Money Creation: Reflections of an Ex-Central Banker on Exogenous/Endogenous Money

31 Pages Posted: 7 Jun 2012 Last revised: 15 Jun 2012

Alexander Pierre Faure

Rhodes University

Date Written: June 7, 2012

Abstract

Exogenous money creation does not exist, but did under a past specie-money system. Central bank control of bank reserves and therefore control of bank deposit (money) creation via the money multiplier can exist, but this has nothing to do with the process of money creation. Rather, it is a style or model of monetary management, a style no longer in fashion because of its severe interest rate consequences. New bank deposits (money), also under a reserves-multiplier model, can only be created endogenously - beginning with the existence of a demand for bank loans which, when satisfied by the banks, leads to the simultaneous creation of bank deposits.

It is heartening that the 'home' of the Monetarist School model of money creation (based on the multiplier), the US, is showing distinct signs of recognition of the source of money creation being as described here. Bank reserve quantity changes are an outcome of deposit quantity changes (money creation) and not the driver thereof. Reserve requirement changes are just one of many sources of changes in bank liquidity, which are happily accommodated by the central bank at the policy/key interest rate, to make it effective.

Keywords: money, endogenous money, exogenous money, central banking, banking, interest rates, monetary policy

JEL Classification: A22, E42, E51, E52, G21

Suggested Citation

Faure, Alexander Pierre, Money Creation: Reflections of an Ex-Central Banker on Exogenous/Endogenous Money (June 7, 2012). Available at SSRN: https://ssrn.com/abstract=2079503 or http://dx.doi.org/10.2139/ssrn.2079503

Alexander Pierre Faure (Contact Author)

Rhodes University ( email )

Grahamstown 6140
South Africa
+27466038301 (Phone)
+27866721344 (Fax)

HOME PAGE: http://ru.ac.za

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