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Contents
Articles
Money supply
1
Quantity theory of money
14
Fractional reserve banking
18
Monetary base
32
Divisia monetary aggregates index
34
References
Article Sources and Contributors
36
Image Sources, Licenses and Contributors
37
Article Licenses
License
38
Money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific
time.[1] There are several ways to define "money," but standard measures usually include currency in circulation and
demand deposits (depositors' easily accessed assets on the books of financial institutions).[2][3]
Money supply data are recorded and published, usually by the government or the central bank of the country. Public
and private sector analysts have long monitored changes in money supply because of its possible effects on the price
level, inflation and the business cycle.[4]
That relation between money and prices is historically associated with the quantity theory of money. There is strong
empirical evidence of a direct relation between long-term price inflation and money-supply growth, at least for rapid
increases in the amount of money in the economy. That is, a country such as Zimbabwe which saw rapid increases in
its money supply also saw rapid increases in prices (hyperinflation). This is one reason for the reliance on monetary
policy as a means of controlling inflation.[5][6]
This causal chain is contentious, however: some heterodox economists argue that the money supply is endogenous
(determined by the workings of the economy, not by the central bank) and that the sources of inflation must be found
in the distributional structure of the economy.[7]
In addition those economists seeing the central bank's control over the money supply as feeble, they also say that
there are two weak links between the growth of the money supply and the inflation rate: first, an increase in the
money supply, unless trapped in the financial system as excess reserves, can cause a sustained increase in real
production instead of inflation in the aftermath of a recession, when many resources are underutilized. Second, if the
velocity of money, i.e., the ratio between nominal GDP and money supply, changes, an increase in the money supply
could have either no effect, an exaggerated effect, or an unpredictable effect on the growth of nominal GDP.
Empirical measures
Money is used as a medium of exchange, in final settlement of a debt, and as a ready store of value. Its different
functions are associated with different empirical measures of the money supply. There is no single "correct" measure
of the money supply: instead, there are several measures, classified along a spectrum or continuum between narrow
and broad monetary aggregates. Narrow measures include only the most liquid assets, the ones most easily used to
spend (currency, checkable deposits). Broader measures add less liquid types of assets (certificates of deposit, etc.)
This continuum corresponds to the way that different types of money are more or less controlled by monetary policy.
Narrow measures include those more directly affected and controlled by monetary policy, whereas broader measures
are less closely related to monetary-policy actions.[6] It is a matter of perennial debate as to whether narrower or
broader versions of the money supply have a more predictable link to nominal GDP.
The different types of money are typically classified as "M"s. The "M"s usually range from M0 (narrowest) to M3
(broadest) but which "M"s are actually used depends on the country's central bank. The typical layout for each of the
"M"s is as follows:
1
Money supply
2
Type of money
M0 MB M1 M2 M3 MZM
[8] V
Notes and coins (currency) in circulation (outside Federal Reserve Banks, and the vaults of depository
institutions)
V
V
V
V
traveler's checks of non-bank issuers
V
V
V
V
demand deposits
V
V
V
V
other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts
at depository institutions and credit union share draft accounts.
V
[9] V
V
V
savings deposits
V
V
V
time deposits less than $100,000 and money-market deposit accounts for individuals
V
V
V
Notes and coins (currency) in bank vaults
V
Federal Reserve Bank credit (minimum reserves and excess reserves)
V
large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets
[10]
V
all money market funds
V
• M0: In some countries, such as the United Kingdom, M0 includes bank reserves, so M0 is referred to as the
monetary base, or narrow money.[11]
• MB: is referred to as the monetary base or total currency.[8] This is the base from which other forms of money
(like checking deposits, listed below) are created and is traditionally the most liquid measure of the money
supply.[12]
• M1: Bank reserves are not included in M1.
• M2: Represents money and "close substitutes" for money.[13] M2 is a broader classification of money than M1.
Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different
economic monetary conditions. M2 is a key economic indicator used to forecast inflation.[14]
• M3: M2 plus large and long-term deposits. Since 2006, M3 is no longer tracked by the US central bank.[15]
However, there are still estimates produced by various private institutions.
• MZM: Money with zero maturity. It measures the supply of financial assets redeemable at par on demand.
The ratio of a pair of these measures, most often M2/M0, is called an (actual, empirical) money multiplier.
Fractional-reserve banking
The different forms of money in government money supply statistics arise from the practice of fractional-reserve
banking. Whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of money is created.
This new type of money is what makes up the non-M0 components in the M1-M3 statistics. In short, there are two
types of money in a fractional-reserve banking system[16][17]:
1. central bank money (obligations of a central bank, including currency and central bank depository accounts)
2. commercial bank money (obligations of commercial banks, including checking accounts and savings
accounts)
In the money supply statistics, central bank money is MB while the commercial bank money is divided up into
the M1-M3 components. Generally, the types of commercial bank money that tend to be valued at lower amounts
are classified in the narrow category of M1 while the types of commercial bank money that tend to exist in larger
amounts are categorized in M2 and M3, with M3 having the largest.
In the US, reserves consist of money in Federal Reserve accounts and US currency held by banks (also known as
"vault cash").[18] Currency and money in Fed accounts are interchangeable (both are obligations of the Fed.)
Reserves may come from any source, including the federal funds market, deposits by the public, and borrowing from
Money supply
the Fed itself.[19]
A reserve requirement is a ratio a bank must maintain between deposits and reserves.[20] Reserve requirements do
not apply to the amount of money a bank may lend out. The ratio that applies to bank lending is its capital
requirement.[21]
Example
Note: The examples apply when read in sequential order.
M0
• Laura has ten US $100 bills, representing $1000 in the M0 supply for the United States. (MB = $1000, M0 =
$1000, M1 = $1000, M2 = $1000)
• Laura burns one of her $100 bills. The US M0, and her personal net worth, just decreased by $100. (MB = $900,
M0 = $900, M1 = $900, M2 = $900)
M1
• Laura takes the remaining nine bills and deposits them in her checking account (current account) at her bank.
(MB = $900, M0 = 0, M1 = $900, M2 = $900)
• The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra
money. If the minimum reserve is 10%, this means $90 will remain in the bank's reserve. The remaining $810 can
only be used by the bank as credit, by lending money, but until that happens it will be part of the banks excess
reserves.
• The M1 money supply increased by $810 when the loan is made. M1 money has been created. ( MB = $900 M0 =
0, M1 = $1710, M2 = $1710)
• Laura writes a check for $400, check number 7771. The total M1 money supply didn't change, it includes the
$400 check and the $500 left in her account. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
• Laura's check number 7771 is accidentally destroyed in the laundry. M1 and her checking account do not change,
because the check is never cashed. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
• Laura writes check number 7772 for $100 to her friend Alice, and Alice deposits it into her checking account. MB
does not change, it still has $900 in it, Alice's $100 and Laura's $800. (MB = $900, M0 = 0, M1 = $1710, M2 =
$1710)
• The bank lends Mandy the $810 credit that it has created. Mandy deposits the money in a checking account at
another bank. The other bank must keep $81 as a reserve and has $729 available for loans. This creates a
promise-to-pay money from a previous promise-to-pay, thus the M1 money supply is now inflated by $729. (MB
= $900, M0 = 0, M1 = $2439, M2 = $2439)
• Mandy's bank now lends the money to someone else who deposits it on a checking account on yet another bank,
who again stores 10% as reserve and has 90% available for loans. This process repeats itself at the next bank and
at the next bank and so on, until the money in the reserves backs up an M1 money supply of $9000, which is 10
times the M0 money. (MB = $900, M0 = 0, M1 = $9000, M2 = $9000)
M2
• Laura writes check number 7774 for $1000 and brings it to the bank to start a Money Market account (these do
not have a credit-creating charter), M1 goes down by $1000, but M2 stays the same. This is because M2 includes
the Money Market account in addition to all money counted in M1.
Foreign Exchange
• Laura writes check number 7776 for $200 and brings it downtown to a foreign exchange bank teller at Credit
Suisse to convert it to British Pounds. On this particular day, the exchange rate is exactly USD 2.00 = GBP 1.00.
The bank Credit Suisse takes her $200 check, and gives her two £50 notes (and charges her a dollar for the service
fee). Meanwhile, at the Credit Suisse branch office in Hong Kong, a customer named Huang has £100 and wants
3
Money supply
4
$200, and the bank does that trade (charging him an extra £.50 for the service fee). US M0 still has the $900,
although Huang now has $200 of it. The £100 notes Laura walks off with are part of Britain's M0 money supply
that came from Huang.
• The next day, Credit Suisse finds they have an excess of GB Pounds and a shortage of US Dollars, determined by
adding up all the branch offices' supplies. They sell some of their GBP on the open FX market with Deutsche
Bank, which has the opposite problem. The exchange rate stays the same.
• The day after, both Credit Suisse and Deutsche Bank find they have too many GBP and not enough USD, along
with other traders. Then, To move their inventories, they have to sell GBP at USD 1.999, that is, 1/10 cent less
than $2 per pound, and the exchange rate shifts. None of these banks has the power to increase or decrease the
British M0 or the American M0 (unless they burn bills); they are independent systems.
Money supplies around the world
United States
Components of US money supply (currency, M1 and M2) since 1959
Year-on-year change in the components of the US money supply 1960–2010
Money supply
5
Components of US money supply (currency, M1 and M2) since 1959 using a logarithmic scale
The Federal Reserve previously published data on three monetary aggregates, but on 10 November 2005 announced
that as of 23 March 2006, it would cease publication of M3.[15] Since the Spring of 2006, the Federal Reserve only
publishes data on two of these aggregates. The first, M1, is made up of types of money commonly used for payment,
basically currency (M0) and checking account balances. The second, M2, includes M1 plus balances that generally
are similar to transaction accounts and that, for the most part, can be converted fairly readily to M1 with little or no
loss of principal. The M2 measure is thought to be held primarily by households. As mentioned, the third aggregate,
M3 is no longer published. Prior to this discontinuation, M3 had included M2 plus certain accounts that are held by
entities other than individuals and are issued by banks and thrift institutions to augment M2-type balances in meeting
credit demands; it had also included balances in money market mutual funds held by institutional investors. The
aggregates have had different roles in monetary policy as their reliability as guides has changed. The following
details their principal components[22]:
• M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical
currency.
• M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or
"current" accounts).
• M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small
denomination time deposits (certificates of deposit of under $100,000).
• M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of
eurodollars and repurchase agreements.
When the Federal Reserve announced in 2005 that they would cease publishing M3 statistics in March 2006, they
explained that M3 did not convey any additional information about economic activity compared to M2, and thus,
"has not played a role in the monetary policy process for many years." Therefore, the costs to collect M3 data
outweighed the benefits the data provided.[15] Some politicians have spoken out against the Federal Reserve's
decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal
Reserve to do so. Congressman Ron Paul (R-TX) claimed that "M3 is the best description of how quickly the Fed is
creating new money and credit. Common sense tells us that a government central bank creating new money out of
thin air depreciates the value of each dollar in circulation."[23] Some of the data used to calculate M3 are still
collected and published on a regular basis.[15] Current alternate sources of M3 data are available from the private
sector.[24]
As of November 17, 2011 the Federal Reserve reported that the U.S. dollar monetary base is $2,150,000,000,000.
This is an increase of 28% in 2 years.[25] The monetary base is only one component of money supply, however. M2,
the broadest measure of money supply, has increased from approximately $8.48 trillion to $9.61 trillion from
November 2009 to October 2011, the latest month-data available. This is a 2-year increase in U.S. M2 of
Money supply
6
approximately 12.9%.[26]
United Kingdom
There are just
measures. M0 is
"wide monetary
money" and M4
"broad money" or
supply".
two official UK
referred to as the
base" or "narrow
is referred to as
simply "the money
• M0: Cash outside Bank of England
+ Banks' operational deposits with
Bank of England. (No longer
published.)
M4 money supply of the United Kingdom 1984–2007. In thousand millions (billions) of
pounds sterling.
• M4: Cash outside banks (i.e. in
circulation with the public and
non-bank firms) + private-sector retail bank and building society deposits + Private-sector wholesale bank and
building society deposits and Certificate of Deposit.[27]
There are several different definitions of money supply to reflect the differing stores of money. Due to the nature of
bank deposits, especially time-restricted savings account deposits, the M4 represents the most illiquid measure of
money. M0, by contrast, is the most liquid measure of the money supply.
European Union
The
European
Central
Bank's
definition of euro area monetary
aggregates[28]:
• M1: Currency in circulation +
overnight deposits
• M2: M1 + Deposits with an agreed
maturity up to 2 years + Deposits
redeemable at a period of notice up
to 3 months.
• M3: M2 + Repurchase agreements
+ Money market fund (MMF)
shares/units + Debt securities up to
2 years
The Euro money supply from 1998–2007.
Money supply
7
Australia
The Reserve Bank of Australia defines
the monetary aggregates as[29]:
• M1: currency bank + current
deposits of the private non-bank
sector
• M3: M1 + all other bank deposits of
the private non-bank sector
• Broad Money: M3 + borrowings
from the private sector by NBFIs,
less the latter's holdings of currency
and bank deposits
• Money Base: holdings of notes and
coins by the private sector plus
deposits of banks with the Reserve
Bank of Australia (RBA) and other
RBA liabilities to the private non-bank sector
The money supply of Australia 1984–2007
New Zealand
The Reserve Bank of New Zealand
defines the monetary aggregates as[30]:
• M1: notes and coins held by the
public plus chequeable deposits,
minus inter-institutional chequeable
deposits, and minus central
government deposits
• M2: M1 + all non-M1 call funding
(call funding includes overnight
money and funding on terms that
can of right be broken without
break penalties) minus
inter-institutional non-M1 call
funding
• M3: the broadest monetary
aggregate. It represents all New
Zealand dollar funding of M3
institutions and any Reserve Bank
New Zealand money supply 1988–2008
repos with non-M3 institutions. M3
consists of notes & coin held by the
public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits
Money supply
8
India
The Reserve Bank of India defines the
monetary aggregates as[31]:
• Reserve Money (M0): Currency in
circulation + Bankers’ deposits with
the RBI + ‘Other’ deposits with the
RBI = Net RBI credit to the
Government + RBI credit to the
commercial sector + RBI’s claims
on banks + RBI’s net foreign assets
+ Government’s currency liabilities
to the public – RBI’s net
non-monetary liabilities.
• M1: Currency with the public +
Deposit money of the public
(Demand deposits with the banking
system + ‘Other’ deposits with the
RBI).
Components of the money supply of India 1970–2007
• M2: M1 + Savings deposits with Post office savings banks.
• M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the
commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the
public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).
• M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).
Japan
The Bank of Japan defines the
monetary aggregates as[32]:
• M1: cash currency in circulation +
deposit money
• M2 + CDs: M1 + quasi-money +
CDs
• M3 + CDs: (M2 + CDs) + deposits
of post offices + other savings and
deposits with financial institutions +
money trusts
• Broadly defined liquidity: (M3 +
CDs) + money market + pecuniary
Japanese money supply (April 1998 - April 2008)
trusts other than money trusts +
investment trusts + bank debentures + commercial paper issued by financial institutions + repurchase agreements
and securities lending with cash collateral + government bonds + foreign bonds
Money supply
9
Link with inflation
Monetary exchange equation
Money supply is important because it is linked to inflation by the equation of exchange in an equation proposed by
Irving Fisher in 1911[33]
•
•
•
•
M is the total dollars in the nation’s money supply
V is the number of times per year each dollar is spent (velocity of money)
P is the average price of all the goods and services sold during the year
Q is the quantity of assets, goods and services sold during the year
In mathematical terms, this equation is really an identity which is true by definition rather than describing economic
behavior. That is, each term is defined by the values of the other three. Unlike the other terms, the velocity of money
has no independent measure and can only be estimated by dividing PQ by M. Adherents of the quantity theory of
money assume that the velocity of money is stable and predictable, being determined mostly by financial institutions.
If that assumption is valid, then changes in M can be used to predict changes in PQ. If not, then the equation of
exchange is useless to macroeconomics.
Most macroeconomists replace the equation of exchange with equations for the demand for money which describe
more regular and predictable economic behavior. However, predictability (or the lack thereof) of the velocity of
money is equivalent to predictability (or the lack thereof) of the demand for money (since in equilibrium real money
demand is simply Q/V). Either way, this unpredictability made policy-makers at the Federal Reserve rely less on the
money supply in steering the U.S.economy. Instead, the policy focus has shifted to interest rates such as the fed
funds rate.
In practice, macroeconomists almost always use real GDP to measure Q, omitting the role of all transactions except
for those involving newly produced goods and services (i.e., consumption goods, investment goods,
government-purchased goods, and exports). That is, the only assets counted as part of Q are newly produced
investment goods. But the original quantity theory of money did not follow this practice: PQ was the monetary value
of all new transactions, whether of real goods and services or of paper assets.
The monetary value of assets, goods,
and service sold during the year could
be grossly estimated using nominal
GDP back in the 1960s. This is not the
case anymore because of the dramatic
rise of the number of financial
transactions relative to that of real
transactions up until 2008. That is, the
total value of transactions (including
purchases of paper assets) rose relative
to nominal GDP (which excludes those
purchases).
U.S. M3 money supply as a proportion of gross domestic product.
Ignoring the effects of monetary
growth on real purchases and velocity, this suggests that the growth of the money supply may cause different kinds
of inflation at different times. For example, rises in the U.S. money supplies between the 1970s and the present
encouraged first a rise in the inflation rate for newly produced goods and services ("inflation" as usually defined) in
the seventies and then asset-price inflation in later decades: it may have encouraged a stock market boom in the '80s
Money supply
and '90s and then, after 2001, a rise in home prices, i.e., the famous housing bubble. This story, of course, assumes
that the amounts of money were the causes of these different types of inflation rather than being endogenous results
of the economy's dynamics.
When home prices went down, the Federal Reserve kept its loose monetary policy and lowered interest rates; the
attempt to slow price declines in one asset class, e.g. real estate, may well have caused prices in other asset classes to
rise, e.g. commodities.
Rates of growth
In terms of percentage changes (to a close approximation under small growth rates,[34] the percentage change in a
product, say XY, is equal to the sum of the percentage changes %ΔX + %ΔY). So:
%ΔP + %ΔQ = %ΔM + %ΔV
That equation rearranged gives the "basic inflation identity":
%ΔP = %ΔM + %ΔV – %ΔQ
Inflation (%ΔP) is equal to the rate of money growth (%ΔM), plus the change in velocity (%ΔV), minus the rate of
output growth (%ΔQ).[35] As before, this equation is only useful if %ΔV follows regular behavior. It also loses
usefulness if the central bank lacks control over %ΔM.
Bank reserves at central bank
When a central bank is "easing", it triggers an increase in money supply by purchasing government securities on the
open market thus increasing available funds for private banks to loan through fractional-reserve banking (the issue of
new money through loans) and thus the amount of bank reserves and the monetary base rise. By purchasing
government bonds (especially Treasury Bills), this bids up their prices, so that interest rates fall at the same time that
the monetary base increases.
With "easy money," the central bank creates new bank reserves (in the US known as "federal funds"), which allow
the banks lend more. These loans get spent, and the proceeds get deposited at other banks. Whatever is not required
to be held as reserves is then lent out again, and through the "multiplying" effect of the fractional-reserve system,
loans and bank deposits go up by many times the initial injection of reserves.
In contrast, when the central bank is "tightening", it slows the process of private bank issue by selling securities on
the open market and pulling money (that could be loaned) out of the private banking sector. By increasing the supply
of bonds, this lowers their prices and raises interest rates at the same time that the money supply is reduced.
This kind of policy reduces or increases the supply of short term government debt in the hands of banks and the
non-bank public, lowering or raising interest rates. In parallel, it increases or reduces the supply of loanable funds
(money) and thereby the ability of private banks to issue new money through issuing debt.
The simple connection between monetary policy and monetary aggregates such as M1 and M2 changed in the 1970s
as the reserve requirements on deposits started to fall with the emergence of money funds, which require no reserves.
Then in the early 1990s, reserve requirements were dropped to zeroin what countries? on savings deposits, CDs, and
Eurodollar deposit. At present, reserve requirements apply only to "transactions deposits" – essentially checking
accounts. The vast majority of funding sources used by private banks to create loans are not limited by bank
reserves. Most commercial and industrial loans are financed by issuing large denomination CDs. Money market
deposits are largely used to lend to corporations who issue commercial paper. Consumer loans are also made using
savings deposits, which are not subject to reserve requirements. This means that instead of the amount of loans
supplied responding passively to monetary policy, we often see it rising and falling with the demand for funds and
the willingness of banks to lend.
10
Money supply
Some academics argue that the money multiplier is a meaningless concept, because its relevance would require that
the money supply be exogenous, i.e. determined by the monetary authorities via open market operations. If central
banks usually target the shortest-term interest rate (as their policy instrument) then this leads to the money supply
being endogenous.[36]
Neither commercial nor consumer loans are any longer limited by bank reserves. Nor are they directly linked
proportional to reserves. Between 1995 and 2008, the amount of consumer loans has steadily increased out of
proportion to bank reserves. Then, as part of the financial crisis, bank reserves rose dramatically as new loans
shrank.
In recent years, some academic economists renowned for their work on the implications of rational expectations have
argued that open market operations are irrelevant. These include Robert Lucas, Jr., Thomas Sargent, Neil Wallace,
Finn E. Kydland, Edward C. Prescott and Scott Freeman. The Keynesian side points to a major example of
ineffectiveness of open market operations encountered in 2008 in the United States, when short-term interest rates
went as low as they could go in nominal terms, so that no more monetary stimulus could occur. This zero bound
problem has been called the liquidity trap or "pushing on a string" (the pusher being the central bank and the string
being the real economy).
Arguments
The main functions of the central bank are to maintain low inflation and a low level of unemployment, although
these goals are sometimes in conflict (according to Phillips curve). A central bank may attempt to do this by
artificially influencing the demand for goods by increasing or decreasing the nation's money supply (relative to
trend), which lowers or raises interest rates, which stimulates or restrains spending on goods and services.
An important debate among economists in the second half of the twentieth century concerned the central bank's
ability to predict how much money should be in circulation, given current employment rates and inflation rates.
Economists such as Milton Friedman believed that the central bank would always get it wrong, leading to wider
swings in the economy than if it were just left alone.[37] This is why they advocated a non-interventionist
approach—one of targeting a pre-specified path for the money supply independent of current economic conditions—
even though in practice this might involve regular intervention with open market operations (or other
monetary-policy tools) to keep the money supply on target.
11
Money supply
The Chairman of the U.S. Federal Reserve, Ben Bernanke, has suggested that over the last 10 to 15 years, many
modern central banks have become relatively adept at manipulation of the money supply, leading to a smoother
business cycle, with recessions tending to be smaller and less frequent than in earlier decades, a phenomenon termed
"The Great Moderation" [38] This theory encountered criticism during the global financial crisis of 2008–2009.
Furthermore, it may be that the functions of the central bank may need to encompass more than the shifting up or
down of interest rates or bank reserves: these tools, although valuable, may not in fact moderate the volatility of
money supply (or its velocity).
References
[1] Paul M. Johnson. "Money stock:," A Glossary of Political Economy Terms (http:/ / www. auburn. edu/ ~johnspm/ gloss/ money_stock)
[2] Alan Deardorff. "Money supply," Deardorff's Glossary of International Economics (http:/ / www-personal. umich. edu/ ~alandear/ glossary/
m. html)
[3] Karl Brunner , "money supply," The New Palgrave: A Dictionary of Economics, v. 3, p. 527.
[4] The Money Supply – Federal Reserve Bank of New York (http:/ / www. newyorkfed. org/ aboutthefed/ fedpoint/ fed49. html)
[5] Milton Friedman (1987). “quantity theory of money”, The New Palgrave: A Dictionary of Economics, v. 4, pp. 15–19.
[6] "money supply Definition" (http:/ / www. investorwords. com/ 3110/ money_supply. html). . Retrieved 2008-07-20.
[7] Lance Taylor: Reconstructing Macroeconomics, 2004
[8] http:/ / dollardaze. org/ blog/ ?post_id=00565
[9] http:/ / research. stlouisfed. org/ fred2/ series/ M1
[10] http:/ / www. investopedia. com/ terms/ m/ m3. asp
[11] http:/ / moneyterms. co. uk/ m0/
[12] "M0" (http:/ / www. investopedia. com/ terms/ m/ m0. asp). Investopedia. . Retrieved 2008-07-20.
[13] "M2" (http:/ / www. investopedia. com/ terms/ m/ m2. asp). Investopedia. . Retrieved 2008-07-20.
[14] "M2 Definition" (http:/ / www. investorwords. com/ 2909/ M2. html). InvestorWords.com. . Retrieved 2008-07-20.
[15] Discontinuance of M3 (http:/ / www. federalreserve. gov/ Releases/ h6/ discm3. htm), Federal Reserve, November 10, 2005, revised March
9, 2006.
[16] Bank for International Settlements – The Role of Central Bank Money in Payment Systems. See page 9, titled, "The coexistence of central
and commercial bank monies: multiple issuers, one currency": http:/ / www. bis. org/ publ/ cpss55. pdf A quick quote in reference to the 2
different types of money is listed on page 3. It is the first sentence of the document:
"Contemporary monetary systems are based on the mutually reinforcing roles of central bank money and
commercial bank monies."
[17] European Central Bank – Domestic payments in Euroland: commercial and central bank money: http:/ / www. ecb. int/ press/ key/ date/
2000/ html/ sp001109_2. en. html One quote from the article referencing the two types of money:
"At the beginning of the 20th almost the totality of retail payments were made in central bank money. Over
time, this monopoly came to be shared with commercial banks, when deposits and their transfer via checks and
giros became widely accepted. Banknotes and commercial bank money became fully interchangeable payment
media that customers could use according to their needs. While transaction costs in commercial bank money
were shrinking, cashless payment instruments became increasingly used, at the expense of banknotes"
[18] http:/ / www. investorwords. com/ 7260/ vault_cash. html
[19] http:/ / research. stlouisfed. org/ fred2/ series/ NFORBRES
[20] http:/ / www. federalreserve. gov/ monetarypolicy/ reservereq. htm
[21] http:/ / wfhummel. cnchost. com/ capitalrequirements. html
[22] ebook: The Federal Reserve – Purposes and Functions:http:/ / www. federalreserve. gov/ pf/ pf. htm
[23] What the Price of Gold Is Telling Us (http:/ / www. lewrockwell. com/ paul/ paul319. html)
[24] See, for example (http:/ / www. shadowstats. com/ alternate_data)
[25] Federal Reserve Statistics (http:/ / www. federalreserve. gov/ releases/ H3/ Current/ )
[26] Federal Reserve Statistics (http:/ / www. federalreserve. gov/ releases/ h6/ current/ h6. htm)
[27] www.bankofengland.co.uk (http:/ / www. bankofengland. co. uk/ mfsd/ iadb/ notesiadb/ M4. htm) Explanatory Notes – M4 retrieved August
13, 2007
[28] The ECB's definition of euro area monetary aggregates: http:/ / www. ecb. int/ stats/ money/ aggregates/ aggr/ html/ hist. en. html
[29] RBA: Glossary – Text Only Version (http:/ / www. rba. gov. au/ Glossary/ text_only. asp)
[30] Series description – Monetary and financial statistics (http:/ / www. rbnz. govt. nz/ statistics/ monfin/ c3/ description. html)
[31] Handbook of Statistics on Indian Economy. See the document at the bottom of the page titled, "Notes on Tables". The link to this pdf
document is: http:/ / rbidocs. rbi. org. in/ rdocs/ Publications/ PDFs/ 80441. pdf The definitions are on the fourth page of the document
12
Money supply
[32] http:/ / www. boj. or. jp/ en/ type/ exp/ stat/ exms01. htm click on the link to the exms01.pdf file. They are defined in Appendix 1 which on
the 11th page of the pdf.
[33] The Purchasing Power of Money, its Determination and Relation to Credit, Interest and Crises, Irving Fisher. Online Library Of Liberty
(http:/ / files. libertyfund. org/ files/ 1165/ Fisher_0133_EBk_v5. pdf)
[34] http:/ / www. mhhe. com/ economics/ mcconnell15e/ graphics/ mcconnell15eco/ common/ dothemath/ percentagechangeapproximation.
html
[35] "Breaking Monetary Policy into Pieces", May 24, 2004, http:/ / www. hussmanfunds. com/ wmc/ wmc040524. htm
[36] Martijn Boermans & Basil Moore (2009). "Locked-in and Sticky textbooks" (http:/ / issuu. com/ martijnboermans/ docs/
boermans_moore__2009__-_locked-in_sticky_textbooks)
[37] Milton Friedman (1962). Capitalism and Freedom.
[38] FRB: Speech, Bernanke-The Great Moderation-February 20, 2004 (http:/ / www. federalreserve. gov/ boarddocs/ speeches/ 2004/ 20040220/
default. htm)
External links
Data
• Aggregate Reserves Of Depository Institutions And The Monetary Base (H.3) (http://www.federalreserve.gov/
releases/h3/Current/h3.htm)
• U.S. M1,M2 Money Supply Historical Table (http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt)
• Money Stock Measures (H.6) (http://www.federalreserve.gov/releases/h6/current/default.htm)
• Data on Monetary Aggregates in Australia (http://www.rba.gov.au/Statistics/AlphaListing/alpha_listing_m.
html)
• Monetary Statistics on Hong Kong Monetary Authority (http://www.info.gov.hk/hkma/eng/press/category/
statistics_index.htm)
• Monetary Survey on [[People's Bank of China (http://www.pbc.gov.cn/english/)]]
Articles
• Article in the New Palgrave on Money Supply (http://www.dictionaryofeconomics.com/
article?id=pde2008_M000236&goto=moneysupply&result_number=2372) by Milton Friedman
• Do all banks hold reserves, and, if so, where do they hold them? (11/2001) (http://www.frbsf.org/education/
activities/drecon/2001/0111.html)
• What effect does a change in the reserve requirement have on the money supply? (08/2001) (http://www.frbsf.
org/education/activities/drecon/2001/0108.html)
• St. Louis Fed: Monetary Aggregates (http://research.stlouisfed.org/aggreg/)
• Anna J. Schwartz on money supply (http://www.econlib.org/library/Enc/MoneySupply.html)
• Discontinuance of M3 Publication (http://www.federalreserve.gov/releases/h6/discm3.htm)
• Investopedia: Money Zero Maturity (MZM) (http://www.investopedia.com/terms/m/moneyzeromaturity.asp)
Computer simulations
• Money Supply Process (http://demonstrations.wolfram.com/MoneySupplyProcess/) by Fiona Maclachlan,
Wolfram Demonstrations Project.
13
Quantity theory of money
14
Quantity theory of money
In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional
relationship with the price level.
The theory was challenged by Keynesian economics,[1] but updated and reinvigorated by the monetarist school of
economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still
disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and,
in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold.
Alternative theories include the real bills doctrine and the more recent fiscal theory of the price level.
Origins and development of the quantity theory
The quantity theory descends from Copernicus,[2] followers of the School of Salamanca, Jean Bodin,[3] and various
others who noted the increase in prices following the import of gold and silver, used in the coinage of money, from
the New World. The “equation of exchange” relating the supply of money to the value of money transactions was
stated by John Stuart Mill[4] who expanded on the ideas of David Hume.[5] The quantity theory was developed by
Simon Newcomb,[6] Alfred de Foville,[7] Irving Fisher,[8] and Ludwig von Mises[9] in the latter 19th and early 20th
century, while it had been argued against by Karl Marx.[10] The theory was influentially restated by Milton Friedman
in response to Keynesianism.[11]
Academic discussion remains over the degree to which different figures developed the theory.[12] For instance, Bieda
argues that Copernicus's observation
Money can lose its value through excessive abundance, if so much silver is coined as to heighten people's
demand for silver bullion. For in this way, the coinage's estimation vanishes when it cannot buy as much silver
as the money itself contains […]. The solution is to mint no more coinage until it recovers its par value.[12]
amounts to a statement of the theory,[13] while other economic historians date the discovery later, to figures such as
Jean Bodin, David Hume, and John Stuart Mill.[12][14]
Historically, the main rival of the quantity theory was the real bills doctrine, which says that the issue of money does
not raise prices, as long as the new money is issued in exchange for assets of sufficient value.[15]
Equation of exchange
In its modern form, the quantity theory builds upon the following definitional relationship.
where
is the total amount of money in circulation on average in an economy during the period, say a year.
is the transactions velocity of money, that is the average frequency across all transactions with which a
unit of money is spent. This reflects availability of financial institutions, economic variables, and choices
made as to how fast people turn over their money.
and
are the price and quantity of the i-th transaction.
is a column vector of the
, and the superscript T is the transpose operator.
is a column vector of the
.
Mainstream economics accepts a simplification, the equation of exchange:
where
Quantity theory of money
15
is the price level associated with transactions for the economy during the period
is an index of the real value of aggregate transactions.
The previous equation presents the difficulty that the associated data are not available for all transactions. With the
development of national income and product accounts, emphasis shifted to national-income or final-product
transactions, rather than gross transactions. Economists may therefore work with the form
where
is the velocity of money in final expenditures.
is an index of the real value of final expenditures.
As an example,
might represent currency plus deposits in checking and savings accounts held by the public,
real output (which equals real expenditure in macroeconomic equilibrium) with
and
the corresponding price level,
the nominal (money) value of output. In one empirical formulation, velocity was taken to be “the ratio of
net national product in current prices to the money stock”.[16]
Thus far, the theory is not particularly controversial, as the equation of exchange is an identity. A theory requires that
assumptions be made about the causal relationships among the four variables in this one equation. There are debates
about the extent to which each of these variables is dependent upon the others. Without further restrictions, the
equation does not require that a change in the money supply would change the value of any or all of ,
, or
. For example, a 10% increase in
could be accompanied by a 10% decrease in
, leaving
unchanged. The quantity theory postulates that the primary causal effect is an effect of M on P.
A rudimentary version of the quantity theory
The equation of exchange can be used to form a rudimentary version of the quantity theory of the effect of monetary
growth on inflation.
If
and
were constant, then:
and thus
where
is time.
That is to say that, if
and
were constant, then the inflation rate (the rate of growth
would exactly equal the growth rate
of the price level)
of the money supply. In short, the inflation rate is a function of the
monetary growth rate.
Less restrictively, with time-varying V and Q, we have the identity
which says that the inflation rate equals the monetary growth rate plus the growth rate of the velocity of money
minus the growth rate of real expenditure. If one makes the quantity theory assumptions that, at least in the long run,
(i) the monetary growth rate is controlled by the central bank, (ii) the growth rate of velocity is purely determined by
the evolution of payments mechanisms, and (iii) the growth rate of real expenditure is determined by the rate of
technological progress plus the rate of labor force growth, then while the inflation rate need not equal the monetary
Quantity theory of money
16
growth rate, an x percentage point rise in the monetary growth rate will result in an x percentage point rise in the
inflation rate.
Cambridge approach
Further information: Cambridge equation
Economists Alfred Marshall, A.C. Pigou, and John Maynard Keynes (before he developed his own, eponymous
school of thought) associated with Cambridge University, took a slightly different approach to the quantity theory,
focusing on money demand instead of money supply. They argued that a certain portion of the money supply will
not be used for transactions; instead, it will be held for the convenience and security of having cash on hand. This
portion of cash is commonly represented as k, a portion of nominal income (
). The Cambridge economists
also thought wealth would play a role, but wealth is often omitted for simplicity. The Cambridge equation is thus:
Assuming that the economy is at equilibrium (
),
is exogenous, and k is fixed in the short run, the
Cambridge equation is equivalent to the equation of exchange with velocity equal to the inverse of k:
The Cambridge version of the quantity theory led to both Keynes's attack on the quantity theory and the Monetarist
revival of the theory.[17]
Quantity theory and evidence
As restated by Milton Friedman, the quantity theory emphasizes the following relationship of the nominal value of
expenditures
and the price level to the quantity of money
:
The plus signs indicate that a change in the money supply is hypothesized to change nominal expenditures and the
price level in the same direction (for other variables held constant).
Friedman described the empirical regularity of substantial changes in the quantity of money and in the level of prices
as perhaps the most-evidenced economic phenomenon on record.[18] Empirical studies have found relations
consistent with the models above and with causation running from money to prices. The short-run relation of a
change in the money supply in the past has been relatively more associated with a change in real output
than the
price level
in (1) but with much variation in the precision, timing, and size of the relation. For the long-run, there
has been stronger support for (1) and (2) and no systematic association of
and
.[19]
Principles
The theory above is based on the following hypotheses:
1. The source of inflation is fundamentally derived from the growth rate of the money supply.
2. The supply of money is exogenous.
3. The demand for money, as reflected in its velocity, is a stable function of nominal income, interest rates, and so
forth.
4. The mechanism for injecting money into the economy is not that important in the long run.
5. The real interest rate is determined by non-monetary factors: (productivity of capital, time preference).
Quantity theory of money
Decline of money-supply targeting
An application of the quantity-theory approach aimed at removing monetary policy as a source of macroeconomic
instability was to target a constant, low growth rate of the money supply.[20] Still, practical identification of the
relevant money supply, including measurement, was always somewhat controversial and difficult. As financial
intermediation grew in complexity and sophistication in the 1980s and 1990s, it became more so. As a result, some
central banks, including the U.S. Federal Reserve, which had targeted the money supply, reverted to targeting
interest rates. But monetary aggregates remain a leading economic indicator.[21] with "some evidence that the
linkages between money and economic activity are robust even at relatively short-run frequencies."[22]
Criticisms
John Maynard Keynes criticized the quantity theory of money in The General Theory of Employment, Interest and
Money. Keynes had originally been a proponent of the theory, but he presented an alternative in the General Theory.
Keynes argued that price level was not strictly determined by money supply. Changes in the money supply could
have effects on real variables like output.[1]
Ludwig von Mises agreed that there was a core of truth in the Quantity Theory, but criticized its focus on the supply
of money without adequately explaining the demand for money. He said the theory "fails to explain the mechanism
of variations in the value of money".[23]
References
[1] Minksy, Hyman P. John Maynard Keynes, McGraw-Hill. 2008. p.2.
[2] Nicolaus Copernicus (1517), memorandum on monetary policy.
[3] Jean Bodin, Responses aux paradoxes du sieur de Malestroict (1568).
[4] John Stuart Mill (1848), Principles of Political Economy.
[5] David Hume (1748), “Of Interest,” "Of Interest" in Essays Moral and Political.
[6] Simon Newcomb (1885), Principles of Political Economy.
[7] Alfred de Foville (1907), La Monnaie.
[8] Irving Fisher (1911), The Purchasing Power of Money,
[9] von Mises, Ludwig Heinrich; Theorie des Geldes und der Umlaufsmittel [The Theory of Money and Credit]
[10] Capital Vol III, Chapter 34
[11] Milton Friedman (1956), “The Quantity Theory of Money: A Restatement” in Studies in the Quantity Theory of Money, edited by M.
Friedman. Reprinted in M. Friedman The Optimum Quantity of Money (2005), pp. 51 (http:/ / books. google. com/
books?id=XVCgcHQS_nQC& pg=PA51& dq="Studies+ in+ the+ Quantity+ Theory+ of+ Money"+ restatement& source=gbs_toc_r&
cad=0_0)- 67. (http:/ / books. google. com/ books?id=XVCgcHQS_nQC& pg=PA67& lpg=PR5& dq="Studies+ in+ the+ Quantity+ Theory+
of+ Money"+ restatement)
[12] Volckart, Oliver (1997), "Early beginnings of the quantity theory of money and their context in Polish and Prussian monetary policies, c.
1520-1550", The Economic History Review 50 (3): 430–449, doi:10.1111/1468-0289.00063
[13] Bieda, K. (1973), "Copernicus as an economist", Economic Record 49: 89–103, doi:10.1111/j.1475-4932.1973.tb02270.x
[14] Wennerlind, Carl (2005), "David Hume's monetary theory revisited", Journal of Political Economy 113 (1): 233–237
[15] Roy Green (1987), “real bills dcctrine”, in The New Palgrave: A Dictionary of Economics, v. 4, pp. 101-02.
[16] Milton Friedman, and Anna J. Schwartz, (1965), The Great Contraction 1929–1933, Princeton: Princeton University Press,
ISBN 0-691-00350-5
[17] Froyen, Richard T. Macroeconomics: Theories and Policies. 3rd Edition. Macmillan Publishing Company: New York, 1990. p. 70-71.
[18] Milton Friedman (1987), “quantity theory of money”, The New Palgrave: A Dictionary of Economics, v. 4, p. 15.
[19] Summarized in Friedman (1987), “quantity theory of money”, pp. 15-17.
[20] Friedman (1987), “quantity theory of money”, p. 19.
[21] NA (2005), How Does the Fed Determine Interest Rates to Control the Money Supply?”, Federal Reserve Bank of San Francisco. February,
(http:/ / www. frbsf. org/ education/ activities/ drecon/ answerxml. cfm?selectedurl=/ 2005/ 0502. html)
[22] R.W. Hafer and David C. Wheelock (2001), “The Rise and Fall of a Policy Rule: Monetarism at the St. Louis Fed, 1968-1986” (http:/ /
research. stlouisfed. org/ publications/ review/ 01/ 0101rh. pdf), Federal Reserve Bank of St. Louis, Review, January/February, p. 19.
[23] Ludwig von Mises (1912), “The Theory of Money and Credit (Chapter 8, Sec 6)” (http:/ / mises. org/ books/ Theory_Money_Credit/
Contents. aspx).
17
Quantity theory of money
Further reading
• Friedman, Milton (1987 [2008]). “quantity theory of money”, The New Palgrave: A Dictionary of Economics, v.
4, pp. 3–20. Abstract. (http://www.dictionaryofeconomics.com/article?id=pde2008_Q000006&q=&
result_number=1) Arrow-page searchable preview (http://books.google.com/books?id=jTx3VZd0T8oC&
pg=PA1&lpg=PR5&dq=+norton) at John Eatwell et al.(1989), Money: The New Palgrave, pp. 1–40.
• Laidler, David E.W. (1991). The Golden Age of the Quantity Theory: The Development of Neoclassical Monetary
Economics, 1870-1914. Princeton UP. Description (http://books.google.com/books?id=leueAAAAIAAJ&
source=gbs_ViewAPI&pgis=1) and review. (http://findarticles.com/p/articles/mi_qa5421/is_n4_v60/
ai_n28638753/)
• Mises, Ludwig Heinrich Edler von; Human Action: A Treatise on Economics (1949), Ch. XVII “Indirect
Exchange”, §4. “The Determination of the Purchasing Power of Money”.
External links
• The Quantity Theory of Money (http://cepa.newschool.edu/het/essays/money/quantity.htm) from John
Stuart Mill through Irving Fisher from the New School
• “Quantity theory of money” at Formularium.org (http://formularium.org/?go=53) — calculate M, V, P and Q
with your own values to understand the equation
• How to Cure Inflation (from a Quantity Theory of Money perspective) (http://econblog.aplia.com/2006/08/
how-to-cure-inflation.html) from Aplia Econ Blog
Fractional reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves (of cash and coin or deposits at the
central bank) that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and
a bank keeps only a fraction (called the reserve ratio) of the quantity of deposits as reserves. Some of the funds lent
out are subsequently deposited with another bank, increasing deposits at that second bank and allowing further
lending. As most bank deposits are treated as money in their own right, fractional reserve banking increases the
money supply, and banks are said to create money. Due to the prevalence of fractional reserve banking, the broad
money supply of most countries is a multiple larger than the amount of base money created by the country's central
bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio
requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.[1][2]
Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their
demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial
banking system,[2] and ensures that banks have enough ready cash to meet normal demand for withdrawals.
Problems can arise, however, when depositors seek withdrawal of a large proportion of deposits at the same time;
this can cause a bank run or, when problems are extreme and widespread, a systemic crisis. To mitigate this risk, the
governments of most countries (usually acting through the central bank) regulate and oversee commercial banks,
provide deposit insurance and act as lender of last resort to commercial banks.
Fractional-reserve banking is the most common form of banking and is practiced in almost all countries. Although
Islamic banking prohibits the making of profit from interest on debt, a form of fractional-reserve banking is still
evident in most Islamic countries.
18
Fractional reserve banking
History
Savers looking to keep their valuables in safekeeping depositories deposited gold coins and silver coins at
goldsmiths, receiving in turn a note for their deposit (see Bank of Amsterdam). Once these notes became a trusted
medium of exchange an early form of paper money was born, in the form of the goldsmiths' notes.[3]
As the notes were used directly in trade, the goldsmiths observed that people would not usually redeem all their
notes at the same time, and they saw the opportunity to invest their coin reserves in interest-bearing loans and bills.
This generated income for the goldsmiths but left them with more notes on issue than reserves with which to pay
them. A process was started that altered the role of the goldsmiths from passive guardians of bullion, charging fees
for safe storage, to interest-paying and interest-earning banks. Thus fractional-reserve banking was born.
However, if creditors (note holders of gold originally deposited) lost faith in the ability of a bank to redeem (pay)
their notes, many would try to redeem their notes at the same time. If in response a bank could not raise enough
funds by calling in loans or selling bills, it either went into insolvency or defaulted on its notes. Such a situation is
called a bank run and caused the demise of many early banks.[3]
Repeated bank failures and financial crises led to the creation of central banks – public institutions that have the
authority to regulate commercial banks, impose reserve requirements, and act as lender-of-last-resort if a bank runs
low on liquidity. The emergence of central banks mitigated the dangers associated with fractional reserve
banking.[2][4]
From about 1991 a consensus had emerged within developed economies about the optimum design of monetary
policy. In essence central bankers gave up attempts to directly control the amount of money in the economy and
instead moved to indirect means by targeting interest rates. This consensus is criticized by some economists.[5]
Reason for existence
Fractional reserve banking allows people to invest their money, without losing the ability to use it on demand. Since
most people do not need to use all their money all the time, banks lend out that money, to generate profit for
themselves. Thus, banks can act as financial intermediaries — facilitating the investment of savers' funds.[2][6] Full
reserve banking, on the other hand, does not allow any money in such demand deposits to be invested (since all of
the money would be locked up in reserves) and less liquid investments (such as stocks, bonds and time deposits) lock
up a lender's money for a time, making it unavailable for the lender to use.
According to mainstream economic theory, regulated fractional-reserve banking also benefits the economy by
providing regulators with powerful tools for manipulating the money supply and interest rates, which many see as
essential to a healthy economy.[7]
How it works
The nature of modern banking is such that the cash reserves at the bank available to repay demand deposits need
only be a fraction of the demand deposits owed to depositors. In most legal systems, a demand deposit at a bank
(e.g., a checking or savings account) is considered a loan to the bank (instead of a bailment) repayable on demand,
that the bank can use to finance its investments in loans and interest bearing securities. Banks make a profit based on
the difference between the interest they charge on the loans they make, and the interest they pay to their depositors
(aggregately called the net interest margin (NIM)). Since a bank lends out most of the money deposited, keeping
only a fraction of the total as reserves, it necessarily has less money than the account balances of its depositors.
The main reason customers deposit funds at a bank is to store savings in the form of a demand claim on the bank.
Depositors still have a claim to full repayment of their funds on demand even though most of the funds have already
been invested by the bank in interest bearing loans and securities.[8] Holders of demand deposits can withdraw all of
their deposits at any time. If all the depositors of a bank did so at the same time a bank run would occur, and the
bank would likely collapse. Due to the practice of central banking, this is a rare event today, as central banks usually
19
Fractional reserve banking
guarantee the deposits at commercial banks, and act as lender of last resort when there is a run on a bank. However,
there have been some recent bank runs: the Northern Rock crisis of 2007 in the United Kingdom is an example. The
collapse of Washington Mutual bank in September 2008, the largest bank failure in history, was preceded by a
"silent run" on the bank, where depositors removed vast sums of money from the bank through electronic transfer.
However, in these cases, the banks proved to have been insolvent at the time of the run. Thus, these bank runs
merely precipitated failures that were inevitable in any case.
In the absence of crises that trigger bank runs, fractional-reserve banking usually functions smoothly because at any
one time relatively few depositors will make cash withdrawals simultaneously compared to the total amount on
deposit, and a cash reserve can be maintained as a buffer to deal with the normal cash demands from depositors
seeking withdrawals. In addition, in a normal economic environment, cash is steadily being introduced into the
economy by the central bank, and new funds are steadily being deposited into the commercial banks.
However, if a bank is experiencing a financial crisis, and net redemption demands are unusually large over a period
of time, the bank will run low on cash reserves and will be forced to raise additional funds to avoid running out of
reserves and defaulting on its obligations. A bank can raise funds from additional borrowings (e.g., by borrowing
from the money market or using lines of credit held with other banks), or by selling assets, or by calling in short-term
loans. If creditors are afraid that the bank is running out of cash or is insolvent, they have an incentive to redeem
their deposits as soon as possible before other depositors access the remaining cash reserves before they do,
triggering a cascading crisis that can result in a full-scale bank run.
As an example for a very simple idea of how the fractional reserve system can work if there is only one bank, for a
Reserve Fraction of 10%, a bank can turn a $1000 deposit of "M0" money, into $18,997 of "M1" money. Ignoring
interest & fees, which makes banks even more profitable, this is how a bank can copy 90% of "M0" money to make
"M1" money, where in this example the money loaned out is simply re-deposited in the bank and loaned out again,
and so on, that is how the $18,997 "M1" money comes from the $1000 of "M0" money. Banks do this by
accumulating loans and deposits (effectively multiplying) the "M0" supply to make a larger "M1" supply. Banks can
collect interest on the spread of the higher loan interest from the lower deposit interests. Return On Investment (ROI)
for a bank is theoretically infinite considering the bank is using none of it's own money, if one excludes the cost of
setting up and maintaining the accounting system.
Money creation
Modern central banking allows banks to practice fractional reserve banking with inter-bank business transactions
with a reduced risk of bankruptcy. The process of fractional-reserve banking expands the money supply of the
economy but also increases the risk that a bank cannot meet its depositor withdrawals.[9][10] Though not a
mainstream economic belief, a number of central bankers, monetary economists, and text books, have said that banks
create money by 'extending credit', where banks obligate themselves to borrowers, and then later manage whatever
liabilities this creates for them, where if the central bank targets interest rates, it must supply base money on demand
to meet the banks reserve requirements, after the banks have begun the lending process[11][12][13][14][15][16][17][18]
and that rather than deposits leading to loans, causality is reversed, and loans lead to deposits.[19][20][21][22]
There are two types of money in a fractional-reserve banking system operating with a central bank:[23][24][25]
1. Central bank money: money created or adopted by the central bank regardless of its form –- precious metals,
commodity certificates, banknotes, coins, electronic money loaned to commercial banks, or anything else the
central bank chooses as its form of money
2. Commercial bank money: demand deposits in the commercial banking system; sometimes referred to as
chequebook money
When a deposit of central bank money is made at a commercial bank, the central bank money is removed from
circulation and added to the commercial banks' reserves (it is no longer counted as part of M1 money supply).
Simultaneously, an equal amount of new commercial bank money is created in the form of bank deposits. When a
20
Fractional reserve banking
21
loan is made by the commercial bank (which keeps only a fraction of the central bank money as reserves), using the
central bank money from the commercial bank's reserves, the m1 money supply expands by the size of the loan.[2]
This process is called deposit multiplication.
Example of deposit multiplication
The table below displays the mainstream economics relending model of how loans are funded and how the money
supply is affected. It also shows how central bank money is used to create commercial bank money from an initial
deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a
fractional-reserve rate of 20% to ultimately create $500 of commercial bank money. Each successive bank involved
in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank
money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve
requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.
The relending model begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes
20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this
point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank
money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created
$100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money
(the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by
depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank's
accounts as a liability (specifically, an IOU to the depositor). From a depositor's perspective, commercial bank
money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run
occurs (at which time everyone wants central bank money).[2]
At this point in the relending model, Bank A now only has $20 of central bank money on its books. The loan
recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it
into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central
bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and
lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank
money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank
lends may end up in the same bank so that it then has more money to lend out.
Table Sources:
Individual Bank
Amount Deposited
Lent Out
Reserves
A
100
80
20
B
80
64
16
C
64
51.20
12.80
D
51.20
40.96
10.24
E
40.96
32.77
8.19
F
32.77
26.21
6.55
G
26.21
20.97
5.24
H
20.97
16.78
4.19
I
16.78
13.42
3.36
J
13.42
10.74
2.68
K
10.74
Total Reserves:
Fractional reserve banking
22
89.26
Total Amount of Deposits: Total Amount Lent Out: Total Reserves + Last Amount Deposited:
457.05
357.05
100
Although no new money was
physically created in addition to the
initial $100 deposit, new commercial
bank money is created through loans.
The 2 boxes marked in red show the
location of the original $100 deposit
throughout the entire process. The total
reserves plus the last deposit (or last
loan, whichever is last) will always
equal the original amount, which in
this case is $100. As this process
continues, more commercial bank
money is created. The amounts in each
The expansion of $100 of central bank money through fractional-reserve lending with a
20% reserve rate. $400 of commercial bank money is created virtually through loans.
step decrease towards a limit. If a
graph
is
made
showing
the
accumulation of deposits, one can see that the graph is curved and approaches a limit. This limit is the maximum
amount of money that can be created with a given reserve rate. When the reserve rate is 20%, as in the example
above, the maximum amount of total deposits that can be created is $500 and the maximum increase in the money
supply is $400.
For an individual bank, the deposit is considered a liability whereas the loan it gives out and the reserves are
considered assets. Deposits will always be equal to loans plus a bank's reserves, since loans and reserves are created
from deposits. This is the basis for a bank's balance sheet.
Fractional reserve banking allows the money supply to expand or contract. Generally the expansion or contraction of
the money supply is dictated by the balance between the rate of new loans being created and the rate of existing
loans being repaid or defaulted on. The balance between these two rates can be influenced to some degree by actions
of the central bank.
This table gives an outline of the makeup of money supplies worldwide. Most of the money in any given money
supply consists of commercial bank money.[23] The value of commercial bank money is based on the fact that it can
be exchanged freely at a bank for central bank money.[23][24]
The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to
hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some members of the
public may choose to hold cash, and there also may be delays or frictions in the lending process.[26] Government
regulations may also be used to limit the money creation process by preventing banks from giving out loans even
though the reserve requirements have been fulfilled.[27]
Fractional reserve banking
23
Money multiplier
The most common mechanism used to
measure this increase in the money
supply is typically called the money
multiplier. It calculates the maximum
amount of money that an initial deposit
can be expanded to with a given
reserve ratio.
Formula
The money multiplier, m, is the inverse
of the reserve requirement, R:[28]
Example
For example, with the reserve ratio of
20 percent, this reserve ratio, R, can
also be expressed as a fraction:
The expansion of $100 through fractional-reserve banking with varying reserve
requirements. Each curve approaches a limit. This limit is the value that the money
multiplier calculates.
So then the money multiplier, m, will be calculated as:
This number is multiplied by the initial deposit to show the maximum amount of money it can be expanded to.
The money creation process is also affected by the currency drain ratio (the propensity of the public to hold
banknotes rather than deposit them with a commercial bank), and the safety reserve ratio (excess reserves beyond the
legal requirement that commercial banks voluntarily hold—usually a small amount). Data for "excess" reserves and
vault cash are published regularly by the Federal Reserve in the United States.[29] In practice, the actual money
multiplier varies over time, and may be substantially lower than the theoretical maximum.[30]
Confusingly there are many different "money multipliers", some referring to ratios of rates of change of different
money measures and others referring to ratios of absolute values of money measures.
Reserve requirements
The modern mainstream view of reserve requirements is that they are intended to prevent banks from:
1. generating too much money by making too many loans against the narrow money deposit base;
2. having a shortage of cash when large deposits are withdrawn (although the reserve is thought to be a legal
minimum, it is understood that in a crisis or bank run, reserves may be made available on a temporary basis).
In practice, some central banks do not require reserves to be held, and in some countries that do, such as the USA
and the EU they are not required to be held during the day when the banks are lending, and banks can borrow from
other banks at near the central bank policy rate to ensure they have the necessary amount of required reserves by the
close of business. Required reserves are therefore considered by some central bankers, monetary economists and
textbooks to only play a very small role in limiting money creation in these countries. Most commentators agree
however, that they help the banks have sufficient supplies of highly liquid assets, so that the system operates in an
orderly fashion and maintains public confidence. The UK for example, which does not have required reserves, does
have requirements that the banks keep a certain amount of cash, and in Australia while there are no reserve
Fractional reserve banking
requirements, there are a variety of requirements to ensure the banks have a stabilising ratio of liquid assets, such as
deposits held with local banks. Individual countries adhere to varying required reserve ratios which have changed
over time.
In addition to reserve requirements, there are other required financial ratios that affect the amount of loans that a
bank can fund. The capital requirement ratio is perhaps the most important of these other required ratios. When there
are no mandatory reserve requirements, which are considered by some mainstream economists to restrict lending, the
capital requirement ratio acts to prevent an infinite amount of bank lending.
Alternative views
Theories of endogenous money date to the 19th century, and were described by Joseph Schumpeter, and later the
post-Keynesians.[31] Endogenous money theory states that the supply of money is credit-driven and determined
endogenously by the demand for bank loans, rather than exogenously by monetary authorities.
Charles Goodhart worked for many years to encourage a different approach to money supply analysis and said the
base money multiplier model was "such an incomplete way of describing the process of the determination of the
stock of money that it amounts to misinstruction"[32] Ten years later he said: "Almost all those who have worked in a
[central bank] believe that this view is totally mistaken; in particular, it ignores the implications of several of the
crucial institutional features of a modern commercial banking system...".[33] Goodhart has characterized the money
stock as a dependent endogenous variable.[34] In 1994, Mervyn King said that the causation between money and
demand is a contentious issue, because although textbooks assume that money is exogenous, in the United Kingdom
money is endogenous, as the Bank of England provides base money on demand and broad money is created by the
banking system.[35][36][37]
Seth B. Carpenter and Selva Demiralp concluded the simple textbook base money multiplier is implausible in the
United States.[38]
24
Fractional reserve banking
25
Money supplies around the world
Components of US money supply (currency, M1, M2, and M3) since 1959. In January
2007, the amount of central bank money was $750.5 billion while the amount of
commercial bank money (in the M2 supply) was $6.33 trillion. M1 is currency plus
demand deposits; M2 is M1 plus time deposits, savings deposits, and some money-market
funds; and M3 is M2 plus large time deposits and other forms of money. The M3 data
[39]
ends in 2006 because the federal reserve ceased reporting it
.
Fractional-reserve banking determines
the relationship between the amount of
central bank money (currency) in the
official money supply statistics and the
total money supply. Most of the money
in these systems is commercial bank
money. Fractional reserve banking
involves the issuance and creation of
commercial bank money, which
increases the money supply through
the deposit creation multiplier. The
issue of money through the banking
system is a mechanism of monetary
transmission, which a central bank can
influence indirectly by raising or
lowering interest rates (although
banking regulations may also be
adjusted to influence the money
supply,
depending
on
the
circumstances).
Regulation
Because
the
nature
of
fractional-reserve banking involves the
possibility of bank runs, central banks
have been created throughout the
world to address these problems.[4][40]
Central banks
Government controls and bank
regulations related to fractional-reserve
banking have generally been used to
impose restrictive requirements on
note issue and deposit taking on the
Components of the euro money supply 1998-2007
one hand, and to provide relief from
bankruptcy and creditor claims, and/or
protect creditors with government funds, when banks defaulted on the other hand. Such measures have included:
1. Minimum required reserve ratios (RRRs)
2. Minimum capital ratios
3. Government bond deposit requirements for note issue
4. 100% Marginal Reserve requirements for note issue, such as the Bank Charter Act 1844 (UK)
5. Sanction on bank defaults and protection from creditors for many months or even years, and
Fractional reserve banking
6. Central bank support for distressed banks, and government guarantee funds for notes and deposits, both to
counteract bank runs and to protect bank creditors.
Liquidity and capital management for a bank
To avoid defaulting on its obligations, the bank must maintain a minimal reserve ratio that it fixes in accordance
with, notably, regulations and its liabilities. In practice this means that the bank sets a reserve ratio target and
responds when the actual ratio falls below the target. Such response can be, for instance:
1.
2.
3.
4.
5.
Selling or redeeming other assets, or securitization of illiquid assets,
Restricting investment in new loans,
Borrowing funds (whether repayable on demand or at a fixed maturity),
Issuing additional capital instruments, or
Reducing dividends.
Because different funding options have different costs, and differ in reliability, banks maintain a stock of low cost
and reliable sources of liquidity such as:
1. Demand deposits with other banks
2. High quality marketable debt securities
3. Committed lines of credit with other banks
As with reserves, other sources of liquidity are managed with targets.
The ability of the bank to borrow money reliably and economically is crucial, which is why confidence in the bank's
creditworthiness is important to its liquidity. This means that the bank needs to maintain adequate capitalisation and
to effectively control its exposures to risk in order to continue its operations. If creditors doubt the bank's assets are
worth more than its liabilities, all demand creditors have an incentive to demand payment immediately, a situation
known as a run on the bank.
Contemporary bank management methods for liquidity are based on maturity analysis of all the bank's assets and
liabilities (off balance sheet exposures may also be included). Assets and liabilities are put into residual contractual
maturity buckets such as 'on demand', 'less than 1 month', '2–3 months' etc. These residual contractual maturities
may be adjusted to account for expected counter party behaviour such as early loan repayments due to borrowers
refinancing and expected renewals of term deposits to give forecast cash flows. This analysis highlights any large
future net outflows of cash and enables the bank to respond before they occur. Scenario analysis may also be
conducted, depicting scenarios including stress scenarios such as a bank-specific crisis.
Risk and prudential regulation
In a fractional-reserve banking system, in the event of a bank run, the demand depositors and note holders would
attempt to withdraw more money than the bank has in reserves, causing the bank to suffer a liquidity crisis and,
ultimately, to perhaps default. In the event of a default, the bank would need to liquidate assets and the creditors of
the bank would suffer a loss if the proceeds were insufficient to pay its liabilities. Since public deposits are payable
on demand, liquidation may require selling assets quickly and potentially in large enough quantities to affect the
price of those assets. An otherwise solvent bank (whose assets are worth more than its liabilities) may be made
insolvent by a bank run. This problem potentially exists for any corporation with debt or liabilities, but is more
critical for banks as they rely upon public deposits (which may be redeemable upon demand).
Although an initial analysis of a bank run and default points to the bank's inability to liquidate or sell assets (i.e.
because the fraction of assets not held in the form of liquid reserves are held in less liquid investments such as
loans), a more full analysis indicates that depositors will cause a bank run only when they have a genuine fear of loss
of capital, and that banks with a strong risk adjusted capital ratio should be able to liquidate assets and obtain other
sources of finance to avoid default. For this reason, fractional-reserve banks have every reason to maintain their
26
Fractional reserve banking
27
liquidity, even at the cost of selling assets at heavy discounts and obtaining finance at high cost, during a bank run
(to avoid a total loss for the contributors of the bank's capital, the shareholders).
Many governments have enforced or established deposit insurance systems in order to protect depositors from the
event of bank defaults and to help maintain public confidence in the fractional-reserve system.
Responses to the problem of financial risk described above include:
1. Proponents of prudential regulation, such as minimum capital ratios, minimum reserve ratios, central bank or
other regulatory supervision, and compulsory note and deposit insurance, (see Controls on Fractional-Reserve
Banking below);
2. Proponents of free banking, who believe that banking should be open to free entry and competition, and that the
self-interest of debtors, creditors and shareholders should result in effective risk management; and,
3. Withdrawal restrictions: some bank accounts may place a limit on daily cash withdrawals and may require a
notice period for very large withdrawals. Banking laws in some countries may allow restrictions to be placed on
withdrawals under certain circumstances, although these restrictions may rarely, if ever, be used;
4. Opponents of fractional reserve banking who insist that notes and demand deposits be 100% reserved.
Example of a bank balance sheet and financial ratios
An example of fractional reserve banking, and the calculation of the reserve ratio is shown in the balance sheet
below:
Example 2: ANZ National Bank Limited Balance Sheet as at 30 September 2007
ASSETS
NZ$m
LIABILITIES
NZ$m
Cash
201
Demand Deposits
25482
Balance with Central Bank
2809
Term Deposits and other borrowings 35231
Other Liquid Assets
1797
Due to Other Financial Institutions
3170
Due from other Financial Institutions 3563
Derivative financial instruments
4924
Trading Securities
1887
Payables and other liabilities
1351
Derivative financial instruments
4771
Provisions
165
Available for sale assets
48
Bonds and Notes
14607
Net loans and advances
87878
Related Party Funding
2775
Shares in controlled entities
206
[subordinated] Loan Capital
2062
Current Tax Assets
112
Total Liabilities
99084
Other assets
1045
Share Capital
5943
Deferred Tax Assets
11
[revaluation] Reserves
83
Premises and Equipment
232
Retained profits
2667
Goodwill and other intangibles
3297
Total Equity
8703
Total Assets
107787 Total Liabilities plus Net Worth
107787
In this example the cash reserves held by the bank is $3010m ($201m currency + $2809m held at central bank) and
the demand liabilities of the bank are $25482m, for a cash reserve ratio of 11.81%.
Fractional reserve banking
28
Other financial ratios
The key financial ratio used to analyze fractional-reserve banks is the cash reserve ratio, which is the ratio of cash
reserves to demand deposits. However, other important financial ratios are also used to analyze the bank's liquidity,
financial strength, profitability etc.
For example the ANZ National Bank Limited balance sheet above gives the following financial ratios:
1.
2.
3.
4.
5.
The cash reserve ratio is $3010m/$25482m, i.e. 11.81%.
The liquid assets reserve ratio is ($201m+$2809m+$1797m)/$25482m, i.e. 18.86%.
The equity capital ratio is $8703m/107787m, i.e. 8.07%.
The tangible equity ratio is ($8703m-$3297m)/107787m, i.e. 5.02%
The total capital ratio is ($8703m+$2062m)/$107787m, i.e. 9.99%.
It is very important how the term 'reserves' is defined for calculating the reserve ratio, as different definitions give
different results. Other important financial ratios may require analysis of disclosures in other parts of the bank's
financial statements. In particular, for liquidity risk, disclosures are incorporated into a note to the financial
statements that provides maturity analysis of the bank's assets and liabilities and an explanation of how the bank
manages its liquidity.
How the example bank manages its liquidity
The ANZ National Bank Limited explains its methods as:
Liquidity risk is the risk that the Banking Group will encounter difficulties in meeting commitments associated
with its financial liabilities, e.g. overnight deposits, current accounts, and maturing deposits; and future
commitments e.g. loan draw-downs and guarantees. The Banking Group manages its exposure to liquidity risk
by maintaining sufficient liquid funds to meet its commitments based on historical and forecast cash flow
requirements.
The following maturity analysis of assets and liabilities has been prepared on the basis of the remaining period
to contractual maturity as at the balance date. The majority of longer term loans and advances are housing
loans, which are likely to be repaid earlier than their contractual terms. Deposits include substantial customer
deposits that are repayable on demand. However, historical experience has shown such balances provide a
stable source of long term funding for the Banking Group. When managing liquidity risks, the Banking Group
adjusts this contractual profile for expected customer behaviour.
Example 2: ANZ National Bank Limited Maturity Analysis of Assets and Liabilities as at 30 September 2007
Total carrying value Less than 3 months 3–12 months 1–5 years Beyond 5 years No Specified Maturity
Assets
Liquid Assets
4807
4807
Due from other financial institutions 3563
2650
440
187
286
Derivative Financial Instruments
4711
4711
Assets available for sale
48
33
1
13
Net loans and advances
87878
9276
9906
24142
Other Assets
4903
970
179
Total Assets
107787
18394
10922
25013
45343
Due to other financial institutions
3170
2356
405
32
377
Deposits and other borrowings
70030
53059
14726
2245
Derivative financial instruments
4932
1
44905
3754
8115
Liabilities
4932
Fractional reserve banking
29
Other liabilities
1516
1315
96
32
60
13
Bonds and notes
14607
672
4341
9594
Related party funding
2275
2275
Loan capital
2062
100
1653
309
Total liabilities
99084
60177
19668
13556
746
4937
Net liquidity gap
8703
(41783)
(8746)
11457
44597
3178
Net liquidity gap - cumulative
8703
(41783)
(50529)
(39072)
5525
8703
Criticisms
Critics of fractional reserve banking have argued one or more of the following: that it is unstable, that it exacerbates
business cycles, that it causes inflation, or that it leads to environmental degradation.
References
[1] Abel, Andrew; Bernanke, Ben (2005), "14.1", Macroeconomics (5th ed.), Pearson, pp. 522–532
[2] Mankiw, N. Gregory (2002), "Chapter 18: Money Supply and Money Demand", Macroeconomics (5th ed.), Worth, pp. 482–489
[3] United States. Congress. House. Banking and Currency Committee. (1964). Money facts; 169 questions and answers on money- a supplement
to A Primer on Money, with index, Subcommittee on Domestic Finance ... 1964. (http:/ / www. scribd. com/ doc/ 7547565/
Money-Facts-Committee-on-Banking-and-Currency). Washington D.C.. .
[4] The Federal Reserve in Plain English - An easy-to-read guide to the structure and functions of the Federal Reserve System. See page 5 of the
document for the purposes and functions: http:/ / www. frbsf. org/ publications/ education/ plainenglish/ index. html
[5] "Monetary Policy Regimes: a fragile consensus, Peter Howells and Iris Biefang-Frisancho Mariscal (2006)" (http:/ / carecon. org. uk/ DPs/
0512. pdf) (PDF). University of the West of England, Bristol. .
[6] Abel, Andrew; Bernanke, Ben (2005). "7". Macroeconomics (5th ed.). Pearson. pp. 266–269.
[7] Mankiw, N. Gregory (2002). "9". Macroeconomics (5th ed.). Worth. pp. 238–255.
[8] Committee on Finance and Industry 1931 (Macmillan Report) on bankers desire to complicate banking issues."The economic experts have
evolved a highly technical vocabulary of their own and in their zeal for precision are distrustful, if not derisive of any attempts to popularize
their science."
[9] Page 57 of 'The FED today', a publication on an educational site affiliated with the Federal Reserve Bank of Kansas City, designed to educate
people on the history and purpose of the United States Federal Reserve system. The FED today Lesson 6 (http:/ / www. philadelphiafed. org/
publications/ economic-education/ fed-today/ fed-today_lesson-6. pdf)
[10] "Mervyn King, Finance: A Return from Risk" (http:/ / www. bankofengland. co. uk/ publications/ speeches/ 2009/ speech381. pdf). Bank of
England. . " Banks are dangerous institutions. They borrow short and lend long. They create liabilities which promise to be liquid and hold
few liquid assets themselves. That though is hugely valuable for the rest of the economy. Household savings can be channelled to finance
illiquid investment projects while providing access to liquidity for those savers who may need it.... If a large number of depositors want
liquidity at the same time, banks are forced into early liquidation of assets – lowering their value ...'"
[11] "Prof Richard Werner describes credit creation." (http:/ / www. youtube. com/ watch?v=wDHSUgA29Ls). WWW.the-free-lunch.com. .
[12] "Disyatat, P. 2010 The bank lending channel revisited." (http:/ / www. bis. org/ publ/ work297. pdf). Bank for International Settlements. .
"Page 2. the concept of the [mainstream economics] money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank
lending. Page 7 When a loan is granted, banks in the first instance create a new liability that is issued to the borrower. This can be in the form
of deposits or a cheque drawn on the bank, which when redeemed, becomes deposits at another bank. A well functioning interbank market
overcomes the asynchronous nature of loan and deposit creation across banks. Thus loans drive deposits rather than the other way around."
[13] "Paul Tucker, Money and credit: Banking and the Macroeconomy" (http:/ / www. bankofengland. co. uk/ publications/ speeches/ 2007/
speech331. pdf). Bank of England. . " banks....in the short run.....lever up their balance sheets and expand credit at will....Subject only but
crucially to confidence in their soundness, banks extend credit by simply increasing the borrowing customer's current account.....This 'money
creation' process is constrained by their need to manage the liquidity risk from the withdrawal of deposits and the drawdown of backup lines to
which it exposes them."
[14] "Glen Stevens, the Australian Economy: Then and now" (http:/ / www. rba. gov. au/ speeches/ 2008/ sp-gov-150508. html). Reserve Bank
of Australia. . " money multiplier, as an introduction to the theory of fractional reserve banking. I suppose students have to learn that, and it is
easy to teach, but most practitioners find it to be a pretty unsatisfactory description of how the monetary and credit system actually works. In
large part, this is because it ignores the role of financial prices in the process."
[15] "White, W. Changing views on how best to conduct monetary policy: the last fifty years" (http:/ / www. bis. org/ speeches/ sp011214. htm).
Bank for International Settlements. . "Some decades ago, the academic literature....emphasised the importance of the reserves supplied by the
Fractional reserve banking
central bank....., and the implications (via the money multiplier) for the growth of money and credit. Today, it is more broadly understood that
no industrial country conducts policy in this way under normal circumstances....there has been a decisive shift towards the use of short-term
interest rates as the policy instrument [in industrialised countries]. In this framework, cash reserves supplied to the banking system are
whatever they have to be to ensure that the desired policy rate is in fact achieved."
[16] "Freedman, C. Reflections on Three Decades at the Bank of Canada" (http:/ / www. bankofcanada. ca/ en/ conference/ 2003/ reflections.
pdf). Bank of Canada. . "It used to be that most academic research treated money (or sometimes base) as the exogenous policy instrument
under the control of the central bank. This was an irritant to those of us working in central banks, because the instrument of policy had always
been the short-term interest rate, and because all monetary aggregates (beyond base) have always been and remain endogenous. In recent
years, more and more academics, in specifying their models, have treated the short-term interest rate as the policy instrument, thereby
increasing the usefulness of their analyses..."
[17] http:/ / college. holycross. edu/ RePEc/ eej/ Archive/ Volume18/ V18N3P305_314. pdf Understanding the Remarkable Survival of
Multiplier Models of Money Stock Determination. Eastern Economic Journal, 1992, vol. 18, issue 3, pages 305-314
[18] The economics of money, banking and finance: a European text. Fourth edition. Howells, P. G. A. Baines, K. Page 241 (http:/ / books.
google. fi/ books?id=aQ6JI1y1dqAC& lpg=PP1& dq=Howells and Bain (2005)& pg=PA241#v=onepage& q& f=false). FT Prentice Hall.
2005. ISBN 9780273693390. .
[19] "(Holmes, 1969 page 73 at the time Senior Vice President of the Federal Reserve Bank of New York responsible for open market
operations) I have not seen, cited in Bank and Credit the Scientific Journal of the National Bank of Poland" (http:/ / www. bankikredyt. nbp.
pl/ content/ 2010/ 03/ bik_03_2010_02. pdf). . " In the real world, banks extend credit, creating deposits in the process, and look for reserves
later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short
run, the Federal Reserve has little or no choice about accommodating that demand… ...'"
[20] "Modern Money Mechanics. Page 37. Money Creation and Reserve Management" (http:/ / upload. wikimedia. org/ wikipedia/ commons/ 4/
4a/ Modern_Money_Mechanics. pdf) (PDF). Federal Reserve Bank of Chicago. . " Page 7. Of course, they do not really pay out loans from
the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept
promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000.
Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system.
Page 37. In the real world, a bank's lending is not normally constrained by the amount of excess reserves it has at any given moment. Rather,
loans are made, or not made, depending on the bank's credit policies and its expectations about its ability to obtain the funds necessary to pay
its customers' checks and maintain required reserves in a timely fashion ...'"
[21] "The Transmission of Monetary Policy in Canada" (http:/ / www. bankofcanada. ca/ wp-content/ uploads/ 2011/ 02/ hermes. pdf). Bank of
Canada. . "Required reserves have traditionally been justified by a desire to influence the size of the money multiplier and by prudential
concerns. However, central banks’ views about money supply determination have for a long time been that the money stock is demand
determined"
[22] Elements of Banking Made Simple, Hoyle and Whitehead (Oxford: Heinemann, 1989 edition). From preface "specifically designed to meet
the requirements of the Institute of Bankers’ Banking Certificate and Foundation Course". Page 22 "Consider a deposit....£1000 in
banknotes....(a) We can lend out £700.... This is the simple view of bank lending. (b) It is....possible for us to have deposits of £3333.33. As
we only have deposits....of £1000 we can lend out £2333.33, provided we can find borrowers. This is the more sophisticated view of bank
lending.
[23] Bank for International Settlements - The Role of Central Bank Money in Payment Systems. See page 9, titled, "The coexistence of central
and commercial bank monies: multiple issuers, one currency": http:/ / www. bis. org/ publ/ cpss55. pdf A quick quotation in reference to the 2
different types of money is listed on page 3. It is the first sentence of the document:
"Contemporary monetary systems are based on the mutually reinforcing roles of central bank money and
commercial bank monies."
[24] European Central Bank - Domestic payments in Euroland: commercial and central bank money: http:/ / www. ecb. int/ press/ key/ date/
2000/ html/ sp001109_2. en. html One quotation from the article referencing the two types of money:
"At the beginning of the 20th almost the totality of retail payments were made in central bank money. Over
time, this monopoly came to be shared with commercial banks, when deposits and their transfer via cheques
and giros became widely accepted. Banknotes and commercial bank money became fully interchangeable
payment media that customers could use according to their needs. While transaction costs in commercial bank
money were shrinking, cashless payment instruments became increasingly used, at the expense of banknotes"
[25] Macmillan report 1931 account of how fractional banking works http:/ / books. google. ca/ books?hl=en& id=EkUTaZofJYEC&
dq=British+ Parliamentary+ reports+ on+ international+ finance& printsec=frontcover& source=web& ots=kHxssmPNow&
sig=UyopnsiJSHwk152davCIyQAMVdw& sa=X& oi=book_result& resnum=1& ct=result#PPA34,M1
[26] http:/ / books. google. com/ books?id=I-49pxHxMh8C& pg=PA303& dq=deposit+ reserves& lr=&
sig=hMQtESrWP6IBRYiiaZgKwIoDWVk#PPA295,M1 William MacEachern, Macroeconomics: A Contemporary Introduction, p. 295
[27] ebook: The Federal Reserve - Purposes and Functions:http:/ / www. federalreserve. gov/ pf/ pf. htm
see pages 13 and 14 of the pdf version for information on government regulations and supervision over banks
30
Fractional reserve banking
[28] http:/ / www. mhhe. com/ economics/ mcconnell15e/ graphics/ mcconnell15eco/ common/ dothemath/ moneymultiplier. html
[29] http:/ / www. federalreserve. gov/ releases/ h3/ Current/ Federal Reserve Board, "AGGREGATE RESERVES OF DEPOSITORY
INSTITUTIONS AND THE MONETARY BASE" (Updated weekly).
[30] http:/ / books. google. com/ books?id=FdrbugYfKNwC& pg=PA169& lpg=PA169& dq=united+ states+ money+ multiplier& source=web&
ots=C_Hw1u82xe& sig=m7g0bMz167DijFsOCbn5f4aWAOU#PPA170,M1 Bruce Champ & Scott Freeman, Modeling Monetary Economies,
p. 170 (Figure 9.1).
[31] A handbook of alternative monetary economics, by Philip Arestis, Malcolm C. Sawyer, p. 53 (http:/ / books. google. com/
books?id=TPa22fYkDSsC& pg=PA53& dq=endogeneity+ money+ supply+ wicksell)
[32] "Goodhart C A E (1984( Monetary Policy in Theory and Practice p.188. I have not seen, cited in Monetary Policy Regimes: a fragile
consensus. Peter Howells and Iris Biefang-Frisancho Mariscal" (http:/ / carecon. org. uk/ DPs/ 0512. pdf) (PDF). University of the West of
England, Bristol. . " The base-multiplier model of money supply determination (which lies behind the exogenously determined money stock of
the LM curve) was condemned years ago as 'such an incomplete way of describing the process of the determination of the stock of money that
it amounts to misinstruction ...'(Goodhart 1984. Page 188)"
[33] "Goodhart C. (1994), What Should Central Banks Do? What Should Be Their Macroeconomic objectives and Operations?, The Economic
Journal, 104, 1424–1436 I have not seen, cited in "Show me the money" – or how the institutional aspects of monetary policy implementation
render money supply endogenous. Juliusz Jablecki" (http:/ / www. bankikredyt. nbp. pl/ content/ 2010/ 03/ bik_03_2010_02. pdf). Bank and
Credit, the scientific journal of the national bank of Poland. .
[34] "Charles Goodhart, 2007.02.28, Whatever became of the monetary aggregates?" (http:/ / www. bankofengland. co. uk/ publications/ events/
ccbs_cornell2007/ paper_6goodhart. pdf). Bank of England. .
[35] "King Mervyn, The transmission mechanism of monetary policy" (http:/ / www. bankofengland. co. uk/ publications/ quarterlybulletin/
qb9403. pdf) (PDF). Bank of England. .
[36] "Paul Tucker, Managing the central bank's balance sheet: Where monetary policy meets financial stability" (http:/ / www. bankofengland.
co. uk/ publications/ speeches/ 2004/ speech225. pdf). Bank of England. . " given this way of implementing monetary policy, money – both
narrow and broad – is largely endogenous. The central bank simply supplies whatever amount of base money is demanded by the economy at
the prevailing level of interest rates."
[37] "Razzak, W. Money in the Era of Inflation Targeting" (http:/ / www. rbnz. govt. nz/ research/ discusspapers/ dp01_02. pdf). Reserve Bank
of New Zealand. . "In New Zealand....money supply is endogenous"
[38] http:/ / www. federalreserve. gov/ pubs/ feds/ 2010/ 201041/ index. html Money, Reserves, and the Transmission of Monetary Policy: Does
the Money Multiplier Exist? Conclusions
[39] http:/ / www. federalreserve. gov/ releases/ h6/ discm3. htm
[40] Reserve Bank of India - Report on Currency and Finance 2004-05 (See page 71 of the full report or just download the section Functional
Evolution of Central Banking): http:/ / www. rbi. org. in/ scripts/ AnnualPublications.
aspx?head=Report%20on%20Currency%20and%20Finance& fromdate=03/ 17/ 06& todate=03/ 19/ 06
The monopoly power to issue currency is delegated to a central bank in full or sometimes in part. The practice
regarding the currency issue is governed more by convention than by any particular theory. It is well known
that the basic concept of currency evolved in order to facilitate exchange. The primitive currency note was in
reality a promissory note to pay back to its bearer the original precious metals. With greater acceptability of
these promissory notes, these began to move across the country and the banks that issued the promissory notes
soon learnt that they could issue more receipts than the gold reserves held by them. This led to the evolution
of the fractional reserve system. It also led to repeated bank failures and brought forth the need to have an
independent authority to act as lender-of-the-last-resort. Even after the emergence of central banks, the
concerned governments continued to decide asset backing for issue of coins and notes. The asset backing took
various forms including gold coins, bullion, foreign exchange reserves and foreign securities. With the
emergence of a fractional reserve system, this reserve backing (gold, currency assets, etc.) came down to a
fraction of total currency put in circulation.
31
Fractional reserve banking
Further reading
•
•
•
•
•
Crick, W.F. (1927), The genesis of bank deposits, Economica, vol 7, 1927, pp 191–202.
Friedman, Milton (1960), A Program for Monetary Stability, New York, Fordham University Press.
Meigs, A.J. (1962), Free reserves and the money supply, Chicago, University of Chicago, 1962.
Philips, C.A. (1921), Bank Credit, New York, Macmillan, chapters 1-4, 1921,
Thomson, P. (1956), Variations on a theme by Philips, American Economic Review vol 46, December 1956,
pp. 965–970.
• Federalreserveeducation.org - The Principle of Multiple Deposit Creation (http://www.federalreserveeducation.
org/fed101_html/policy/frtoday_depositCreation.pdf)
• Reserve Requirements - Fedpoints - Federal Reserve Bank of New York (http://www.newyorkfed.org/
aboutthefed/fedpoint/fed45.html)
• Bank for International Settlements - The Role of Central Bank Money in Payment Systems (http://www.bis.
org/publ/cpss55.pdf)
External links
• Modern Money Mechanics (http://upload.wikimedia.org/wikipedia/commons/4/4a/
Modern_Money_Mechanics.pdf) Federal Reserve educational material explaining how money is created.
• Interactive Fractional Reserve Calculator (http://www.themoneyjar.co.uk/calc/fractional-reserve-banking.
html) Calculator that details deposit multiplication for any reserve requirement.
Monetary base
In economics, the monetary base (also base money, money base,
high-powered money, reserve money, or, in the UK, narrow money)
is a term relating to (but not being equivalent to) the money supply (or
money stock), the amount of money in the economy. The monetary
base is highly liquid money that consists of coins, paper money (both
as bank vault cash and as currency circulating in the public), and
commercial banks' reserves with the central bank. Measures of money
are typically classified as levels of M, where the monetary base is
smallest and lowest M-level: M0. Base money can be described as the
Monetary base is the bottom blue line
most acceptable (or liquid) form of final payment. Broader measures of
the money supply also include money that does not count as base
money, such as demand deposits (included in M1), and other deposit accounts like the less liquid savings accounts
(included in M2) etc.
(The narrow money supply is an earlier term used in the U.S to describe currency held by the non-bank public and
demand deposits of banks, M1).
32
Monetary base
Management
"Open market operations" are monetary policy tools that affect directly the monetary base; the monetary base can be
expanded or contracted using an expansionary policy or a contractionary policy, but not without risk.
The monetary base is typically controlled by the institution in a country that controls monetary policy. This is usually
either the finance ministry or the central bank. These institutions print currency and release it into the economy, or
withdraw it from the economy, through open market transactions (i.e., the buying and selling of government bonds).
These institutions also typically have the ability to influence banking activities by manipulating interest rates and
changing bank reserve requirements (how much money banks must keep on hand instead of loaning out to
borrowers).
The monetary base is called high-powered because an increase in the monetary base (M0) can result in a much
larger increase in the supply of bank money, an effect often referred to as the money multiplier. An increase of 1
billion currency units in the monetary base will allow (and often be correlated to) an increase of several billion units
of "bank money". This is often discussed in conjunction with fractional-reserve banking banking systems. A system
of full-reserve banking would not allow for an increase of currency in the banking system on top of the monetary
base.
The Austrian School of economics is critical of fractional-reserve banking, stating that the increase of money in the
banking system is equivalent to an artificial injection of credit, which is the source of the business cycle. This is
elaborated in the Austrian business cycle theory, for which Friedrich Hayek won the Nobel Prize in economics in
1974. However, in 1976, in a paper on The Denationalization of Money,[1] Hayek advocated that rather than
re-instituting a government-mandated gold standard, a free market in money be allowed to develop, with issuers of
money competing with each other to produce the best, most stable and healthy currency. This sparked an entire
school of thought within economics, Free Banking, with banks not being banned from having fractional reserves as
other Austrians such as Murray Rothbard advocated, but instead being free to experiment and discover the best
method of conducting business.
References
[1] Hayek, Denationalization of Money (http:/ / mises. org/ books/ denationalisation. pdf)
External links
• Brunner, Karl (1987). "High-powered money and the monetary base" (http://www.dictionaryofeconomics.com/
article?id=pde1987_X001039). In Newman, Peter K.; Eatwell, John; Palgrave, Robert Harry Inglis; Milgate,
Murray. The New Palgrave Dictionary of Economics. New York: Macmillan. doi:10.1057/9780230226203.2726.
ISBN 0-935859-10-1. Retrieved 08 February 2011.
• Goodhart, Charles (1987). "Monetary base" (http://www.dictionaryofeconomics.com/
article?id=pde1987_X001483). In Newman, Peter K.; Eatwell, John; Palgrave, Robert Harry Inglis; Milgate,
Murray. The New Palgrave Dictionary of Economics. New York: Macmillan. doi:10.1057/9780230226203.3102.
ISBN 0-935859-10-1. Retrieved 08 February 2011.
• Cagan, Phillip (1965). "High-Powered Money" (http://www.nber.org/chapters/c1642.pdf). Determinants and
Effects of Changes in the Stock of Money, 1875-1960. Cambridge, Massachusetts: National Bureau of Economic
Research. pp. 45–117. ISBN 0-870-14097-3. Retrieved 08 February 2011.
• Aggregate Reserves Of Depository Institutions And The Monetary Base (H.3) (http://www.federalreserve.gov/
releases/h3/Current/h3.htm)
33
Divisia monetary aggregates index
34
Divisia monetary aggregates index
In econometrics and official statistics, and particularly in banking, the Divisia monetary aggregates index is an
index of money supply. It is a particular application of a Divisia index to monetary aggregates.
Background
The monetary aggregates currently in use by the Federal Reserve (and most other central banks around the world) are
simple-sum indexes, in which all monetary components are assigned a unitary weight, as follows
where
is one of the
monetary components of the monetary aggregate
. This summation index implies
that all monetary components contribute equally to the money total, and it views all components as dollar for dollar
perfect substitutes. It has been argued, however, that such an index cannot, in general, represent a valid structural
economic variable for the services of the quantity of money.
Over the years, there have been many attempts at properly weighting monetary components within a simple-sum
aggregate. Without theory, however, any weighting scheme was questionable. Since 1980, attention has been
focused on the gains that can be achieved by a rigorous use of microeconomic- and aggregation-theoretic
foundations in the construction of monetary aggregates. This new approach to monetary aggregation was derived and
advocated by William A. Barnett (1980) and has led to the construction of monetary aggregates based on Diewert's
(1976) class of superlative quantity index numbers. The new aggregates are called the Divisia aggregates or
Monetary Services Indexes. Early research with those aggregates using American data was done by Salam Fayyad in
his 1986 PhD dissertation.
The Divisia index (in discrete time) is defined as
according to which the growth rate of the aggregate is the weighted average of the growth rates of the component
quantities. The original continuous time Divisia index formula for consumer goods was derived by Francois Divisia
in his classic paper published in French in 1925 in the Revue d'Economie Politique. The discrete time Divisia
weights are defined as the expenditure shares averaged over the two periods of the change
for
, where
is the expenditure share of asset
during period
, and
is the user cost of asset
which is just the opportunity cost of holding a dollar's worth of the
yield on the
th asset, and
, derived by Barnett (1978),
th asset. In the last equation,
is the market
is the yield available on a 'benchmark' asset that is held only to carry wealth between
different time periods.
In the literature on aggregation and index number theory, the Divisia approach to monetary aggregation,
, is
widely viewed as a viable and theoretically appropriate alternative to the simple-sum approach. See, e.g.,
International Monetary Fund (2008), Macroeconomic Dynamics (2009), and Journal of Econometrics (2011). The
simple-sum approach,
, which is still in use by some central banks, adds up imperfect substitutes, such as
Divisia monetary aggregates index
currency and non-negotiable certificates of deposit, without weights reflecting differences in their contributions to
the economy's liquidity. A primary source of theory, applications, and data from the aggregation-theoretic approach
to monetary aggregation is the Center for Financial Stability [1] in New York City. More details regarding the Divisia
approach to monetary aggregation are provided by Barnett, Fisher, and Serletis (1992), Barnett and Serletis (2000),
and Serletis (2007. Divisia Monetary Aggregates are available for the United Kingdom by the Bank of England [2],
for the United States by the Federal Reserve Bank of St. Louis [3], and for Poland by the National Bank of Poland [4].
Divisia monetary aggregates are maintained for internal use by the European Central Bank [5], the Bank of Japan [6],
the Bank of Israel [7], and the International Monetary Fund [8].
References
• Barnett, William A. [9] "The User Cost of Money". Economics Letters (1978), 145-149.
• Barnett, William A. "Economic Monetary Aggregates: An Application of Aggregation and Index Number Theory
[10]
," Journal of Econometrics 14 (1980), 11-48.
• Barnett, William A. and Apostolos Serletis. The Theory of Monetary Aggregation. Contributions to Economic
Analysis 245. Amsterdam: North-Holland (2000).
• Barnett, William A., Douglas Fisher, and Apostolos Serletis. "Consumer Theory and the Demand for Money".
Journal of Economic Literature 30 (1992), 2086-2119.
• Diewert, W. Erwin. [11] "Exact and Superlative Index Numbers". Journal of Econometrics 4 (1976), 115-146.
• Divisia, Francois. "L'Indice Monétaire et la Théorie de la Monnaie," Revue D'Économie Politique 39 (1925),
842-864.
• Fayyad, Salam. "Monetary Asset Component Grouping and Aggregation: An Inquiry into the Definition of
Money". PhD Dissertation. University of Texas at Austin (1986).
• International Monetary Fund. "Monetary and Financial Statistics Compilation Guide." (2008), 183-184.
• Journal of Econometrics, special issue on "Measurement with Theory," Elsevier journal, Amsterdam, vol. 161,
no. 1, March (2011).
• Macroeconomic Dynamics, special issue on "Measurement with Theory," Cambridge University Press journal,
Cambridge, UK, vol 13, supplement 2 (2009).
• Serletis, Apostolos. [12] The Demand for Money: Theoretical and Empirical Approaches. Springer (2007).
References
[1] http:/ / www. centerforfinancialstability. org/ index. php
[2] http:/ / www. bankofengland. co. uk/ statistics/ ms/ current/ index. htm
[3] http:/ / research. stlouisfed. org/ msi/ 2006msidata. html
[4] http:/ / www. nbp. pl/ Homen. aspx?f=en/ statystyka/ miary/ miary. html
[5] http:/ / www. ecb. int/ home/ html/ index. en. html
[6] http:/ / www. boj. or. jp/ en/
[7] http:/ / www. bankisrael. gov. il/ firsteng. htm
[8] http:/ / www. imf. org/ external/ index. htm
[9] http:/ / econ. tepper. cmu. edu/ barnett/ Welcome. html
[10] http:/ / www. sciencedirect. com/ science/ article/ pii/ 0304407680900706
[11] http:/ / www. econ. ubc. ca/ diewert/ hmpgdie. htm
[12] http:/ / econ. ucalgary. ca/ serletis. htm
35
Article Sources and Contributors
Article Sources and Contributors
Money supply Source: http://en.wikipedia.org/w/index.php?oldid=480978504 Contributors: Adiutrix, Aebrett, Aeæ, Afelton, Alan Peakall, Aldur42, Alessandro57, AlexE, Although,
Analoguni, Andlarry, Andres rojas22, Andrewpmk, Antagonist, Appleseed, Aprock, Archimerged, Arcturus87, Ariel., Artoasis, Autopilot, AzertyFab, Baronnet, Bart1313, Baush, Beadbs,
BenB4, Benjo71, Binh Giang, Bmicomp, Bobrayner, Boson, Br77rino, Bryan Derksen, Btyner, Buldri, CBMuir1, Caesura, Cameron Scott, Capricorn42, Carbonate, Cassowary, CharlBarnard,
Cherkash, Chochopk, Choster, Chris 73, Chris the speller, Corleonebrother, Cowpriest2, Cretog8, Crosbiesmith, Cryout, Dabeamer42, Danerobe, Dark Charles, Dcsohl, Dearsina, Debresser,
Deon Steyn, Deusnoctum, Dgw, Diberri, Dickreuter, Diza, DocendoDiscimus, Docu, Dotter, Duoduoduo, Dwarnr, Dysmorodrepanis, EGeek, Earth, Ecoleads, Edaeda, Edward, Egfrank, Ehsanit,
Ehsing, El T, Elsquatregats, Equilibrium007, Ettrig, Evergreens78, Ewlyahoocom, Farmanesh, Favonian, Feco, Fig wright, Filiocht, Financestudent, Finnancier, Fleisher, Foofighter20x,
FrankTobia, GCarty, Gary King, Gaytan, Gilliam, GoingBatty, Grafen, Greensburger, Gregalton, Ground Zero, Grouse, Gwideman, Gypsydoctor, Hawklord, Hede2000, Hellothatsme, Henrygb,
Henrym, Hoggr, HonestIntelligence, Huttelmk, I Enjoy Commenting, Ibagli, Iluxan, J'raxis, JBKramer, Jackzhp, Jaeger5432, Jason Hommel, Jaxsonjo, Jdevine, JeevanJones, Jerryseinfeld,
Jes007, Jni, JoanneB, Joerotger, John Quiggin, JohnDoe0007, Joshsmith65536, Jossycruise, Jt, Junling, Jurras, Justanyone, KHirsch, KarynN1, Katieh5584, Kbh3rd, Kermit2, Kershner, Kinu,
Kwamikagami, Kwertii, Lachatdelarue, LarsPensjo, Laurenjf, Lawrencekhoo, Lejarrag, Liftarn, Lightmouse, LilHelpa, LinusK, Llywrch, LorenzoB, Lysglimt, MSGJ, Maktimothy, Marek69,
Mariusm98, MartinDK, Maxx.T, Mcarling, Melchoir, Michael Hardy, MichaelGood, MiguelTremblay, MilesAgain, Mischling, Misterx2000, Mnmngb, Momokolam, Msankowski, Mtiffany71,
Nagle, Nargalzius, Nbarth, Nealmcb, Nickshanks, Nik42, Nikai, Nirvana2013, Nixeagle, Normxxx, NotAnonymous0, Nricardo, Nurg, Nutcracker, Ohnoitsjamie, OneWorld22, OsamaBinLogin,
Osvaldi, Paddles, Pakaran, Palefire, Paul Nollen, Pde, Peoplez1k, Perspicacite, Phanly, Phoib0, Pjtobe, Pleasantville, ProfessorPaul, Prothonotar, Pseudomonas, Publicly Visible, Quuxplusone,
Radagast83, Ramiromasters, Raven in Orbit, Rdnk, Reaper Eternal, Rebrane, Reissgo, Rich Farmbrough, Richard reti, Rinconsoleao, Rricci, Rworsnop, Sabine McNeill, Sam Francis, Sbharris,
Sdoerr, Searchme, Shabestan64, Shane1800, Shinkansen Fan, Sigmundur, Simon123, SimonP, Sintaku, SlamDiego, Slaniel, Sligocki, Smyth, Sojournerpaul, Soliloquial, Sonic Craze, Superluser,
SvenAERTS, Sweikart, Taffenzee, Tannin, Tassedethe, Teles, Tempshill, Tequendamia, Terjepetersen, That Guy, From That Show!, Thomasmeeks, TitaniumCarbide, TitaniumDreads, Tito80,
Tmh, Tmkly3, Total-equilibrity, Tpb, TreasuryTag, Trueness, Unschool, Veinor, Versageek, Volunteer Marek, Vzbs34, Wavelength, Wickit1, Wideshanks, Wikiant, Wizofaus, WriterHound,
Xaje, Yahel Guhan, Yellow Element, Zaereth, Zain Ebrahim111, ZephyrAnycon, Zyrxil, Zzuuzz, 428 anonymous edits
Quantity theory of money Source: http://en.wikipedia.org/w/index.php?oldid=480842545 Contributors: Abhijay, Akradecki, AlterFritz, Analogdino, AngleWyrm, Aresch, Atlastawake,
Bender235, Binary TSO, Binksternet, Bkwillwm, Byelf2007, C4VC3, Colchicum, Courcelles, Cournot, Cretog8, Crossxwill, Cryout, Dabigkid, David Santucci, DickClarkMises, Djstreet,
DoostdarWKP, Duoduoduo, Euchiasmus, Flying Pete, Gaius Cornelius, Goestofaisal, Haemo, Harkathmaker, J.delanoy, Jayhshah, Jdevine, Jerryseinfeld, John Quiggin, Ligulem, MartinDK,
Maurege, Mdd4696, Mferree, Miccon, Mikem1234, MrOllie, Narinukositkul, Nbarth, Nbierma, Oxymoron83, Panache, Pikitfense, RayBirks, Rich Farmbrough, Rjwilmsi, SimonP, SlamDiego,
Smyth, Softwarenerd, Stefan Kruithof, Stephen lau, SueHay, Sweikart, Tagus, That Guy, From That Show!, The Gnome, Thomasmeeks, Volunteer Marek, WikHead, ZephyrAnycon, 101
anonymous edits
Fractional reserve banking Source: http://en.wikipedia.org/w/index.php?oldid=481437529 Contributors: $atan's$pawn, $hady$hysterGeithner, 84user, Abject Normality, Afelton, Akamad,
Alansohn, Alast0r, AltiusBimm, AmourReflection, Analoguni, Andrewedwardjudd, AnonMoos, AnthonyQBachler, Appraiser, Apteva, Arronax50, Arthur Rubin, Atlantia, BD2412,
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Farmbrough, Rinconsoleao, Rjwilmsi, Rockpocket, Rogermw, Ron Paul...Ron Paul..., Rubicon, Rubisco, Sabine McNeill, Saforrest, Sandstein, Sardanaphalus, Sargdub, Satori Son, Sbharris,
Scientus, Sealer25, Shinokamen, Simon123, Smallman12q, Smarkflea, Snappy, Snodgrass Bat, Socppt12, Socppt15, Sommers, Sparkygravity, StarTrekkie, StoborSeven, Strikehold, Striver,
Sumdog, Sunray, Susurrus, Tabletop, Tamino, Terjepetersen, The Anome, The Four Deuces, The Transhumanist, TheFreeloader, TheGoldenAgeofHyperinflation, TheSoundAndTheFury,
TheSourceAura, Theblackbay, Themfromspace, Themoneymultiplier, Thepatriots, Threlicus, Ticklemygrits, Tim1357, Timneu22, TitaniumDreads, Tito80, Toby Douglass, Torkillbruland,
TruthComesFromAGunBoat, UnexpectedTiger, User2004, Utcursch, VengeancePrime, Vexorg, Vin Kaleu, Vincent the Vain, Vino s, Virginiahammon, VulgarKeynesianMilitarism, Weaponbb7,
Wideshanks, Will Beback, Will2k, Xyzzyplugh, Yourmanstan, Yworo, Zenwhat, Zoicon5, 608 anonymous edits
Monetary base Source: http://en.wikipedia.org/w/index.php?oldid=463811928 Contributors: Alberth2, Anual, Ariel., Autopilot, Bluemoose, Budsy1, Cameron Scott, Cheeselog3000, Cretog8,
Culmensis, DanMS, Dawnseeker2000, Discospinster, DocWatson42, DocendoDiscimus, Feco, Gigs, Greatcmy, Greensburger, Hisabness, Htournyol, HugeHedon, Iiigoiii, IrekReklama, JHP,
Jerryseinfeld, Joescallan, John Quiggin, Kajisol, MarceloB, Marcopil64, MeltingPrism, MrBAI, Nikai, Plastikspork, Regan123, Sabine McNeill, Shai-kun, Tassedethe, Thomasmeeks, Tim Ross,
Tpb, Yellow Element, Yunzhong Hou, 35 anonymous edits
Divisia monetary aggregates index Source: http://en.wikipedia.org/w/index.php?oldid=469410412 Contributors: CBM, Calecon, Den fjättrade ankan, Duoduoduo, Econterms, John Quiggin,
Marudubshinki, Melcombe, Rayc, The Anome, Wabarnett, 1 anonymous edits
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Image Sources, Licenses and Contributors
Image Sources, Licenses and Contributors
Image:Components of US Money supply.svg Source: http://en.wikipedia.org/w/index.php?title=File:Components_of_US_Money_supply.svg License: Creative Commons
Attribution-Sharealike 3.0 Contributors: Autopilot
Image:Changes in US Money supply.svg Source: http://en.wikipedia.org/w/index.php?title=File:Changes_in_US_Money_supply.svg License: Creative Commons Attribution-Sharealike 3.0
Contributors: Autopilot
Image:Components_of_US_Money_supply_(logscale).svg Source: http://en.wikipedia.org/w/index.php?title=File:Components_of_US_Money_supply_(logscale).svg License: Creative
Commons Attribution-Sharealike 3.0 Contributors: Components_of_US_Money_supply.svg: Autopilot derivative work: Autopilot (talk)
Image:M4 money supply.svg Source: http://en.wikipedia.org/w/index.php?title=File:M4_money_supply.svg License: Creative Commons Attribution-Sharealike 2.5 Contributors:
Crosbiesmith, Lionel Allorge
Image:Euro money supply Sept 1998 - Oct 2007.jpg Source: http://en.wikipedia.org/w/index.php?title=File:Euro_money_supply_Sept_1998_-_Oct_2007.jpg License: Public Domain
Contributors: Analoguni (talk) at en.wikipedia
Image:Money supply of Australia 1984-2007.jpg Source: http://en.wikipedia.org/w/index.php?title=File:Money_supply_of_Australia_1984-2007.jpg License: Public Domain Contributors:
Analoguni (talk)
Image:New zealand money supply 1988-2008.jpg Source: http://en.wikipedia.org/w/index.php?title=File:New_zealand_money_supply_1988-2008.jpg License: Public Domain Contributors:
Analoguni (talk)
Image:Components of the money supply of india 1970-2007.gif Source: http://en.wikipedia.org/w/index.php?title=File:Components_of_the_money_supply_of_india_1970-2007.gif License:
Public Domain Contributors: Analoguni (talk)
Image:Money supply of japan.gif Source: http://en.wikipedia.org/w/index.php?title=File:Money_supply_of_japan.gif License: Public Domain Contributors: Analoguni
Image:Us proportionate m3.svg Source: http://en.wikipedia.org/w/index.php?title=File:Us_proportionate_m3.svg License: Creative Commons Attribution-Sharealike 2.5 Contributors:
Crosbiesmith, Dnu72, 1 anonymous edits
Image:Consumer Loans 1990 2008.png Source: http://en.wikipedia.org/w/index.php?title=File:Consumer_Loans_1990_2008.png License: unknown Contributors: Bryan Derksen,
Kkochendarfer, Monkeybait
File:Fractional reserve banking 20percent 100base.gif Source: http://en.wikipedia.org/w/index.php?title=File:Fractional_reserve_banking_20percent_100base.gif License: Public Domain
Contributors: Analoguni
File:Fractional-reserve banking with varying reserve requirements.gif Source:
http://en.wikipedia.org/w/index.php?title=File:Fractional-reserve_banking_with_varying_reserve_requirements.gif License: Public Domain Contributors: Analoguni
File:Components of the United States money supply2.svg Source: http://en.wikipedia.org/w/index.php?title=File:Components_of_the_United_States_money_supply2.svg License: Public
Domain Contributors: User:El T (talk), Analoguni (talk), User:Jklamo (talk)
File:Euro money supply Sept 1998 - Oct 2007.jpg Source: http://en.wikipedia.org/w/index.php?title=File:Euro_money_supply_Sept_1998_-_Oct_2007.jpg License: Public Domain
Contributors: Analoguni (talk) at en.wikipedia
file:Components of US Money supply (logscale).svg Source: http://en.wikipedia.org/w/index.php?title=File:Components_of_US_Money_supply_(logscale).svg License: Creative Commons
Attribution-Sharealike 3.0 Contributors: Components_of_US_Money_supply.svg: Autopilot derivative work: Autopilot (talk)
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License
License
Creative Commons Attribution-Share Alike 3.0 Unported
//creativecommons.org/licenses/by-sa/3.0/
38