Frances Coppola makes the same mistake as Positive Money.

Frances Coppola claims that if say 10% of the money supply is physical cash, then the remaining 90% must be money created by private banks. See item No.1 in her first comment after the article here. Positive Money put the same argument, though they claim the relevant percentages are 3% and 97%.

 

That idea relies on the idea that bank reserves do not circulate in the economy (a point explicitly made by Coppola) therefor they are to be ignored. I suggest that argument is flawed for the following reasons.

Reserves come into existence when a private sector entity is paid money by the central bank or government (and that’s central bank created money). E.g. it might be me selling $X of government debt or some other asset as part of the QE operation.

I then get a cheque from the government / central bank for $X and lodge it at my commercial bank, which in turn gets the central bank to credit its account in the books of the central bank to the tune of $X. But that money is very much available to me to spend as I wish. I.e. that money “circulates” in the economy.

Or as Richard Lipsey puts it in his text-book in bold print: “The central bank gets high-powered money into the economic system simply by buying securities (usually government debt instruments). It pays for these purchases with newly issued high powered money.”

Coppola then goes on to claim that private banks can purchase government debt with private bank created money. Er…no. Central banks just don’t accept private bank created money – ever. Indeed, even a private bank won’t accept money created by another private bank: it invariably wants central bank money in settlement (or an admission by the first bank that it owes the second $Y of CB money).

However, Frances Coppola works hard and produces plenty of interesting articles. No one can be 100% right 100% of the time (apart from me of course?!?!).

 

 

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