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AntiCapitalist MeetUp: deleting the 'money multiplier' from textbooks [1]

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Date: 2025-07-27

While it applies to describing the connection between banks and the Fed, ‘money multipliers’ become more tricky, especially when more policy is driven by interest rates rather than monetary quantities, which entails so much more unlearning since the concept does dominate textbook content, especially since the 2008 crisis and the perniciousness of rentier capitalism, but also from the Great Depression.

Many introductory economics classes include lessons on the important roles of banks and the Federal Reserve (Fed) in the U.S. financial system and how these two entities are linked. While some textbooks provide sound descriptions of these topics, many miss some key aspects of how banks make decisions, inaccurately explain how the Fed implements monetary policy, and contain outdated descriptions of the linkage between banks and the Fed. This outdated link is often tied to the concept of the "money multiplier," which is anchored in an obsolete explanation of how the Fed operates and influences banks. We recommend that textbook authors and teachers eliminate the use of the money multiplier concept in explaining the linkage between banks and the Fed. Instead, we suggest that classroom materials emphasize a contemporary description of how the Fed operates, focusing on changes in interest rates, not monetary quantities, as the mechanism through which Federal Reserve policies are linked with the banking system and the rest of the economy. www.stlouisfed.org/...

The complete rejection of the money multiplier model is spreading. Of course, this rejection has been at the heart of post-Keynesian economics since at least the 1950s, and likely is a minor technical matter that persists long after its usefulness and relevance becomes anachronistic.

The traditional money multiplier theory, which posits that a central bank can control the money supply by manipulating the reserve ratio, has come under scrutiny and is increasingly considered outdated by many economists and institutions, including the Federal Reserve.

Here's why:

The Fed's shift to an ample-reserves regime: The Federal Reserve has changed how it implements monetary policy. Instead of targeting the level of reserves in the banking system, it now operates with ample reserves. In this environment, banks aren't constrained by reserve requirements when making lending decisions. Therefore, the money multiplier, which relies on these reserve requirements, loses its relevance.

Bank lending is not reserve-dependent: The traditional theory suggests banks are limited in lending by the amount of available reserves. However, in reality, banks can create new deposits when they make loans, rather than needing pre-existing reserves to do so. They obtain necessary reserves from the interbank market or the central bank when needed...

The Fed influences interest rates, not necessarily the money supply directly: In the ample-reserves regime, the Fed primarily impacts the economy by influencing interest rates, such as the federal funds rate, which then guides other interest rates and affects borrowing and spending decisions.

In short, the money multiplier is seen as an oversimplified model that doesn't accurately reflect how money is created and how the Fed operates in the current monetary policy environment. What's being taught instead?

Instead of relying on the money multiplier, economics education is evolving to focus on:

Endogenous money theory: This perspective emphasizes that money creation is largely driven by commercial banks' lending decisions, not solely determined by the central bank's control over the money base. Modern Monetary Theory (MMT): MMT focuses on the operation of sovereign currency systems and the ability of a government that issues its own currency to spend and tax, highlighting the difference between a currency issuer and a currency user. The role of interest rates in monetary policy: Instructors are now emphasizing how the Fed influences the economy through changes in interest rates, which affect banks' lending behavior and overall economic activity, according to the Federal Reserve Bank of St. Louis. While some textbooks may still include the money multiplier, there's a growing push to update teaching materials to reflect the current understanding of monetary economics and the Fed's operating framework.

Federal Reserve Bank of St. Louis

bad or unrealistic assumptions… “Policies such as Quantitative Easing which has been in the news lately are predicated on a mistaken belief about the way the banking system operates and how the non-government and government sectors interact. One of the hard-core parts of mainstream macroeconomic theory that gets rammed into students early on in their studies, often to their eternal disadvantage, is the concept of the money multiplier. It is a highly damaging concept because it lingers on in the students’ memories forever, or so it seems. It is also not even a slightly accurate depiction of the way banks operate in a modern monetary economy characterised by a fiat currency and a flexible exchange rate. billmitchell.org/...

Some publications from the Federal Reserve Bank of St. Louis and other economists have questioned the relevance and utility of the traditional money multiplier model in analyzing the United States economy. Here are some reasons why its importance has been questioned: Changes in Monetary Policy: The way the Federal Reserve conducts monetary policy has evolved, particularly since the 2008 financial crisis. The Fed now utilizes tools like paying interest on excess reserves, which can impact the incentive for banks to lend out all excess reserves, thereby affecting the money multiplier's traditional assumptions.

Dominance of Interest Rate Targeting: Most central banks, including the Federal Reserve, have shifted away from directly targeting the money supply as a primary policy objective. Instead, they focus on influencing interest rates to manage economic activity and inflation.

Excess Reserves: Following the financial crisis, there has been a significant increase in the level of excess reserves held by banks. This accumulation of reserves, alongside the payment of interest on them, can lead to a decrease in the money multiplier's effectiveness in predicting changes in the money supply.

Weak Demand for Loans: Even when banks have ample reserves, the expansionary effect of the money multiplier can be limited if there's weak demand for loans from businesses and individuals. In essence, while the money multiplier remains a concept often taught in introductory economics, its practical application for understanding current monetary policy and analyzing the U.S. economy has become less central, according to some analyses and observations.

Similarly, Steve Keen recommends that undergraduate economics curricula is bogus, although it trends to the technocratic.

This might seem like a promotional pitch, but I really didn’t have the resources to join Steve Keen’s think-tank project, so I thought I might share what will be likely another more technical move toward a counter-hegemonic, heterodox political economics.

In the history of economic thought there have been a variety of competing ideas that have served to separate the academic study of economics from its metabolic relation to actual economic activity.

The field could be as complex as the below chart, but isn’t, as one thinks about data science, materials science, and ecology.

Instead the history has looked like competing ideological groupings, e.g. personalities and “great men” (sic), as well as mathematical skill.

Some names have yet to be included in the above ‘Pantheon’ including Paul Cockshott and Steve Keen, among others more in the future decolonization of the discipline, since what Marx and Engels would call the ‘metabolic turn’ has yet to be completed.

OTOH Don't let schooling interfere with your education.

Also, counter-intuition

x A new paper shows that the more money the Pentagon gets, the more energy it uses and the more greenhouse gas it emits. Which is weird, because "threat multiplier" advocates keep telling me that increased Pentagon spending is responsible climate policy. journals.plos.org/climate/arti...



[image or embed] — Sam Ratner (@samratner.bsky.social) Jul 8, 2025 at 11:58 AM

Similarly, human failures of domination:

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