Lars P. Syll — Schumpeter–an early champion of MMT

Keeper quote from Joseph Schumpeter. He nailed endogenous money as "credit money" and observed correctly how "money" gets created by banks' extending credit — "they create deposits in their act of lending." This effect is now amplified through non-bank and quasi-bank financial institutions.

The contemporary financialized economy runs largely on privately created credit. This has an even greater effect than Schumpeter likely anticipated. Economists' ignoring this unduly limit the scope of their models by failing to include money & banking, and finance. The result is "surprise resulting from exogenous shock." In other words, the conventional economists were looking in the wrong direction owning to oversimplification of their models of an economy. 

To say that this resulted in "great embarrassment of the profession in the fallout from the global financial crisis would be an understatement. But conventional economists still have not dealt with it by including a correct approach to money & banking and finance. Nor have institutional arrangement been changed to prevent a repeat, perhaps on an even grander scale.

Hyman Minsky was a student of Schumpter at Harvard. Minsky drew out some conclusions from Schumpter's view that became the financial instability hypothesis. Randy Wray, MMT economist and perhaps the most published author on theory of money, was a student of Minsky.

Although Schumpeter eschewed being associated with any particular economic school of thought, he is often considered as belonging to the Austrian school of economics and he was an Austrian national. Hyman Minsky also eschewed association with a particular economic school, but he is often characterized as a Post Keynesian.

MMT has roots in many previous economists and economic schools, although it is usually associated with the Post Keynesian. But here is Wray associated with Schumpeter through Minsky. MMT economists also acknowledge their debt to Abba Lerner, a student of Friedrich Hayek who is generally associated with the Austrian school of economics, too.

Incidentally, the chapter in which this quote occurs is worth reading in full. Here is the citation:

Joseph Schumpeter, History of Economic Analysis, Allen & Unwin, 1954, reprinted by Tayor & Francis, 1986, p. 1080
in CHAPTER 8 Money, Credit, and Cycles, 7. BANK CREDIT AND THE ‘CREATION’ OF DEPOSITS, pp. 1076-1083.

Schumpeter doesn't take credit for originality in this, citing Keynes's Theory of Money, for example. He does criticize Keynes for again mudding the waters in the General Theory. See footnote on page 1080.

Lars P. Syll’s Blog
Schumpeter — an early champion of MMT
Lars P. Syll | Professor, Malmo University

Lars P. Syll — How money is created

David Graeber and the Bank of England.

Lars P. Syll’s Blog
How money is created
Lars P. Syll | Professor, Malmo University

Brian Romanchuk — Primer: What Limits Bank Lending?

The unfortunate fact that bank deposits are considered money has one side effect: our mysticism about money extends towards banking. The apparent ability of banks to "create money out of thin air" seems unfair, and this leads to questions about what limits their ability to lend. The answer is a lot simpler than one might suspect. For any other business (with the possible exception of the resource industry), output is largely constrained by their ability to find customers that they can sell their product to. The business of banks is lending. By analogy, the ability to find customers that they can profitably lend to limits their growth....

Bond Economics
Primer: What Limits Bank Lending?
Brian Romanchuk

Dirk Ehnts — “Money from nothing” – my newspaper article translated into English

German daily newspaper Die tageszeitung published my article on money creation last weekend (here). This is the translation from German into English (also available as a pdf):

econoblog 101
“Money from nothing” – my newspaper article translated into English
Dirk Ehnts | Lecturer at Bard College Berlin

Steve Keen — Note To Joe Stiglitz: Banks Originate, Not Intermediate, And That’s Why Aggregate Demand Is Stuffed

Steve Keen schools Joe Stiglitz on how banks work.

Joe correctly notes that “the world faces a deficiency of aggregate demand”, and attributes this to both “growing inequality and a mindless wave of fiscal austerity”, neither of which I dispute. But then he adds that part of the problem is that “our banks … are not fit to fulfill their purpose” because “they have failed in their essential function of intermediation”….

I’m the last one to defend banks, but here Joe is quite wrong: the banks have very good reasons not to “fulfil their purpose” today, because that purpose is not what Joe thinks it is. Banks don’t “intermediate loans”, they “originate loans”, and they have every reason not to originate right now.

In effect, Joe is complaining that banks aren’t doing what economics textbooks say they should do. But those textbooks are profoundly wrong about the actual functioning of banks, and until the economics profession gets its head around this and why it matters, then the economy will be stuck in the Great Malaise that Joe is hoping to lift us out of.…

Not all economists are operating under wrong model bias, however.

For decades now, a handful of rebel economists have been disputing this—including me of course, but going back to Irving Fisher and even earlier, and including modern non-mainstream economists like Stephanie Kelton (who now advises Bernie Sanders), and University of Southampton Professor Richard Werner. Oh, and a guy named Hyman Minsky too, whom the mainstream ignored until the 2008 crisis. But the mainstream ignored us before the crisis, and continues to ignore us after it, because their “banks as intermediaries” model tells them that we are just spouting nonsense.

We’re not, of course: the ordinary public tends to get that, and even The Bank of England has come out and said that it’s the mainstream that is spouting nonsense, not the rebels. But the mainstream rejects our analysis out of hand, because their model tells them that it’s OK to do so.

This wouldn’t matter if we could ignore the mainstream of the economics profession, but we can’t, because they are the key individuals who influence the economic policies that are actually put in place by politicians.

Forbes
Note To Joe Stiglitz: Banks Originate, Not Intermediate, And That’s Why Aggregate Demand Is Stuffed
Steve Keen | Professor and Head Of School Of Economics, History & Politics, Kingston University, London

Bill Mitchell — Central bank propaganda from the US

Most regular readers and those who understand MMT already know this, but it is a good summary of the correct versus the erroneous notion of banking operations.

Bill Mitchell – billy blog
Central bank propaganda from the US
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Dirk Ehnts — Paul Krugman and monetary theory

Since monetary theory is complicated stuff, I would like to see the debate on endogenous renewed. It is a, perhaps the, decisive issue for the Western world in the 21st century.

econoblog 101
Paul Krugman and monetary theory
Dirk Ehnts | Berlin School for Economics and Law

Ellen Brown — Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans

Warren Mosler quoted.

Web of Debt
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans
Ellen Brown | founder of the Public Banking Institute

Nick Edmonds — If Banks Don't Lend Reserves, What Do They Lend?

Confusing money (accounting entries) with money things, like cash. Again, generalizing from a special case and a limited one at that.

The fact is that a loan does not have to a loan of anything. Some loans can easily be treated as being a loan of something, such as a loan of a car. But dollar loans are not in general a loan of something, even if we feel a desperate urge to think of them as such. They are in fact just bilateral agreements to procure accounting entries.

For many purposes, it is fine to think of dollar loans as being loans of money. But we should be careful not to fool ourselves into thinking that is what they actually are, because we need to understand how things work when that interpretation no longer fits.

Reflections on Monetary Economics
If Banks Don't Lend Reserves, What Do They Lend?
Nick Edmonds

When a bank makes a loan and credits a deposit account, it undertakes an obligation to settle in accordance with customer's wishes, by either furnishing cash at the window or clearing a draft on the customer's account, which the bank does either through intra- or inter-bank netting accounts or in the official payments system, as appropriate. Most of these transactions simply involve marking up one account and marking down another account in the accounts of both parties to the transaction.

Money is not only created "out of thin air," but it is also exchanged in thin air.

Brian Romanchuk — No, Banks Do Not Lend Reserves

This is a response to an article by Nick Rowe, "Repeat after me: people cannot and do not 'spend' money", in which he states that banks lend reserves. As can be guessed from the title of my article, I disagree. But the difference in view is more nuanced than is suggested by the title. There is a good deal of disinformation spread about banking on the internet, so I think this is an important subject. Although this is fairly theoretical, it touches on the topic of the effectiveness of Quantitative Easing (spoiler: it isn't effective).

Bond Economics

No, Banks Do Not Lend Reserves
Brian Romanchuk

Bank reserves are settlement balance held at the central bank for clearing in the payments system and to exchange for vault cash to provide customer with the means to settle spot transaction that need no further clearing. Bank reserves in the payments system come into play after intra-bank and inter-bank clearing. Vault cash is counted as bank reserves for the purpose of the reserve requirement if imposed. Cash in circulation is not counted in bank reserves. The public does not hold bank reserves in any form.  Cash is exchangeable for reserve balances at the central bank, which the public has no access to and where only member institutions are permitted to hold accounts.

Claiming that banks lend out reserves misconstrues the meaning of bank reserves. Bank reserves are liabilities of the cb and when the cb receives reserve balances from a member institution, it marks down its own liabilities. When the cb receives bank reserves in payment of taxes, it marks up the Treasury account by an equal amount. 

In this way, a private deposit account is marked down and the spendable money supply (stock) called M1 is reduced. The credit to the Treasury account is not considered part of the spendable money supply until it is used in clearing when Treasury directs the cb to mark up a bank's reserve account, resulting in a credit to a customer's account, for example, a Social Security deposit. This increase in a demand deposit account results in an increase in M1 money supply. 

Bank reserves, which are more accurately called settlement balances, never leave the the payments system run through the central bank's accounting system, other than bank reserves being exchanged for vault cash, which counts toward the bank's reserve balance. Vault cash loses this status when a customer withdraws cash.

Peter Martin — “Positive Money” : A Fallacy built on a Little known Truth

The crunch issue for all banks, wherever they are, is that they do have, from time to time, to back up the money they have created supposedly “out of thin air” with real government money. The mistake which I think many are making is to assume that bank created money, created when loans are issued, stays in the economy until that loan is repaid. It doesn’t....

A more usual scenario would be that a bank would lend money to a business, say a builder, who would hire bricklayers, joiners, buy raw materials etc for his building project. Every transaction would attract the usual government taxes. Income tax. VAT, NI contributions, Corporation tax etc. As the newly created money is spent and respent it rapidly dwindles until there is nothing left. It has nearly all gone to the government’s taxman who doesn’t want the money as it was originally created. He insists that banks convert their IOUs to government IOUs....

Modern Monetary Theory: Real Economics
“Positive Money” : A Fallacy built on a Little known Truth.
Peter Martin

Joe Weisenthal — Everybody Should Read This Explanation Of Where Money Really Comes From

Good charts illustrating money creation by banks.

Business Insider
Everybody Should Read This Explanation Of Where Money Really Comes From
Joe Weisenthal

Ralph Musgrave — Loans create deposits? Not in one sense of the word “loan”

Ralph makes an important point here. Krugman's claim has been the banks don't create new money when they make loans. They just intermediate old money among savers and borrowers. The endogenous money view, embraced by the BOE paper, is that bank lending creates new money "out of nothing" in the sense that old money is not transferred from saver to borrower. The loan as new bank asset creates a customer deposit as a new bank liability. The aggregate assets and liabilities of the banking system rise in total. This is reflecting in an increase in broad money, that is, M1, independently of base money. If more base money is needed to meet reserve requirements, then the central bank accommodates by buying government securities. This should be a simple and obvious point but apparently some smart people have missed it.

Ralphonomics

Loans create deposits? Not in one sense of the word “loan”
Ralph Musgrave

Randy Wray — Banks Don’t Lend Reserves! Who Knew? MMT, That’s Who!

OK so it took almost four decades but finally the mainstream is waking up to the fact that banks do not “lend out” reserves (except to one another in the fed funds market). The whole “deposit multiplier” story that was taught in every American money and banking textbook is wrong. Always has been wrong.
(Just an aside: the mistake was largely an American deal. British students got to use Charles Goodhart’s text, which always got it right. But generations of Americans as well as foreigners who studied in America were misled by our textbooks.)

If our policymakers who art in Washington understood this, we would not have got QE. Or all the hyperinflation hyperventilating by those who fear that the trillions of dollars of excess reserves will get “lent out” and cause prices to go to the stratosphere.
Banks do not “use” reserves as the raw material for loan-making. Rather, they lend out their own deposits, which are created by keystrokes. Post Keynesians have been saying this since a seminal piece by Basil Moore was published in 1979 (and it is easy to find early precursors all the way back to the dawn of time–as I demonstrated in my 1990 book, Money and Credit in Capitalist Economies).

Economonitor — Great Leap Forward
Banks Don’t Lend Reserves! Who Knew? MMT, That’s Who!
L. Randall Wray | Professor of Economics, UMKC

Steve Keen to Mish — Why banks can't lend reserves

That "increase reserves to increase lending" argument is so hard to shake, but reserves can't be lent from simply from a double-entry bookkeeping point of view.

The way that accountants keep track of the "assets equals liabilities plus equity" rule is to record an increase in assets as a positive and an increase in liabilities as a negative (your liabilities rise, so a negative gets bigger). Reserves are an asset [of the bank], as are loans, and shown as a positive. Deposits—which are created by a loan—are a liability and shown as a negative.

So to lend to a customer, a bank has to show a negative on that customer's accounts. This can be matched by a positive on the loans entry--because the loan has increased in size. No problem.

But if banks were to lend from reserves, they would need to record a minus there--reserves have fallen. And on the liabilities side, they want to ... also show a negative. Whoops! No can do.

The end result of this logic is that reserves are there for settlement of accounts between banks, and for the government's interface with the private banking sector, but not for lending from.Banks themselves may (if they are allowed--I simply don't know the rules here) swap those assets for other forms of assets that are income-yielding, but they are not able to lend from them.

Read it at Mish's Global Economic Trend Analysis
Notes From Steve Keen on "Lending Reserves" and "Debt Jubilees"
by Michael "Mish" Shedlock

See also Mish's Can Bernanke Force Banks to Lend by Halting Interest on Excess Reserves?

Warren Mosler on "deposits create reserves"

From comments at The Center of the Universe

Y Reply:
June 25th, 2012 at 10:18 am

Warren,
“the fed allows it’s member banks- it’s designated agents- to ‘create’ reserve balances within the regulatory framework.
This framework includes reserve requirements as well as extensive regulation on what type of loans/assets are allowed and not allowed. So if a bank creates a loan/deposit/reserves it’s done so within the regulatory framework as a agent of government.”

- When you say the fed allows its member banks to ‘create’ reserve balances, do you mean the fed allows member banks to become ‘overdrawn’? Why do you put ‘create’ in speech marks?
Could you clarify specifically what you mean in detail when you say member banks ‘create’ reserve balances?
thanks!

Warren Mosler Reply:
June 25th, 2012 at 10:52 am

Bank deposits are the accounting record of the liability associated with loans.

So when a bank lends you $100 they might at the same time enter the number ’100′ into your checking account.

But the loan didn’t do the entering of the 100 into your account per se. The 100 liability is the accounting record of the loan.

liabilities are accounting records off assets, etc.

When you account for something you don’t exactly ‘create’ it the way the word ‘create’ is generally understood-
making something out of something else, etc.

What I mean by allowing banks to create reserves is that regulation allows banks to make loans and corresponding deposits that it will accept for payment of taxes recognizing that they are allowing that bank to incur a reserve deficiency in the case of reserve requirements. Additionally, when the Fed ‘clears a check’ it’s allowing the possibility of the account debited to be overdrawn which is also the possibility of a loan from the Fed.

Hey, Jamie Dimon, loans create deposits!

When asked why other banks have higher loan-to-deposit ratios Dimon responded:

"We have to keep a higher amount of cash on hand becaue our customers can move lots of money at a single clip."

Does Dimon think his bank lends its reserves?

Loans create deposits, Jamie...loans create deposits.