 54.4k
7
votes
What are taxes for since law forbids printing of money?
"Why I don't hear nobody speaking about such idea?"
Because historical experience says it won't work.
By printing money instead of collecting taxes, what increases is the nominal disposable income....
- 33.4k
7
votes
How can the stock market keep growing indefinitely?
As mentioned in the other answer, the amount of money does not have to correspond to the total value of all assets in the economy. However, there is some correspondence that is not mentioned in the ...
- 54.4k
7
votes
Accepted
What would monetarists do when interest rates approach zero and become ineffective?
An excellent overview of not just monetarist view on this issue but all other mainstream views on monetary policy at zero lower bound (ZLB) can be found in Ullersma (2002) The Zero Lower Bound on ...
- 54.4k
6
votes
Why is fractional reserve banking allowed?
This is meant to add to @BKay's answer. Here are some examples that might help to see what's happening when a bank makes a loan.
A bank's balance sheet
The image below is text taken from Greg ...
- 9,345
6
votes
Accepted
Who owns the federal reserve?
The Federal Reserve is a system, consisting of the reserve banks, which are "owned" (in a limited fashion) by their member banks (members select the leadership of the reserve banks), and the Federal ...
- 6,374
6
votes
Gold coins as currency?
Here are three types of money:
Commodity money: goods of value are used as money (e.g. gold in your example, or cigarettes in a prison),
Representitive money: money is still based on a commodity but, ...
- 16.9k
6
votes
Is the Federal Reserve issuing money in a fair way?
No, because monetary policy is known to increase inequality.
In effect, evidence indicates that monetary policy has contributed toward higher inequality. Therefore, the Fed is not being very ...
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6
votes
Accepted
Why are banks allowed to resell mortgages?
A bank selling mortgages does not, by itself, increase the money supply.
To see this, work through the balance sheet implications step-by-step:
A bank makes a mortgage loan, swapping cash assets on ...
- 6,374
6
votes
Why is the US rating AAAA+ after they printed trillions of dollars out of thin air, and bailed out the US stock market?
First of all let's get our facts straight as it is not proper to argue based on incorrect premises.
The maximum ranking possible, used by conventional internationally respected debt ranking agencies, ...
- 54.4k
6
votes
Why does an economic slowdown lead to deflation?
First, let me address some incorrect premises in your question
Usually economists say that in recession there is deflation, so increasing the money supply does not lead to high level of inflation.
...
- 54.4k
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
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Why was Friedman so wrong about inflation?
Why was Friedman so wrong about inflation?
He actually was not wrong in a broad sense, only in more specific sense.
First, you are actually misrepresenting and slightly 'strawmaning' Friedman's ideas....
- 54.4k
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 ...
- 6,374
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 ...
- 1,061
5
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How does burning a huge amount of cash money affect the monetary supply?
It would seem logical that this would result in reverse-inflation or lower prices, but this is actually not the case (at least over time).
The banking system has a "supply and demand" market for ...
- 1,090
5
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What are taxes for since law forbids printing of money?
The current answers correctly point out that financing the government via the printing press would generate inflation. Since inflation is bad, this would be a bad policy.
However, these answers miss ...
- 1,852
5
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Gold coins as currency?
This question rises from confusion about basics. I'm going to cite some answers I've placed elsewhere, hopefully this gives a sufficient base such that you can answer this question on your own.
...
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5
votes
Accepted
What effect would destroying large amounts of physical currency have on government finances
In most modern economies, the central bank certainly has the authority to print money, when it does so to implement its legally defined objective. Let's consider what the implications of this '...
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