Even this is misleading private banks do not "create" money. They add to the supply but do not create. For every loan credit there is an equal loan debit. The total amount of money, the sum of all credits and debits, is the exact same.
Printed dollars are necessary in an amount proportional to economic activity, and the sum of printed dollars is only loosely related to the total money supply as it affects the macroeconomy (and is becoming less relevant every year).
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
The multiplier is an upper bound on money creation by banks, and it does not specify a timeline. That's a fact. Obviously, not every bank loans all the way to the minimum reserve ratio (for example, currently, the reserve ratio is zero in the US, which makes for a poor denominator). Nor does every recipient of proceeds from a loan put all of that money into a lending bank. However, the money supply is still increased via lending. The increase from the issuance of a loan is immediately reflected in total deposits.
What your link is stating is that central banks respond dynamically to the total number of bank deposits, and apply other policies (such as influencing interest rates) against that number directly, which can overpower the effect of the multiplier, if the central bank chooses. However, it does not nullify it, and it very much depends on a central bank taking that action. Your link also mentions regulations which may be specific to the UK about how banks lend, but the underlying principle of money creation remains unchanged.
1. It allows the government to spend more money, which ends up going to a bunch of places that can't be "unspent" (government worker salaries, contractors, equipment, etc.). That money goes into various banks and ends up getting irreversibly multiplied.
2. In order to fill bids for Treasuries, the Fed front-runs other market participants with artificially low interest rates (below market), forcing other major Treasury participants (like banks) to lower their commercial interest rates in order to do something with their deposits, resulting in more borrowing.
It should also be noted that the Fed sets the Fed Funds Rate, but my understanding is that this has a less pronounced effect. And it sets the minimum fractional reserve ratio, which as of COVID, is ZERO (infinite multiplier potential, although most big banks are pretty conservative with their reserves. Although IMO they do not need to be, since the odds of a run on the bank in an approaching-cashless society is nil).
Yes, a loan creates both a credit and a debit, and they offset exactly. In that sense, nothing is created.
But the credit spends just like cash. The debit, on the other hand, does not spend like negative cash. So in the sense of the supply of money in circulation, bank loans create money.
Can't banks lend something like 7X more money than they have in deposits?
In practice it's a lot fuzzier than that, but the above is the basic concept people are usually talking about. The 7x doesn't mean the government or someone else is handing them extra dollar bills, it's just the ratio of what has to be kept in reserves vs. can be loaned out, and the amount that is loaned out effectively gets counted twice in terms of the money supply (and many more times over, since that money will get deposited into a bank and loaned out again at that 7x ratio).
In theory a bank could create an infinite amount of money claims, at least up to the point where nobody wants any more at the interest rate offered. However, the bank is also subject to capital requirements which determine how much risk it can take relative to the amount of equity it has (this used to be called the “reserve ratio” but that is an outdated concept).
> The total amount of money, the sum of all credits and debits, is the exact same
?
This gets to the heart of why there can be negative dynamics in a credit cycle. If I’ve lent 1 real dollar 100 or 1000x then there is a real risk of everyone needs that dollar back today. Similarly if creditors become risk averse and stop redepositing the money into the banking system, the velocity of money will tank and the number of dollars available to lend/spend will collapse. Growing the money supply only through fractional reserve dynamics also poses risks if a systemic imbalance emerges between creditors and debtors requiring some individuals/corps to be permanent borrowers e.x the Great Depression, and Recession.
In many ways the US is using treasuries to counterbalance the above by having the federal reserve purchase treasuries which will never be paid back in real dollars. However until the pandemic the government had limited ability to place those trillions of dollars in the hands of people who needed the surplus.
The economic principle at work is you can have $1 in the bank and loan that to 7 people sequentially (who each redeposit it), or have $7 and loan it to those same people simultaneously (who each redeposit it), but in both cases the same transactions happened ($7 out and $7 in).
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
According to the lede of [1], "[Federal Reserve Deposits] are interchangeable with Federal Reserve Notes", i.e. cash. But you are claiming the opposite. Do you have a source?
[1] - https://en.wikipedia.org/wiki/Federal_Reserve_Deposits
This is how I see it. Treasury makes new treasuries, and the Federal reserve buys them (through a bank, but it is a middle man only). Essentially, Federal reserve created money and loaned it to the government, holding the treasuries as IOU. This is further complicated as the Federal reserve is also mandated to give all profits to the treasury. So, essentially, the treasury did not create the money, only got a loan, but its loan payments are going to come back to itself.
I personally find it easier to dispel with the illusion of an independent fed, and just say the government (which includes both fed and treasury) prints money.
When the base money is itself an IOU, then debt issued by the privileged party is indeed printing money, albeit money with an expiration date.
New money is created by debt issuance. This comes from both the federal government, which supplies the monetary base, and from commercial lenders, which leverage the monetary base through loans to the “real” economy—business startup loans, mortgages, supply chain finance, revolving lines of credit, etc.
I think you’re technically right; I would only call it outright printing if the Fed actually canceled the debt rather than rolling it over.
I can't help but think this is confusing as heck to most Americans.
I'm not sure all of the quoted statements are true. Private banks create a good chunk of the new money that goes into circulation by issuing loans. The Federal government (through the Treasury) creates still more by issuing bonds to cover deficit spending.
The Fed can influence the rate of money creation by setting short term rates. But the Fed can't force banks to loan money, so its power is limited. Especially so with short term rates pegged at zero for most of the last 13 years or so.
Although some view the Fed's QE as a form of "money printing," it's not. It's an asset swap in which the Federal reserve buys a Treasury from a bank, issuing a reserve asset as a credit to the bank. Reserve assets thereby become "trapped" inside the banking system. They are not cash and can only be used under very restricted conditions (not unlike a laundry token) at least according to some sources.