What Kind Of Money Do USA Private Banks Create?


I think I see a better way to explain one key point of Modern Money Theory (MMT) that the experts have failed to exploit. The money the Federal Reserve bank creates is called “high powered money” by MMT proponents. I always struggle to understand the difference between high powered money and the money that private banks create.

Here is what I have come to recognize. Private banks do not really create money. They create the promise of money. When you have a private bank account or a loan, the bank is promising you that if you ever want high powered money they will provide it to you by the terms of your loan or your bank account balance. As long as your transactions are wholly within one private bank, you are only dealing with promises of money.

It is only when you want to take high powered money out of that bank, that the bank is forced to turn its promise into actual money. If you write a check to someone who is also a customer of the same bank corporation, the bank only needs to transfer its promise to pay you to the account of the person depositing your check into the same bank corporation.

Furthermore, the bank only has to worry about the difference between what people want to take out of the bank and what people want to put into this bank. Under normal circumstance this difference of money is a small fraction of the money obligations the private bank has on its books. This is what makes the idea of fractional reserve banking work so well, under normal circumstances.

I think I will stop here to let people digest what I have just said. I have posted this story on my Facebook page. We can discuss what I have said, and your questions about it on Facebook.

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