I was reading this post by Scott Sumner in which he concluded with the following:
“This post has already run too long, so I’ll do the quantity theory of money in the next post. We’ll see how the central bank can control the value of money (and NGDP), by changing the currency stock.”
I just don’t get the obsession with currency and other forms of government money. It reminds me of the obsession with the gold standard in many ways. As if we should focus on pegging the currency to some particular money. But doesn’t this get the entire monetary system exactly backwards? Of course, banks don’t create money by multiplying bank reserves or cash. If we want to really understand our monetary system we need to better understand how inside money (bank money) “rules the monetary roost” and how government money facilitates the use of inside money.
This obsession with government money gets the entire money system backwards by focusing on the cane (the facilitating feature) when we should be focused on the leg (the actual banking system). I’ll be curious to see what Sumner says because he’s explicitly stated in the past that he doesn’t much care for understanding how modern banking works. To me, that’s like saying that you don’t much care how the monetary system works, yet you’ll continue to propose fixes for it (or describe how it works?!?). That doesn’t make a lot of sense to me. The world we live in is one built around private banking, but the world economists live in is one built mainly around the Federal Reserve, which is designed to facilitate its true master – the private banking system.