Talk:Endogenous money

Scope of term

I am going to alter the text of this article and want to make sure that I am not starting some sort of "war". I am admittedly unclear on the concept of endogenous and exogenous money. It would appear that the "endogenous" people are saying that the free market determines the amount and use of money and that the banks will operate to _allow_ the economy and the market to do what is "best". My own opinion is that recent events tend to contradict that religious position.

The control of credit (and that is essentially what money is) is not to be entrusted to a small group of self interested financial elitists (owners of the credit machine) because the result will be exactly what we have seen. The control of money belongs in the hands of a representative government that in fact represents all of the society and its various classes, opinions, and religious persuasions. We therefore arrive at the crux of "endogenous" to _WHAT_. Are we talking about endogenous to a society or to a banking system or to the WTO or the cosmos or _WHAT_.

There is great confusion here. Lets us attempt to be more precise. _WHO_ is the controller of money????--The Trucker (talk) 19:46, 3 March 2010 (UTC)

From whence does money flow

The following statement is very confusing:

"According to Minsky, money supply is strictly defined as the sum of high-powered money and demand deposits. As opposed to the idea that money supply is negatively related to the rate of interest with a given financial structure ; but it shifted to the right when the financial intermediaries squeeze inactive and issue new substitutes for money, reacting to monetary or just exploiting the profit opportunities during the cycle."

This may be due to punctuation. How about:

"According to Minsky, the money supply is strictly defined as the sum of high-powered money (that supplied by the monetary authority) and demand deposits (that created by loans thus deposits), as opposed to the idea that money supply is negatively related to the rate of interest within a given financial structure. The equilibrium (I think this is the place where supply intersects demand) shifts to the right when the financial intermediaries squeeze inactive deposits (possibly short changing the savers) and issue new substitutes for money (such as securitizations) reacting to monetary constriction (not enough authoritative money) or just exploiting the profit opportunities during the cycle.

So the real question is: do I understand this stuff or am I hallucinating?

I do not take offense at my lack of knowledge. I _WANT_ to understand this.--The Trucker (talk) 20:43, 3 March 2010 (UTC)

Trucker - endogenous money creation is a heterodox economic theory and therefore the concept of general equilibrium does not apply (this is also why the theory is so useful in terms of being able to explain the causes of financial and economic crisis, whereas general equilibrium theory fails dismally to do this.) The debate around this can be summarized in terms of the disagreement between Steve Keen and Paul Krugman - both of them seem to agree that endogenous money creation exists, they just disagree about what to do about it. If endogenous money creation is unbalanced, it implies that parts of the economy may become excessively indebted to other parts - there may be a systemic build up in aggregate debt. This is a very old idea, for example you might want to investigate the concept of a debt jubilee which is found in the old testament, which suggests endogenous money creation has been around for a very long time indeed. I hope that helps, its not easy to get your head around this stuff! Zoe Lindesay — Preceding unsigned comment added by Zoe Lindesay (talk • contribs) 20:00, 6 April 2012 (UTC)

Trucker - "If endogenous money creation is unbalanced, it implies that parts of the economy may become excessively indebted to other parts - there may be a systemic build up in aggregate debt. This is a very old idea, for example you might want to investigate the concept of a debt jubilee which is found in the old testament, which suggests endogenous money creation has been around for a very long time indeed."

The problem of debts mounting up in excess of the ability to pay is not a result of the endogenous nature of money but is caused by "The Miracle of Compound Interest". The Sumerians were the first to recognize that there exists a fundamental contradiction between the growth of interest bearing debt & the growth of the real economy of production & consumption. Because interest bearing debt grows exponentially but the real economy grows only in an S-Curve, debts will always outstrip the ability of the real economy to pay. The only question is how won't they be paid. The answer is political. The Bronze Age solution for thousands of years was periodic debt cancellation. Vilhelmo De Okcidento (talk) 19:20, 17 October 2013 (UTC)

Money is a flow

Endogenous money means that banks and central banks cannot push on a string and determine the amount of money independently of demand. Instead, the moment a customer of a bank uses a credit line, the bank records two entries - one on the asset side and one on the liability side - into its ledger. Once you realise the accounting logic of an emission of money, it becomes immediately clear that money is endogenous.

Central bankers back endogenous money theory

Perhaps relevant to the article is that the endogenous money theory has been backed by two recent central banking papers which both conclude that the money multiplier does not function at all as is taught.

The Fed's: "Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?"

While the institutional facts alone provide compelling support for our view, we also demonstrate empirically that the relationships implied by the money multiplier do not exist in the 28 data for the most liquid and well-capitalized banks. Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected. Specifically, our results indicate that bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks

The BIS's: The bank lending channel revisited

If anything, the process actually works in reverse, with loans driving deposits. In particular … the concept of the money multiplier is flawed and uninformative in terms of analyzing the dynamics of bank lending. Under a fiat money standard and liberalized financial system, there is no exogenous constraint on the supply of credit except through regulatory capital requirements. An adequately capitalized banking system can always fulfill the demand for loans if it wishes to.

The above papers make a real mockery of the Money multiplier and Fractional reserve banking articles which currently don't even state anywhere that the theory of banks being dependent on reserves to issue loans is contested.

--124.169.198.190 (talk) 09:30, 6 February 2013 (UTC)

And the Bank of England has now come down on the side of endogenous money creation with an exceptionally clear explanation of how money creation actually works. See Money creation in the modern economy. We could do worse than rewrite this article based on theirs. If the Fed, the Bank of International Settlement, and the Bank of England supports this view of money creation, it's fair to say that it's fast becoming the orthodox view. -- Derek Ross | Talk 22:23, 13 March 2014 (UTC)

I am just going to address part of this topic.

In the United States, most bank loans are indeed made by crediting the deposit liabilities of the banks or by issuing other kinds of debt (such as cashier's checks), etc., etc. Issuing loan proceeds to a customer in the form of a big bag of paper currency and coin is almost unheard of.

This is not "fast becoming the orthodox view". It's always been the orthodox view -- at least, if you're an insider in the world of banking -- and at least going back to the time I was in college (the 1970s) and to the time when I was a bank auditor (the 1980s).

Where are all the text books that supposedly claim that banks make the majority of loans by doling out paper currency? None of my college text books say that.

The idea that most bank loans are made by having the bank dole out paper currency that the bank acquired from depositors is not only incorrect, it's silly.

I haven't read this article in full, and I haven't looked up the sources, so I'm not saying that some textbook or another isn't giving a misleading impression about how the vast bulk of bank lending is done. I'm just saying that my college training wasn't misleading on this point. Maybe I just went to a good school or I had good textbooks.

A similar discussion in on-going at the talk page for the article on Fractional reserve banking. Famspear (talk) 04:03, 14 March 2014 (UTC)

Example: From the Federal Reserve Bank of Chicago, making it clear that the general rule is that banks usually issue loan proceeds simply by crediting deposit accounts -- not by doling out the paper currency or coin that the bank has already received as "deposits".

Of course, they [commercial banks] do not really make loans out of the money they receive as deposits. If they did this, they would be acting just like financial intermediaries and no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits they make to the borrowers' deposit accounts. Loans (assets) and deposits (liabilities) both rise....

--Federal Reserve Bank of Chicago, Modern Money Mechanics, pp. 3-13 (May 1961), reprinted in Money and Banking: Theory, Analysis, and Policy, p. 59, ed. by S. Mittra (Random House, New York 1970) (bolding added).

As we can see, that quote is from the Federal Reserve Bank of Chicago back in 1961.... about fifty-three years ago. The textbook in which this quote was published was from 1970, over forty-three years ago. In terms of teaching the way most bank lending actually works, this is nothing new, folks. Famspear (talk) 04:10, 14 March 2014 (UTC)

In February 2013, an anonymous editor commented that the Wikipedia Money multiplier and Fractional reserve banking articles "don't even state anywhere that the theory of banks being dependent on reserves to issue loans is contested." Without getting into what the current state of the articles is now (as of March 2014), let's be clear: There is difference between saying (A) "banks are limited in the amount of loans they can make because of reserve requirements" and saying (B) "most bank loans are made by banks doling out reserves in the form of paper currency and current coins." Famspear (talk) 04:52, 14 March 2014 (UTC)

I'm confused by your statements. Who said that this had anything to do with handing out paper currency or coins? After all, it's perfectly possible to run an endogenous money system that hands out paper currency. All you need to do is give banks the right to print their own notes, as the Free banking era demonstrated. Also the endogenous money POV would surely contrast (A) "banks are limited in the amount of loans they can make because of reserve requirements" with (B) "banks will try to borrow reserves in proportion to the amount of loans they have made" rather than talking about "doling out reserves in the form of paper currency and current coins", wouldn't it? -- Derek Ross | Talk 18:12, 18 March 2014 (UTC)

Coming back to Modern Money Mechanics for a moment. This paper is very misleading and has caused all sorts of confusion. Let me make a cartoon summary of the paper:

• A: Page 1: "The relationships shown are based on simplifying assumptions."
• B: Later on: banks lend out money left with them by depositors
• C: Later on: enormous detail and tables about banks lending out money left with them by depositors
• D: Later on: of course banks doesn't really lend out money left with them by depositors

the frb wiki page does that same thing. Loads of space given to B and C, and later on a mention of D. B and C are clearly some not-actually-true but purportedly useful as a teaching aid model of what is going on. If the federal reserve are saying B&C are not actually true then why should wiki be publishing them? Reissgo (talk) 11:43, 2 November 2014 (UTC)

I'll leave this here for comments.

The issue I see is essentially this, the standard economics textbook example, which the Wikipedia FRB page is derived from, is provably incorrect. (To prove that, either apply the standard accounting equation to the example, or simply apply interest and capital repayments and watch the banks run out of liquidity in about 2 rounds.)

The source of the confusion appears to partly stem from a bad example (the original appears to have been the 1931 Macmillan Report, the cite for which is possibly the only useful thing on the page) and partly a copy and paste error - in the original the example is clearly stated to be confined to "a single bank", which at least avoids the liquidity issues. However it's done incredible damage to understanding of the banking system, and an alarming number of economics papers can be simply falsified by observing that the author is mixing up liability deposits and asset cash.

As a researcher in this area, I feel more than a little concerned about this - but I also don't feel comfortable with citing my own research to sort things out. This is really one of those very interesting cases, where I suppose Wikipedia is correct in some sense in giving an incorrect example - because the textbook itself is wrong. Leaving that aside, I'm not entirely sanguine about going it alone to deal with the resulting flame fest that trying to sort that page out would trigger. (The talk page itself is truly epic.) Any suggestions welcome.Mischling (talk) 02:34, 5 September 2015 (UTC)

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Difficult to understand

At present, the first paragraph is as follows.

In post-Keynesian economics, endogenous money is the term used to convey the view that the quantity of money in an economy (conventionally, and by this account misleadingly, termed the money supply) is determined endogenously—that is, as a result of the interactions of other economic variables, rather than exogenously (autonomously) by an external authority such as a central bank.

Can it be described in layman's terms? --JamesPoulson (talk) 00:08, 10 December 2016 (UTC)