For decades now, the major economic textbooks have been teaching an explanation which is not just wrong, but back to front. The textbook explanation involves the assumption that banks repeatedly lend and re-lend deposits up to a limit determined by the “reserve ratio”. This explanation is known as the “money multiplier model”, a model in which the money supply is said to be “exogenous”.
Standard & Poor’s chief global economist describes the Money Multiplier Model as a “defunct idea” and that “Banks can not and do not ‘lend out’ reserves”.
Michael Kumhof, Deputy Division Chief, Modelling Unit, Research Department, International Monetary Fund said “the textbook treatment of money in the transmission mechanism can be rejected”.
Mervyn King, Governor of the Bank of England 2003 to 2013 said “Textbooks assume that money is exogenous … in the United Kingdom, money is endogenous”.
Professor Charles Goodhart CBE, FBA, ex Monetary Policy Committee, Bank of England said of the money multiplier model: “It should be discarded immediately”.
Professor David Miles, Monetary Policy Committee, Bank of England said “The way monetary economics and banking is taught in many, maybe most, universities is very misleading”.
JP Morgan Chase, Global Data Watch: “In spite of being almost totally divorced from reality, the money multiplier is still taught in undergraduate economics textbooks, with much resulting confusion.”
Despite all these quotes, textbooks (and Wikipedia) blindly carry on peddling these bulls..t ideas.