- May 7, 2010
- Reaction score
- Upstate SC
- Political Leaning
The difference is that in your case, the government has stepped in and declared, "Legally, banks must follow this regulation." But the thing that banks must do is just a regulation, and is not operationally necessary. Just like bond issuance does not operationally enable a government to issue currency, reserves do not operationally enable a bank to create loans.
If that regulation is in place, then banks would "need" to obtain reserves, and reserves would need to be available. This is the same reasoning we use when we say that the government must spend money into the economy before they can tax it away - it's only because of the system that is in place, where when you write a check to the government, they get "paid" in pre-existing reserves. But before the Fed existed, the government accepted bank-created money, and they used it just like we all use dollars.
I get your point that a system could be created where we don't need this or that, but in the system that we actually DO have, some MB must exist before any horizontal/low powered/endogenous money can be created.
If you want to discuss fantasy monetary systems, or a way to build a better monetary system than what we have, I can see several possible HUGE advantages of having a money supply that is entirely exogenously created. I can only think of one minor advantage of a system our money supply is entirely endogenous. Maybe I should start a new thread on that because I think we are both getting tired of arguing about the exact process in which endogenous money is created