Most people think that the money created by the banking system is real: If you ask them how much money they have, they will include the money in their bank account, even if their bank is operating under a fractional-reserve regime... meaning that not everyone can get their money back if they all ask for it at the same time.
If they don't why would they leave their money on deposit? Laziness? Indifference to their circumstances in a post-crash world?
Because of this, when the bank creates extra money it results in higher prices because when a greater number of people think that they have money, they will pay more for goods. People will accept "bank account money" as though it is real (not only the purchaser, but also the seller of the goods values bank credit).
But is it real? Can the bank be relied upon to give us our money back? The bank relies upon the Government to refund our deposits, so we must ask whether the Government will provide sufficient funds in the event of a bank run... it is likely that, although they have promised to do so, the Government will not return all the promised deposits. It might be expedient for them (the Government) to explain that to return the money to the affluent depositors is a luxury that cannot be afforded in difficult times. Instead the money will go to worthy Government officials who will spend it wisely on the needy... this results in hyperinflation (of the (narrow) money supply) but results in prices lower than they were before the bank(ing) crisis.
In the sense that everyone thinks that bank credit "is real" then it is so, but when the value is truly tested in a banking failure then we will (may very well) find that it is not so real...
The money created by the banking system is not real, even though most people (apparently, according to their preferences as expressed in the market of prices) think that it is.
Thursday 23 April 2009
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