התכתבות מואב - הבנק המרכזי של אנגליה

 Hi Omer,

Thanks for your email, and your interest. Please see some responses below in red. Let us know if you have any follow-up questions.

 Many thanks,

 Michael, Amar and Ryland

 Dear Amar and Mike

 I hope you can help me with this, and I apologize for taking your time on these rather non-scientific clarifying questions. As I’m sure you are aware of, there are many bloggers and activists that make some claims on the impact of the creation of money by commercial banks that are rather groundless and reflect some misunderstanding of the issue. Here in Israel the main group pushing for the adoption of the “Chicago Plan” presents your paper as proof of

their claims. I would be grateful if you can clarify a few points:

  1.In your view, is your paper on how money is created in the modern economy new research presenting unknown facts to the scientific community or is it mainly (or just) a paper designed to clarify to the general public what monetary economist know (at least by and large). Do you suggest that the fact that commercial banks create money is unknown to economists and that students are not taught this?

Reply: The aim of our paper was to do the latter – spell out clearly what a large number of monetarist economists already know. Most of the content in our paper can be found in some form or another in other Bank of England publications going back to the 1990s. However, we did think that aspects of  that the money creation process are often not taught clearly, and as a result even some economists hold misconceptions in this area.

  2.You write that the supply of broad money ultimately depends on the monetary policy. Should we interpret this as monetary policy has an effect on the supply of money but doesn’t control it, or should one interpret this as the Bank of England has full control of the supply of money? Or at least by end large, and for any practical issue (controlling inflation and having the ability to perform QE), it has sufficient control over the supply of money?

 Reply: While the central bank doesn’t have precise, mechanical, control over the broad money supply, by and large we think that the monetary authority is able to control the quantity of broad money in the economy, should it need to – in our article we describe monetary policy as ‘the ultimate limit’ on money  creation. The Bank is mandated to target inflation, rather than broad money, so in practice the MPC would only seek to influence the quantity of broad money indirectly in the course of meeting the inflation target.

   3 Do you claim that there is something wrong with the way banks create money and that the Bank of England is puzzled by how you have come to this unfortunate situation in which commercial banks create money? Does the Bank of England, or do you, think that you should adopt the Chicago plan? Do you think that the partial reserve required by banks, which allows them to create money,has any significant impact on the allocation of credit in the economy?

Reply: We certainly aren’t arguing that there is anything obviously wrong with the way banks create money – it was intended to be a positive rather than normative article. Nor were we arguing that it is an unfortunate coincidence that commercial banks are able to create money. The Bank does not have an official view on the optimal set of monetary arrangements, or the Chicago Plan specifically – we take our remit as given. In our article we argue that quantitative reserve requirements are unlikely to – under the current operating framework in the UK – be a binding constraint on credit and money creation.

   4.Do you suggest that banks activity of financial mediation doesn’t exist or isn’t a major part of the banks’ activity?

Reply: Our point is that banks aren’t simply financial intermediaries. Of course, intermediation and maturity mismatch are key functions performed by banks. But the fact that they create money is also important.

 My motivation here is some damage control in the Israeli media who is influenced by our local activists (something like your “positive money”  group).

 Thanks a lot and best regards

 Omer