Modern monetary theory - Mitchell and Wray Q4

This is Question 1 in a series of Modern monetary theory interviews - Professors Bill Mitchell and Randy Wray. See billy blog (http://bilbo.economicoutlook.net/blog) for more information on this approach to macroeconomics. You can also get more information from Centre of Full Employment and Equity (http://e1.newcastle.edu.au/coffee).

Questions asked:
One of the biggest challenges when presenting these issues to the general public, is to explain to people how money, in a fiat currency system is actually created. It is difficult for people to get their head around the idea that a fiat currency is money that is created by the sovereign power declaring it to exist, essentially by entering an amount in an account. Theyve just declared this is now money that exists.

Category:

Education

Tags:

• Modern monetary theory
• Professor Bill Mitchell
• Professor Randy Wray

[WilhelmDrake]

@dilbertgeg

"Only the govt creates net NEW money."

Yes, I am aware of this but at any particular time the money supply is composed of ~95% of private bank credit. This is what I was referring to, not net money.

[dilbertgeg]

@WilhelmDrake private banks create two things at once: Deposits and Loans. From the banks' perspective, the deposits (say in a car company's account) is a liability, while the loan (to the consumer) is an asset. These net to zero. Only the govt creates net NEW money.

[WilhelmDrake]

Only a small percentage (~3%) of money is created by the government. The remainder is created by private banks who are given a legal privelege to create credit through bank loans.