Steve Roth — Actually, Exclusively Banks Impress Money

Actually, non really. Only governments own got "printing presses" too other attempts to "print money" are called counterfeiting. Steve Roth knows this, of course, so he must beingness using "printing money" inwards to a greater extent than or less other sense. Banks don't own got printing presses inwards the basement, literally or figuratively. Governments that number their currencies every bit authorities liabilities do.

Banks increment M1 coin furnish yesteryear adding assets every bit receivables to their residuum sheets every bit receivables  too booking corresponding liabilities every bit payables. The opposite shows upward on the borrower's residuum sheet. Both sets of books are inwards balance, amongst internet null on the respective residuum sheet. Credit too debit entires match. Now the depository fiscal establishment has an property on its residuum canvas too the client has a credit inwards a deposit account. So fifty-fifty though the internet is null inwards the fiscal system, purchasing mightiness increases inwards nongovernment owing to the increment inwards M1 coin furnish every bit a resultant of the deposit inwards the customer's deposit account.

Why is this non a divide of "printing money" then, every bit Steve Roth claims?

When a primal depository fiscal establishment issues the government's currency it creates liabilities on its residuum canvas too assets on the residuum sheets of banks every bit deposits at the primal bank. Assets increment inwards nongovernment every bit a whole without a corresponding liability inwards nongovernment. There is a alter inwards aggregate nongovernment fiscal assets.

When banks exercise a deposit yesteryear extending a loan, at that spot is no alter inwards aggregate internet fiscal assets inwards nongovernment. The internet is zero. When primal banks deficit spend, at that spot is. The internet is the sum of the deficit.

A currency is the unit of measurement of describe organisation human relationship that which the authorities sets too which it accepts every bit payment of obligations it imposes on nongovernment, chiefly taxes but too tariffs, fees too fines. When banks settle accounts amongst the authorities every bit proxies for customers, they own got to settle inwards the government's liabilities, either cash or depository fiscal establishment reserves inwards the primal depository fiscal establishment payments system. This is what "printing money" implies. 

All currency users including banks own got to obtain the currency every bit authorities liabilities, too the entirely root is authorities issuance of the currency through spending or lending, since entirely authorities tin exercise authorities liabilities. In modern monetary production economies, governments delegate this mightiness to their primal depository fiscal establishment every bit the government's fiscal agent. 

The currency sovereign's mightiness to exercise its ain liabilities is unlimited. The constraint is the availability of existent resources for sale inwards the currency, since over-issuance risks inflation. Correspondingly, under-issuance risks contraction too ultimately deflation.

For example, when a taxpayer pays taxes to the authorities that issues the currency, 1 of 2 things happen. Either the taxpayer pays inwards cash at a authorities office, or tenders payment through a bank, e.g., a newspaper depository fiscal establishment check or electronic check. If cash, that cash is deducted from currency inwards circulation, reducing M1. 

If yesteryear check, the depository fiscal establishment check has to clear inwards the government's payment system. In this case, the authorities charges the bank's describe organisation human relationship inwards the payments arrangement too the depository fiscal establishment corresponding charges the customer's describe organisation human relationship at the bank. If at that spot are insufficient funds inwards the customer's account, so the depository fiscal establishment bounces the depository fiscal establishment check too the funds are non deducted from the banks' describe organisation human relationship at the primal bank. This illustrates the huge divergence inwards sort betwixt the "money" banks generate through credit issuance inwards M1, too the "money" that the authorities issues through its fiscal agent, the primal bank.

What happens if the depository fiscal establishment doesn't own got plenty funds inwards its describe organisation human relationship at the primal banks to encompass its obligations? Either the depository fiscal establishment borrows inwards the interbank marketplace seat at the policy charge per unit of measurement gear upward the primal banks sets, or the primal depository fiscal establishment exactly lends the funds to the depository fiscal establishment so the payment arrangement to clear. But the depository fiscal establishment is charged a penalization charge per unit of measurement gear upward higher upward the policy charge per unit of measurement to discourage this, too a depository fiscal establishment that abuses the "discount window" risks its standing too ultimately its seat inwards the payments system.

Again, a pseudo-problem arises from using "money" without a proper technical definition, or else non paying attending to the existing definitions. Similar problems arise amongst other key fiscal too economical terms, such "the involvement rate," "capital," too "saving."

SteveRoth is right that loans creating deposits adds to the M1 coin supply, but this is non currency issuance inwards the customary important of the phrase. Government's issuance of liabilities inwards the government's unit of measurement of describe organisation human relationship is non the same every bit banks creation of its ain liabilities inwards the government's unit of measurement of account, which the depository fiscal establishment cannot issue, beingness currency users too non issuers. 

If banks could "print money" inwards the feel of number currency every bit the authorities creates its ain liabilities yesteryear mark upward accounts on its spreadsheet, banks' risking would non risk insolvency owing to default on loans they extend. This is non the case. Conversely, authorities bonds are default-risk costless since the authorities tin ever number currency to encompass its obligations to safety holders.

However, because depository fiscal establishment credit increases M1, which adds to purchasing mightiness inwards nongovernment, depository fiscal establishment lending tin touching the cost degree too spur inflation. Similarly, contraction inwards depository fiscal establishment lending that is non showtime is deflationary.

Steve Roth too thinks that issuance of authorities securities to showtime deficits, which is mandatory inwards the US, sterilizes those funds so that they don’t add together to coin inwards the feel of M1. This is non the case. The funds that authorities injects increment M1 since currency is issued yesteryear crediting deposit account, which adds to M1. 

Taxes subtract from both M1and too aggregate nongovernment fiscal assets. Payment for buy of newly issued authorities securities decreases M1, but those authorities liabilities are only switched from deposit accounts inwards the payments arrangement to fourth dimension deposits at the primal bank. The sum of nongovernment internet fiscal assets rest the same inwards aggregate.

Moreover, authorities securities are the around liquid divide of fiscal property after cash, brusque term bills are essentially cash equivalents, too authorities securities are the best divide of collateral, spending is non affected yesteryear draining the monetary base of operations every bit deposit accounts at the primal depository fiscal establishment to fourth dimension deposits at the primal bank. 

Issuance of authorities securities does non sterilize deficit spending. There are other reasons to number authorities securities, but this is non 1 of them. Chiefly, authorities securities issuance drains the monetary base, facilitating the primal depository fiscal establishment hitting its target when non paying involvement on excess reserves too non choosing to gear upward the policy charge per unit of measurement to zero. Government securities too provide interest-bearing default-free risk instruments for the fiscal community too nongovernment savers. Issuance of authorities securities is non necessary operationally. It is a policy choice, so political.

Ok, this looks similar semantics too logic-chopping. But it is not. It’s exactly every bit of import to exercise conceptual models that are right every bit it is formal models. This agency weeding out the weasel words, clarifying concepts too getting description right. Some formalism inwards needed inwards this regard, but it is non econometric but double-entry accounting. This requires thinking inwards damage of T-accounts, too that needs to last depository fiscal establishment check yesteryear writing it out.

See Eric Tymoigne, The Financial System too the Economy: Principles of Money & Banking, v. 2.1. 

Asymptosis
Actually, Only Banks Print Money
Steve Roth