Money Matters: There is No Such Thing as a Money 'Supply'
Monetary literature remains plagued by references to money “supply” at a time when the endogeneity of money is becoming generally accepted. Money endogeneity is not a hypothesis; it is a fact, and one that has existed since a goldsmith-banker wrote out the first receipt (bank note) and handed it to a borrower (as opposed to a depositor of gold coins). The creation of money has always been endogenous, even under the Friedman-Schwartzian Monetarist fixed-money-rule model. Once this is accepted, then it is logical to refer to the quantity or stock of money, and to the supply of bank credit. The household, corporate and government sectors borrow from banks to consume (C) or invest (I), which are the major components of nominal GDP [C + I + net exports (= aggregate demand, AD)]. Domestic credit extension (DCE) thus represents the link between the monetary and real economies. Money creation is the outcome of the change in DCE; the latter, not the change in M, approximates the change in AD (there are other influences). The essence of monetary policy is that the central bank controls the (reference) prime lending rate (PR) of banks via its policy interest rate (PIR), and thereby the demand for bank credit. It controls PR in normal (ie non-QE) times by manipulating the liquidity of banks to a borrowed reserves condition (actual, close to, or threat of), in order to make the PIR effective. The causation path is clear.
Money Creation: Reflections of an Ex-Central Banker on Exogenous/Endogenous Money
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.
Accommodationism, Structuralism, and Superstructuralism
Post Keynesians object to Milton Friedman's notion of a "helicopter drop" of money. I think their objections are appropriate. Basil Moore asserts the central bank just holds the line on interest rates, and accommodates everything. How does it do this? What are the asset transactions (T-account entries) between the central bank and the private sector that accomplish this injection of reserves? Moore never specifies this, which leads one to think that there may be a helicopter in the background. If the central bank buys assets from the private banks, then balance sheets will be