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Banking and “The Money Multiplier”

Steve Keen May 2, 2018 Steve Keen's Debt Watch

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Summary:
“Fractional Reserve Banking” and “The Money Multiplier” are two of the most reviled aspects of the current monetary system for libertarian and Austrian inclined thinkers. Post Keynesian thinkers like myself and leading Central Banks argue that these things don’t exist: they’re economic textbook models that are in fact fundamentally wrong, and people railing against them ...

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“Fractional Reserve Banking” and “The Money Multiplier” are two of the most reviled aspects of the current monetary system for libertarian and Austrian inclined thinkers. Post Keynesian thinkers like myself and leading Central Banks argue that these things don’t exist: they’re economic textbook models that are in fact fundamentally wrong, and people railing against them like my good mate Mish Shedlock are in fact “tilting at windmills” (see http://globaleconomicanalysis.blogspot.co.uk/2009/10/fractional-reserve-lending-constitutes.html or https://www.themaven.net/mishtalk/economics/debunking-mmt-keynesianism-monetarism-reader-asks-what-theories-do-you-believe-czT-_MgG6kmzxyd3cNxKeA/).



I decided to model “Fractional Reserve Banking” in my Minsky software for this talk I gave at DMU University in Leicester. The result was somewhat different to what I expected: you can create money the Money Multiplier way: it’s not impossible, as some Post Keynesians claim (see http://www.paecon.net/PAEReview/issue80/DiMuzioNoble80.pdf). But for this to work, all bank loans have to be “cash only”–which clearly they’re not.



I cover the money multiplier model from about the 25 minute mark in this video, and I’ll do a slower, more detailed set of videos on it shortly. You can download the Minsky files I use here from my Patreon site www.patreon.com/ProfSteveKeen.



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About Steve Keen
Steve Keen
Steve Keen (born 28 March 1953) is an Australian-born, British-based economist and author. He considers himself a post-Keynesian, criticising neoclassical economics as inconsistent, unscientific and empirically unsupported. The major influences on Keen's thinking about economics include John Maynard Keynes, Karl Marx, Hyman Minsky, Piero Sraffa, Augusto Graziani, Joseph Alois Schumpeter, Thorstein Veblen, and François Quesnay.
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