25
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 doesn't matter to the fundamental aspect of your question, but I think it's of some use. Because a "bank" has to allow deposits (at least by a naive ...
22
I think you misunderstand what "electronic money" is - moving electronic money around isn't simply a matter of sending the right "codes" - it is ultimately about asking the central bank of that currency to move money around.
Sure you can open up excel and write in it "I have \$100" but that isn't USD, much as writing \$100 on a piece of paper doesn't make ...
13
There is a long standing problem in most discussions of Fractional Reserve Banking (FRB), around the precise definition of money. Cash money (that is M0) is an asset on the banking system balance sheet, while deposit money (the liability) is the money that is created by lending.
Ever since the introduction of cheques specifically, and in general the ...
13
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 right now. It does NOT mean all the shares have been traded at that price.
If a company issues 1 million shares, at a starting price of £10, the market cap is £10 ...
13
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-ideological positions.
The OP starts by writing
"Basic logic says that, once a central bank is issuing new money for increasing the money supply, the money should be ...
12
I recommend a careful read of the Wikipedia page for Fractional-reserve banking because it seems you are confused about how fractional reserve banking works.
Banks only lend out money they have under fractional reserve banking and, in fact, strictly less than they have. Those funds are a mix of deposits, funds from other debt issuance, and bank equity. They ...
10
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 credit to anyone who they find adequate. The reason to do so is that banks will favor investment opportunities which lead to long term growth, such as build a ...
8
The problematic part of the statement, is the "because of other reasons not important here" part . In other words: "ignore general equilibrium" -which is an unacceptable statement to make when discussing government policy and actions.
Consider the naive quantity theory of money:
$$PQ = VM \tag{1}$$
$P$ is the price level, $Q$ is output produced (measured ...
8
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 system, do. The government creates money, puts it out into the economy, and collects it back through taxation and other payments.
If it does that while ...
7
When the USD is highly valued, it allows people from the home country, the United States in this case, to purchase goods relatively cheaply from abroad and put pressure on domestic firms to have low prices. From a consumption standpoint, this may be advantageous.
A high value USD may also make goods from the United States more expensive relative to goods ...
7
"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. The "value of work" is certainly not increased. And the important question is, does this increased nominal income lead to higher consumption?
Consider a ...
7
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 bank's loans (or government bonds) in return.
The central bank now has the loans (or government bonds) as assets and the cash as liabilities.
The cash is a ...
7
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: compared to notes, coins offer
Less payment system efficiency. Using \$1 coins instead of \$1 notes for transactions is inherently inefficient, requiring a ...
7
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, is AAA. I know of no rating agency that issues AAAA+ ratings.
The US debt rating is not AAAA+. The most recent ratings from Fitch, Moody's and S&P are AAA, ...
7
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 banks do need to take deposits or borrow money some other way:
By attracting new deposits, the bank can
increase its lending without running down its reserves [.....
6
What is value? Ultimately, value flows from the utility people get from consuming goods and services.
Now, suppose, in your example world, I am a farmer and it is Autumn so I have the product of a large harvest. Here are three things I could do with it:
Consume (and thereby enjoy the value of) my entire harvest immediately. But this would leave me hungry ...
6
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 Mankiw's textbook Macroeconomics (7th edition, p. 555). This is a simplified version of a typical bank's balance sheet. Notice that reserves, loans, and securities ...
6
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), arbitrarily adding 000's to its deposit account.
This cannot be done as stated. The double entry book keeping accounting system on which all banking is based, requires ...
6
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 Reserve Board of Governors, which oversees the member banks and is independent within the government (that is, the Governors are nominated by the President and ...
6
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 its balance sheet for a mortgage asset. The customer receives cash. At this stage, the money supply has been increased.
2a. A bank sells a mortgage to another ...
6
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 than banks receiving deposits when households save and then lending them out, bank lending creates deposits
Central Banks print fiat currency. Pieces of paper ...
6
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 other answer so I will focus on that.
First, there should always be enough money in the economy so people can carry all the transactions they want. If that is not ...
5
I'm adding this as a separate answer because it's quite independent of my other answer.
We've agreed that if there are X dollars existing and you counterfeit Y dollars, then you've stolen Y/(X+Y) of the value of those X dollars.
This assumes you do your counterfeiting all at once, and without warning.
If instead you do your counterfeiting slowly over ...
5
The minimum required capital matters, but in the opposite direction: the more capital you have, the more likely you can challenge big banks. Because the costs of a new bank look like this:
(http://www2.deloitte.com/content/dam/Deloitte/pt/Documents/financial-services/dttl-fsi-uk-Banking-Disrupted-2014-06.pdf)
You need $15 mn just to keep it alive. Recall ...
5
A bill with an expiration date does not become worthless suddenly. Clearly its value would decrease over time until, just before the expiration date, it was next to worthless. Think about it: how much would you pay for a $1 bill that expires in 5 minutes? Certainly a lot less than you would for one that expires in 6 months.
This constantly changing value ...
5
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 reserves. When say 1 million dollar is withdrawn and not redeposited, the banking system in the aggregate will bid more for current reserves to replace the ones ...
5
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 out on several advantages of an inflation tax. Firstly, there would be substantial productivity gains since the entire government revenue system, tax advisors, ...
5
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, instead of actually using that commodity in exchange, they use pieces of paper that can be exchanged for the commodity (e.g. the gold standard),
Fiat money: ...
5
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 'elimination' of cash are.
The Balance Sheet
From the asset management side of the central bank, currencies are always a liability - because, amongst other things, ...
5
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 supportive of fairness, from this point of view.
Reasons are several. Some examples:
Booming Stock Markets: low interest rates generate booming stock markets. Because ...
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