This post is to introduce a tutorial which is posted up top as Monetary_System. It describes the workings of the our modern fiat monetary system, which differs significantly from the gold standard upon which classical economics theory was based. Many economics textbooks have not caught up with this. For instance, the widely-taught money multiplier model of fractional reserve banking no longer applies. This article points out some counter-intuitive aspects of today’s financial system: banks can make loans without having any prior deposits, ongoing government deficit spending is typically prudent and necessary, and an increase in net savings in the private sector cannot be produced by individuals trying to save.
The article starts off discussing money in general, and then describes the interactions of the U.S. treasury and central bank. Although it gets into the operational details of bonds, loans, and investments, it does not presuppose a background in economics, and defines most specialized words as they appear. The casual reader will probably find the first third of the article easy going. After that, it depends on how thirsty you are for knowledge. The article is probably too long to read at one sitting.
The contents are:
What is Money?
Measurements of Money Supply
Clashing Schools of Economics
Monetary Realism: Economics Without Politics
Basic Operations of Fiat Monetary Systems
Money Creation in the Private Sector
Sectoral Balances: Private, Government, and Foreign Surpluses and Deficits Must Net to Zero
Historical U.S. Sectoral Balances
Trade Deficit and Government Deficit
Financial Assets and Real Wealth
Accounting for Investment and Savings
Federal Government Borrowing Operations
Is Quantitative Easing “Printing Money”?
Can the Government Print Money?
Should the Government Print Money?
Is the National Debt Really a Problem?
Fiscal Policy Choices: Short versus Long Term Effects