New Tutorial: Why Central Banks Don’t Control the Money Supply…

I’ve decided to share an incomplete copy of the most recent tutorial I’ve been working on:

Why Central Banks Don’t Control the Money Supply: A Visual Tour of the Macroeconomic Dynamics of Bank Loans, Reserve Requirements, Capital Requirements, and Cash Withdrawals

Please note: in case you haven’t seen it, the tutorial How Loans Create Money is a prerequisite.

The new tutorial has three parts, but only one is fleshed out. The first part — on reserve requirements and their implications — is mostly in place as a first draft. The middle part — on capital requirements — is visible only as a rough text outline of the likely content (for those who are curious). The third part — on cash withdrawals — is just a blank placeholder page.

I’ve posted the tutorial now because I’m not sure when I’ll next be able to make significant progress on it, and also because covering this topic has been more difficult than I expected. What I’ve shared now (about eight minutes of audio/visual content) barely scratches the surface of the topic of money, banking, central banks, etc, and may do more to raise questions than provide answers. (There are some links to outside reading listed on the last page for the adventurous — though they will be nothing new to those already versed on these topics).

What was your experience of the draft tutorial, "Why Central Banks Don't Control the Money Supply"?

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Other feedback is of course welcome also.

  • Joe Hufford

    Your visualizations are great! You mentioned the FED’s discount rate, if a bank is short reserves it can borrow from the FED and pay a penalty rate (I think). Could you elaborate on this more? I have friends who think that all dollars are *loaned* into existence by the fed and thus it enslaves us in a pyramid of debt because the only way to pay the interest is to borrow more from the fed. I know this is incorrect, I’m searching for the details on how to shoot this down for good (and I know the fed returns most of its profits from its treasuries portfolio back to the fed). So guess a complete picture of all the ways base money is injected into the system would answer it, instead of just “the fed can always supply needed reserves”. But still, I love the visualizations, and I’m very excited to see the section on capital requirements, I haven’t gotten my head around that aspect yet.

    Maybe you could make a simple 5 minute or so youtube video that could be passed around facebook explaining how sectoral balances work and why the “national debt” isn’t something to be scared about and how a balanced federal budget would prevent the private sector from accumulating savings. Most people just aren’t able to see the macro constraints of income=spending without some sort of visuals. More people would sit through a few minute video than will click through the visualizations. We’re in the process of destroying our society because we can’t understand how money works.

    • econviz

      Thanks for the comments and suggestion!

      Sounds like you have your facts right (though I think you meant to say returning profits back to the TREASURY). But the Fed’s operations are a pretty complex subject and I don’t think I can get into too many details on a comment, sorry… For the most part the Fed is just swapping assets (such as between bonds and bank reserves), nothing scary. There are some links to detailed outside resources here that could help:

      Yes, banks can borrow from the Fed’s discount window at the penalty rate. However, most of the time this is barely used, as can be seen in this graph:

      So for the above reason (and other reasons, such as the fact that the Fed currently PAYS interest on reserves!) you’re right that about the “only way to pay the interest is to borrow more from the fed” view being incorrect!

      I agree that a 5 minute youtube video on topics you mention would be ideal. The “How the Economy Works” tutorial was my best effort on covering those core concepts:

      …but it’s close to 30 minutes and I’m not sure how well these concepts could be truly explained (rather than stated as fact without backing) in a 5 minute video. My sense right now is that most people need higher quality production values (art, animation, etc) than I am capable of in order to take a video seriously.


      • Joe Hufford

        Thanks! I’ll definitely check out those links and the other visualizer. I understand the swapping assets thing, that’s all QE was, fed now holds bonds and banks have reserves on which they earn 0.25% interest. But just real quick, is discount window borrowing the only time interest is paid to the fed on money it creates? I suppose I mean in the normal course of affairs, as things like currency swap lines might pay interest to the fed, I don’t know how those work at all, but I believe they’re pretty rare. (yes I meant returned to the treasury earlier). And thanks a ton for that fred graph of discount borrowing, I had no idea that it had rarely been used in the last 50 years.

        • econviz

          AFAIK, yes, the discount window is the only “normal” situation that pays interest to the Fed. But I’m not an expert on some of the advanced details so I could be wrong and you’re better off checking outside guides.

          You might also try the Balance Sheet Visualizer on this site and the two “Open Market Ops” operations in the drop down — though they are definitely not as thorough an answer as you are looking for.


  • iakovos