Money supply

The money supply is the amount of money that is offered by the central bank and commercial banks within an economy . The money supply is offset by the money demand on the money market .

General

The other market participants in the money market, such as commercial banks (all credit institutions excluding the Bundesbank ), companies in the non-bank sector and the state and its subdivisions ( public administration , state-owned companies ) play an important role in determining the money supply. The factors of the money base , cash ratio and minimum reserve ratio must be taken into account when managing the money supply.

In the banking system , money is a liability on the balance sheet because it is on the liabilities side of the balance sheet in the form of cash at the central bank and as sight deposits at commercial banks . In terms of the balance sheet, the supply of money is therefore the willingness of the banking system to accept liabilities that represent money.

history

The realization that the demand for money is no less important for the height of the price level than the supply of money, and its inclusion in monetary theory, was primarily thanks to William Petty , John Locke , Richard Cantillon and David Hume . Petty came to the realization in 1682 that the required amount of money (money supply) was smaller than the annual income. He considered a money supply equal to half the annual rent plus a quarter of the annual rent plus the weekly expenses of the entire population plus a quarter of the annual export value as sufficient. Locke knew as early as 1691 that the interest rate in the market was determined by the supply and demand of money; With a given amount of money, the demand for money would have the sole effect on the level of interest. Cantillon recognized in 1734 (published in 1755) that a positive balance of payments leads to a higher domestic supply of money, which in the long term increases prices. An export surplus increases the supply of money, which ultimately leads to interest rate cuts and thus stimulates the propensity to invest. He thus recognized the inflationary consequence of an increasing supply of money, but pointed out the possibility of saving . In addition to the supply and demand for each individual good, Montesquieu also used the supply and demand of money to explain prices and tried to put the appropriate supply of money in a fixed relationship to the size of the entire economy. For him the supply of money was identical to the total amount of gold and silver, and the demand for money was equal to the total amount of economic goods. Without considering the speed of circulation of money , he demanded in his book On the Spirit of Law in 1748 that the amount of money must always correspond to the amount of goods.

The currency theory (mainly representatives: Henry Thornton and David Ricardo ) saw the money supply as exogenous (determined by monetary policy ) since 1809 , because the central bank determines the money supply autonomously, money only arises through the money supply. For Ricardo, the available money supply (money supply) corresponded to the money requirement (money demand). The banking theory (representatives above all: Thomas Tooke , John Fullarton ), on the other hand, assumed from 1844 that the demand for money creates a corresponding supply of money, so that money arises through demand for money on the money market (endogenous). According to banking theory, there are economic processes behind every demand for money, so that the credits automatically flow back after the transactions associated with the production of goods have been completed ( English law of reflux ; Fullarton's reverse flow principle ).

In 1911 Irving Fisher analyzed the supply of money (the supply of means of payment ) by examining the velocities of circulation, the relationship between checks and money in circulation, and the effects of currency systems. According to his quantity equation , the product of the amount of money and its velocity of circulation must be identical to the product of the price level and trade volume, i.e. the financial economy corresponds to the real economy .

In 1970 Milton Friedman advocated the thesis that the central bank could bring about an increase in money that was not based on the growth in demand for money. As a result of the additional money supply, interest rates fall, but the economic agents are not prepared to hold the larger part of the additional means of payment as cash because the more important determinants of money demand - real income and prices - are initially not affected by the larger money supply.

Origin of the money supply

In modern economies, money is offered, ie “produced”, by the central bank and commercial banks. Accordingly, a distinction is made between central bank money and commercial bank money in the money supply .

Central bank money

→ Main article : Central bank money

The central bank is the sole issuer of central bank money. From the point of view of the central bank, it is an action parameter that it uses as part of its monetary policy to control the money supply . It pursues a money supply target that it announces publicly and that acts like a moral appeal to the commercial banks. The European Central Bank (ECB) pursues a monetary policy strategy based on the money supply, but not an actual money supply target. Rather, it seeks a stability-oriented monetary growth to where they are at the medium-term trend in real gross domestic product , the change in the velocity of circulation of the monetary aggregate M3 and with the objective of price stability to be agreed increase in the HICP - price index oriented. In the Eurosystem, the reference value for the growth of the money supply is a guideline established by the Governing Council that specifies which growth rate of the money supply is in line with the objective of price stability under normal conditions. Since January 2002, this reference value for an annual growth rate of the money stock M3 has been 4.5% compared to the previous year.

If the money supply is to be increased by central banks as part of an expansionary monetary policy , this can be done by increasing the currency in circulation , but much more by reducing the minimum reserves or by open market policy . With the latter, the ECB has the main refinancing instrument , longer-term refinancing business or fine-tuning operations at its disposal. There are permanent purchase programs or temporary lending through securities repurchase agreements . Conversely, if the monetary policy is contracting , the central bank restricts the circulation of cash, increases the minimum reserves or sells securities to the commercial banks .

Commercial bank money

The commercial bank money is created either by active money creation or by passive money creation . The latter occurs when non-banks make cash deposits into their bank account at a commercial bank or make transfers from their central bank account to their commercial bank account. In the case of active money creation that allows credit business of commercial banks whose borrowers , payments to creditors to pay, which are reflected in payment recipients as additional deposits. The money creation multiplier helps to increase the money supply, which is restricted by the minimum reserve and the cash quota . Central banks succeed in influencing the creation of commercial bank money primarily through the minimum reserve requirement.

Money market equilibrium

The money market equilibrium arises on the money market when the demand for money coincides with the supply of money : ${\displaystyle L}$ ${\displaystyle M}$

${\displaystyle L=M}$.

This so-called LM function leads neither to inflation nor to deflation in the goods market . If money demand and money supply do not match, there is either a money gap

${\displaystyle L>M}$

or vice versa, there is a surplus of money . Money gap or money overhang produce inflationary or deflationary effects and are therefore eliminated by the central banks as part of monetary policy by controlling the money supply.

Interest rate control

The central bank also takes the opportunity to use the s. G. To vary base rate . The interest rate for the loans at which the commercial banks borrow from the central banks is adjusted to the respective economic situation. Thus, lowering the key interest rate can - but does not have to - generate increased demand for loans from the commercial banks. This in turn means that an increased amount of money is available. The opposite effect is therefore the increase in the key interest rate, money is withdrawn from the money market because the general demand for credit decreases, but the interest on deposits at commercial banks increases. With higher interest rates, saving becomes more attractive. The central bank thus has a stabilizing effect on inflation and deflation.

Both variants of the control lead to the same result. The prerequisite for this is that the central bank has a good knowledge of the demand for money so that it can provide a corresponding supply of money. If there is a high level of uncertainty about the future development of the demand for money, some central banks prefer to control the interest rate. When the money supply is aligned with the money market's demand for money, the so-called equilibrium interest rate is set by the resulting money market equilibrium.

Factors

Monetary base

The monetary base is an important part of the calculation of the money supply M1 as a determinant of the deposit money creation possibilities of commercial banks. The cash from households and companies, added to the minimum reserves of the commercial banks that are held at the central bank , add up to the monetary base: ${\displaystyle {\text{B}}}$ ${\displaystyle {\text{BG}}}$ ${\displaystyle {\text{RB}}}$

${\displaystyle {\text{B}}={\text{BG}}+{\text{RB}}}$.

This results in a connection between the monetary base and the money supply. To calculate the amount of money you still need the money creation multiplier : ${\displaystyle {\text{M1}}}$ ${\displaystyle {\text{m1}}}$

${\displaystyle {\text{m1}}={\text{m1}}\cdot {\text{B}}}$.

The money creation multiplier contained therein is calculated as follows: ${\displaystyle {\text{m1}}}$

${\displaystyle {\text{m1}}={\frac {1}{b+r\cdot (1-b)}}}$.

This takes into account the cash component and the minimum reserve ratio. When calculating the money creation factor, time deposits ( M2 ) and savings deposits ( M3 ) are neglected for the sake of simplicity . ${\displaystyle b}$ ${\displaystyle r}$

Cash quota

The cash quota is the calculated share of the total amount of money that households and companies want to hold as cash. It follows: ${\displaystyle b}$

${\displaystyle b={\frac {\text{BG}}{\text{M1}}}}$.

The cash quota is therefore used as a behavioral parameter for households and companies. A high cash quota means that households and companies spend or invest little money. A low cash quota, on the other hand, means that households and companies spend a large amount of their money.

Reserve ratio

The minimum reserve ratio of the commercial banks indicates what proportion these reserves ( ) make up on the non-cash part (sight deposits) of the total money supply. This is calculated as follows: ${\displaystyle r}$ ${\displaystyle {\text{RB}}}$

${\displaystyle r={\frac {\text{RB}}{(1-b)\cdot {\text{M1}}}}}$

The value of the reserve rate is thus determined by the minimum reserve requirements of the central bank and the business policies of the credit institutions. The reserve holdings of commercial banks and the desire to hold cash on the part of non-banks thus limit the possibility of money creation as a cause.

literature

• Blanchard, Oliver; Gerhard, Illing, (2003): Macroeconomics. 3rd updated edition, Munich: Pearson Studium, Prentice Hall, ISBN 3-8273-7051-5
• Runner, Nikolaus KA: Money offer. Tübingen: JCB Mohr (Paul Siebecht), ISBN 3-16-146277-7
• Mussel, Gerhard: Fundamentals of the monetary system. Verlag Wissen und Praxis, ISBN 3-928238-60-4
• Groh, Gisbert; Schröer, Volker: industrial clerk. 31st edition, Rinteln: Merkur Verlag, ISBN 3-8120-0420-8
• Borchert, Manfred, (2003): Money and Credit. 7th edition, Munich: Oldenbourg, ISBN 3-486-27420-1
• Felder, Bernhard; Homburg, Stefan, (2004): Macroeconomics and New Macroeconomics. 7th edition, Berlin: Springer Verlag, ISBN 3-540-25020-4
• Anderegg, Ralph, (2007): Fundamentals of monetary theory and monetary policy. Munich: R. Oldenbourg Verlag, ISBN 978-3-486-58148-5

Individual evidence

1. ↑ Dieter Duwendag / Karl-Heinz Ketterer / Wim Kösters / Rüdiger Pohl / Diethard B. Simmert, Monetary Theory and Monetary Policy in Europe , 1999, p. 111
2. ^ Willi Albers / Anton Zottmann (eds.), Concise Dictionary of Economics , Volume 6, 1981, p. 394
3. ↑ William Petty, Quantulumcunque Concerning money , 1682, pp 211 et seq.
4. ↑ John Locke, Some Considerations of the consequences of the lowering of interest, and raising the value of Money , 1691, pp. 62 f.
5. ^ Richard Cantillon, Essai Sur la Nature du Commerce en Général , 1755, p. 105
6. ^ Montesquieu, De L'esprit des Loix , XXII, 1748, p. 7
7. ^ David Ricardo, On the high Price of Bullion - A Proof of the Depreciation of Bank Notes , 1809, pp. 90 ff.
8. ↑ Werner Ehrlicher , Monetary Theory and Monetary Policy III: Monetary Theory , in: Willi Albers u. a. (Ed.,), Handwörterbuch der Wirtschaftswwissenschaft, Volume 3, 1981, p. 379
9. ^ John Fullarton, On the Regulation of Currencies , 1845, p. 58
10. ↑ Irving Fisher, The Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises , 1911, p. 26 f.
11. ↑ Milton Friedman, A Theoretical Framework for Monetary Analysis , in: The Journal of Political Economy vol. 78/2, 1970, p. 195
12. ↑ Gabler Wirtschaftslexikon, Volume 3, 1984, Sp. 1697
13. ↑ Dieter Duwendag / Karl-Heinz Ketterer / Wim Kösters / Rüdiger Pohl / Diethard B. Simmert, Monetary Theory and Monetary Policy in Europe , 1999, p. 110
14. ↑ Manfred Borchert, Money and Credit: Introduction to Monetary Theory and Monetary Policy , 2003, p. 67
15. ↑ Ulrich CH Blum / Alexander Karmann / Marco Lehmann-Waffenschmidt / Marcel Thum / Klaus Wilder / Bernhard W. Wieland / Hans Wiesmeth, Basics of Economics , 2003, p. 130 f.