4. Page 265: section 8.3: The Creation Of Money By The Banking System
Learning Objective 3 asks you to explain how a small amount of cash can support many loans and create more money.
The creation of digital money is not dependent on the amount of cash a bank has on hand.
5. Page 265: Balance sheet of Saymor Bank Ltd.
This fictitious example is meant to simplify and replicate the balance sheet of a commercial bank and does a pretty good job except one thing. You probably already know what that is by now, there are no listed reserve accounts however the term can be used interchangeably with whatever a bank chooses to call its cash balance. In the case of the CIBC you would see cash and deposits with banks, and this has no bearing on how much digital money a bank can create.
6. Page 266 - 270: The Money Multiplier
Those with this textbook or any other Macroeconomic textbook will most likely have an explanation of how the money multiplier theoretically works so I will not include any excerpts here. Again, this is not how the money creation process currently works.
The Money Multiplier Fact or Fiction?
Prior to July of 1994 there were reserve requirements meaning that commercial banks were required to hold a certain percentage of reserves relative to the amount of liability deposits which is consistent with the money multiplier model in the textbook.
However, empirical research initiated by Basil Moore (Moore 1979, 1983, 1988a, 1997, 2001) and later independently corroborated by numerous researchers, including Kydland and Prescott (1990), confirmed a simple operational observation about how banks actually operate, made in the very early days of the monetarist controversy, by the then senior vice-president of the New York Federal Reserve, Alan Holmes. The ‘Money Multiplier’ model assumes that banks need excess reserves before they can make loans. The model process is that first deposits are made, creating excess reserves, and then these excess reserves allow loans to be made, which create more deposits. Each new loan reduces the level of excess reserves, and the process stops when this excess has fallen to zero.
But in reality, Holmes pointed out, banks create loans first, which simultaneously creates
deposits. If the level of loans and deposits then means that banks have insufficient reserves, then
they get them afterwards – and they have a two-week period in which to do so.
In contrast to the Money Multiplier fantasy of bank managers who are unable to lend until they receive more deposits, the real-world practicality of banking was that the time delay between deposits and reserves meant that the direction of causation flowed, not from reserves to loans, but from loans to reserves.
Source: Revised And Expanded Edition Debunking Economics The Naked Emperor Dethroned/Steve Keen/2011/Zen Books Ltd./page #308
7. Page 87:
Banks are not just financial intermediaries.
In the circular flow of income the textbook implies that savings are necessary for investment to the business sector, this is only true when speaking about capital investment or when people pool money in a fund and then invest. However commercial banks do not lend out savings they create brand new digital money in the process of making a loan (refer money myth #1).
8. Page 280:
The supply of money excluding cash (which is less than 2.4% of money in circulation today, the rest is digital) is not determined by the Bank of Canada. The money supply or credit is determined by a commercial banks willingness to create the money and a borrower willing to accept the loan. To better understand how money is leveraged up see: http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/CAR18_index.aspx , or go to https://progressivemoney.ca/money-creation
9. Page 281:
The Bank of Canada does not set the money supply and it is dependent on interest rates, the opposite of what is claimed in the textbook. Basically the higher the interest rates the less people will want to take on new debt and more likely they will want to resolve existing debts, hence a shrinking money supply. The lower the interest rates creates a reversal of the process.