W3 - Lecture prep
September 12, 2022 12:02 PM
Title:
WI state theory of • State theory of money:
money? • what should count as money? Whatever we all want to hold.
W should count as
money? ▪ As we all must pay taxes, the state imposes its own currency by demanding their
taxes on their own currency.
□ Tax claims and government bonds are denominated in the state's currency.
• State faces a problem of how it will finance itself: bonds? Borrowing?
• State needs to support economic development of its people
WI Modern monetary • Modern monetary theory (MMT) focuses on the ability of the state to count on the Central
theory? Bank to support their economy (the deficit myth by Stephanie Kelton)
Is money multiplier Schasfoort (2020)
theory accurate? • Money multiplier theory of how money is created is just a myth
Why? • This theory is based on fractional reserve banking, because banks can only create a
multiple of the original central bank money supply.
HD banks create • Banks create money by extending credits (bank deposits)
money? • You can use their debt to buy anything you want
• Banks still make a profit due to liquidity transformation (and the interest rates involved)
• 2 most important differences with money multiplier story:
WI wrong about the ○ Order of events
money multiplier ▪ Money multiplier timing:
story?
□ CB -> individuals -> bank (keeping a fraction and lending the rest) ->
individuals -> bank… until no longer possible because of mandatory
reserves
▪ Alternative story's timing:
□ Bank (provides loan to individual) AND individual (provides loan to bank) ->
customer pays for goods/services -> CB provides cash to banks when
needed to withdraw -> individual withdrawns money
No central bank money is needed for banks to provide loans
○ What constraints money creation?
W constraints money ▪ Money multiplier constraints on money supply: reserve requirement set by CB
creation?
□ They don’t constraint money creation in real life because (almost) all CB
have policies that facilitate reserve creation on demand
▪ Alternative story's constraints on money supply:
□ Public's demand for debt
banks cannot lend if no-one I willing to borrow
□ Capital requirements: fraction of loans to back them up
□ Liquidity ratio: percentage of their assets that must be cash or other liquid
alternatives
Bezemer (2019) - Part 2: Functioning
Money creation
• The state licenses banks to print money (issue liabilities that are state-sanctioned: the central
HI money created?
bank allows to change bank deposits to currency one to one)
HD money creation • Money creation in a closed circular economy:
happens in a closed ○ Banks extend credits to borrowers on the conviction they will repay them
circular economy? ▪ The loan clerks have a responsibility against society for sustainable economic
development, against the customer (not going into bankruptcy) and against the
bank (not losing money)
□ A banking oath was introduced in the NL in 2015 and has been pledged
W happens to banks by >90000 bank employees.
& client's balance ○ Once a bank extends a loan, they add this amount to their customer's account and add
sheets when a loan that liability the customer has to them as their asset
is extended?
• Alternative forms of money creation other than bank credit creation:
W other forms of ○ net international inflows
Banking Page 11
, W other forms of ○ net international inflows
money creation ○ gov't spending as public credit creation (i.e.: unemployment benefits or infrastructure
exist?
projects)
▪ Exact opposite of taxation
▪ Based on this is the theory of coordination problem solving by the government via
HD gov't spending large public spending (Theories of 'Big push' and 'unbalanced growth' in
overcome
coordination probs? development economics)
□ Entrepreneurship in public investment (infrastructure, education,
healthcare, etc…) can result in economic development that would pay back
the initial investment and cause a win-win-win scenario for citizens, private
and public sectors
▪ Unlike bank credit, there's no future repayment requirement for money that the
state spends
Must gov't loans be □ No one using a hospital or a school needs to repay the value of what they
repaid (as bank's)? receive. This because the value created by them exceeds the benefits their
direct users accrue from them (benefits go to society as a whole when
healthier and better educated people extend society's potential in
productive, social and cultural domains)
• Credit creation supports economic activity, provided it makes new economic activity possible
WI role of credit ○ Not always the case. Credit needs to support production and innovation for this to
creation on econ.
Activity? happen
Money circulation
•
• Circulation is only a metaphor
Y is money ○ Money never leaves the bank (if there's more than one bank, it never leaves the
circulation only a
metaphor? banking system)
○ It is not so much about money flows (for Joseph Schumpeter the 'circular flow') but
about the flows of labor, products and services.
• Economic development requires an expanding money supply: value creation requires
YD econ. Dev't transactions that make this development possible which requires an expanding money supply
require an through money creation (at least initially)
expanding money
supply? ○ When investments in new activities need to be made before actual production, money
creation is typically required
○ In the long-run, as more technologies makes production cheaper, more innovation may
mean that less money creation is necessary to run the economy
• Innovation and the case for disruption
YR banks key for ○ Innovations very often do not serve the interest of those who control the financial
innovation (and
growth)? resources, which are typically benefiting economically from the status quo. If no money
creation was possible, the entrepreneurs with innovative and disruptive ideas would
have to get funding from the wealthy (which may have vested interest in the status
quo)
• The shift to the market based economy (in which banks sell their loans to financial markets in
Y have the market return for funding) has undermined banks' role in innovation. Banks have become less
based economy involved in the real economy
(selling loans)
affected negatively ○ For profit, they became more risky (leveraging and lower capital buffers) and let to
Banking Page 12
September 12, 2022 12:02 PM
Title:
WI state theory of • State theory of money:
money? • what should count as money? Whatever we all want to hold.
W should count as
money? ▪ As we all must pay taxes, the state imposes its own currency by demanding their
taxes on their own currency.
□ Tax claims and government bonds are denominated in the state's currency.
• State faces a problem of how it will finance itself: bonds? Borrowing?
• State needs to support economic development of its people
WI Modern monetary • Modern monetary theory (MMT) focuses on the ability of the state to count on the Central
theory? Bank to support their economy (the deficit myth by Stephanie Kelton)
Is money multiplier Schasfoort (2020)
theory accurate? • Money multiplier theory of how money is created is just a myth
Why? • This theory is based on fractional reserve banking, because banks can only create a
multiple of the original central bank money supply.
HD banks create • Banks create money by extending credits (bank deposits)
money? • You can use their debt to buy anything you want
• Banks still make a profit due to liquidity transformation (and the interest rates involved)
• 2 most important differences with money multiplier story:
WI wrong about the ○ Order of events
money multiplier ▪ Money multiplier timing:
story?
□ CB -> individuals -> bank (keeping a fraction and lending the rest) ->
individuals -> bank… until no longer possible because of mandatory
reserves
▪ Alternative story's timing:
□ Bank (provides loan to individual) AND individual (provides loan to bank) ->
customer pays for goods/services -> CB provides cash to banks when
needed to withdraw -> individual withdrawns money
No central bank money is needed for banks to provide loans
○ What constraints money creation?
W constraints money ▪ Money multiplier constraints on money supply: reserve requirement set by CB
creation?
□ They don’t constraint money creation in real life because (almost) all CB
have policies that facilitate reserve creation on demand
▪ Alternative story's constraints on money supply:
□ Public's demand for debt
banks cannot lend if no-one I willing to borrow
□ Capital requirements: fraction of loans to back them up
□ Liquidity ratio: percentage of their assets that must be cash or other liquid
alternatives
Bezemer (2019) - Part 2: Functioning
Money creation
• The state licenses banks to print money (issue liabilities that are state-sanctioned: the central
HI money created?
bank allows to change bank deposits to currency one to one)
HD money creation • Money creation in a closed circular economy:
happens in a closed ○ Banks extend credits to borrowers on the conviction they will repay them
circular economy? ▪ The loan clerks have a responsibility against society for sustainable economic
development, against the customer (not going into bankruptcy) and against the
bank (not losing money)
□ A banking oath was introduced in the NL in 2015 and has been pledged
W happens to banks by >90000 bank employees.
& client's balance ○ Once a bank extends a loan, they add this amount to their customer's account and add
sheets when a loan that liability the customer has to them as their asset
is extended?
• Alternative forms of money creation other than bank credit creation:
W other forms of ○ net international inflows
Banking Page 11
, W other forms of ○ net international inflows
money creation ○ gov't spending as public credit creation (i.e.: unemployment benefits or infrastructure
exist?
projects)
▪ Exact opposite of taxation
▪ Based on this is the theory of coordination problem solving by the government via
HD gov't spending large public spending (Theories of 'Big push' and 'unbalanced growth' in
overcome
coordination probs? development economics)
□ Entrepreneurship in public investment (infrastructure, education,
healthcare, etc…) can result in economic development that would pay back
the initial investment and cause a win-win-win scenario for citizens, private
and public sectors
▪ Unlike bank credit, there's no future repayment requirement for money that the
state spends
Must gov't loans be □ No one using a hospital or a school needs to repay the value of what they
repaid (as bank's)? receive. This because the value created by them exceeds the benefits their
direct users accrue from them (benefits go to society as a whole when
healthier and better educated people extend society's potential in
productive, social and cultural domains)
• Credit creation supports economic activity, provided it makes new economic activity possible
WI role of credit ○ Not always the case. Credit needs to support production and innovation for this to
creation on econ.
Activity? happen
Money circulation
•
• Circulation is only a metaphor
Y is money ○ Money never leaves the bank (if there's more than one bank, it never leaves the
circulation only a
metaphor? banking system)
○ It is not so much about money flows (for Joseph Schumpeter the 'circular flow') but
about the flows of labor, products and services.
• Economic development requires an expanding money supply: value creation requires
YD econ. Dev't transactions that make this development possible which requires an expanding money supply
require an through money creation (at least initially)
expanding money
supply? ○ When investments in new activities need to be made before actual production, money
creation is typically required
○ In the long-run, as more technologies makes production cheaper, more innovation may
mean that less money creation is necessary to run the economy
• Innovation and the case for disruption
YR banks key for ○ Innovations very often do not serve the interest of those who control the financial
innovation (and
growth)? resources, which are typically benefiting economically from the status quo. If no money
creation was possible, the entrepreneurs with innovative and disruptive ideas would
have to get funding from the wealthy (which may have vested interest in the status
quo)
• The shift to the market based economy (in which banks sell their loans to financial markets in
Y have the market return for funding) has undermined banks' role in innovation. Banks have become less
based economy involved in the real economy
(selling loans)
affected negatively ○ For profit, they became more risky (leveraging and lower capital buffers) and let to
Banking Page 12
