Dreaming back to 1949, the great powers were there to deceive us

"In traditional economic theory, when the money supply exceeds the demand for money, inflation is inevitable. When you say total money supply, do you mean the total amount of currency in circulation or the total amount of currency issued?"

“Of course it’s the total amount of currency issued!”

In this era, there is no term "narrow money", but Lao Hu intends to popularize the three concepts of M0, M1, and M2 first.

M0, or cash in circulation, refers to cash outside the banking system. This refers to the cash issued by the central bank minus the cash held by commercial banks, which equals the cash held by the public. This cash can be used directly to pay for a variety of goods and services and is the most liquid form of money. For example, if you use the cash in your pocket to buy snacks at a street vendor, this cash is considered M0.

M1, also known as narrow money, is equal to demand deposits held by enterprises and institutions plus credit card deposits held by individuals. Enterprise demand deposits are deposits that businesses can use for payment and settlement at any time. This form of money is also highly liquid because businesses can easily use demand deposits to pay for transactions, such as using demand deposits to pay for goods.

M2 is the broad money supply, comprising M1 + time deposits + savings deposits + foreign currency deposits + trust deposits. M2 covers a broader range, encompassing not only money that can be used directly for transactions but also forms of money that cannot be used immediately for payments but can be converted into cash or demand deposits for payment under certain conditions. For example, while personal time savings deposits cannot be withdrawn for consumption at any time like demand deposits, they can be used for various payments when withdrawn early or upon maturity. M2 provides a more comprehensive reflection of the overall money supply in society.

After listening to Lao Hu's story, the three economists looked at each other in confusion.

At present, China only has M0. If we have to say that there are M1 and M2, then the values ​​of M1 and M2 will not be much different from M0!

The reason is very simple. There are no banks in most areas. Even if there are, they are only for promoting the RMB. As for savings and loan services, they are very few.

Everyone who has money hides it in their own house. As for depositing it in the bank, don't joke. In the past one or two hundred years, the country has been in war. If you put your money in a bank today, the bank may go bankrupt tomorrow.

Coupled with the unlimited depreciation of legal tender and gold yuan, the people had no confidence in paper money at all.

After listening to Guan Tianpei's story, Hu Zhenhua felt like there was a dead fly stuck in his throat and he couldn't make a sound!

This is really pretending to be so smart that it's like going to the sewer!

Hu Zhenhua's mind worked quickly. He slammed the table and shouted,

"I'm very pleased with your pragmatic attitude! One of the solutions I've prescribed is universal banking!"

"As the saying goes, many hands make light work! The country may be poor, but that doesn't mean the people are broke! If every citizen in the country deposited ten yuan in the bank, how much would that be? Five or six billion!"

Hu Zhenhua knocked on the table and shouted,

"If you have deposits, you can get loans! Please note that what I am going to say next is all practical information!"

Lao Hu cleared his throat and said,

"Suppose a bank receives 100 billion yuan in deposits, and the central bank's reserve requirement ratio is 20%! The bank's loanable funds are then 80 billion yuan! This money is loaned to Company A! Company A pays part of the loan to suppliers and saves part, but eventually, the money flows back into the bank! Therefore, the bank retains another 20% as a reserve, leaving 64 billion yuan to be loaned to Company B. This 64 billion yuan is ultimately deposited back into the bank, leaving 20% ​​as a reserve, and the remaining 51.2 billion yuan is given to Company C..."

“假设银行将所有可贷资金全部贷出，且所有贷款资金都重新存入银行系统，我们利用货币乘数可以计算出最终影响。货币乘数 = 1/法定准备金率。在这个例子中，货币乘数为1/0.2 = 5。最初的100亿元存款通过银行体系的货币创造作用，理论上最多可使M2增加100x5 = 500亿元。

Consider the complexity of other factors, such as cash leakage (where some loan proceeds are not redeposited into the banking system but held in cash). These factors will reduce the money multiplier and thus reduce the actual increase in M2.

However, one thing is certain: M2 can be significantly increased. Just think about how many jobs these tens of billions of dollars can create and how much tax revenue can be generated!

Guan Tianpei, Dai Zong and He Baoyi naturally knew the money creation function of the banking system, and they also understood its drawbacks.

Guan Tianpei asked,

"M2 has increased, but the total wealth in society has remained unchanged. The ultimate result must be inflation!"

Hu Zhenhua gave a thumbs up and praised,

"As expected of an economist, you hit the nail on the head! But you overlooked one point: it's not M2 that causes inflation, but M1!"

"M1?"

"That's right. Please carefully recall the definitions and connotations of M0, M1, and M2. If the newly added money doesn't enter the real economy but instead circulates within the financial system, such as if a large amount of funds remain in the interbank market or are used for asset speculation (such as in non-consumption areas like the stock market and real estate market), without significantly affecting the supply and demand relationship in the goods and service markets, there will be no significant inflation."

Dai Zong keenly noticed the loophole in Lao Hu's words and asked,

"Banks lend money to businesses, but there's no guarantee that the money will circulate within the banking system. It will eventually flow into the market!"

Hu Zhenhua nodded slightly and said with a smile,

"You're right. For example, if some companies use loans to pay workers' wages, this money will definitely flow into the market! But the amount won't be too much!"

Dai Zong did not agree with Hu Zhenhua's statement and retorted,

“What if it’s too much?”

"How could it possibly be too much? Don't forget that the money creation function of the banking system doesn't create real money, but rather book money. If it wants to flow into the market, it either happens through interbank transfers, which won't fuel inflation because the money remains within the banking system. Or, ordinary people withdraw cash to buy goods in the market, and the maximum amount of cash withdrawals is 100 billion yuan."

Dai Zong knocked on the table and said worriedly,

"What you said makes sense, but the bank has clearly loaned out hundreds of millions of yuan. What if these companies ask to withdraw all of it?"

Hu Zhenhua laughed.

"I can tell you've never worked in a bank before, so you don't understand the intricacies of this. The money creation we just discussed is an extreme scenario. How could it actually expand fivefold? At most, we'll create one or two times as much money. At the same time, banks will lend money to each other to mitigate operational risk. Even if a bank faces a crisis, doesn't the central bank still serve as the lender of last resort? And if inflation does occur, we can withdraw funds from the market."

“How to recycle!”

“Raise interest rates!”

The three looked at each other again. Raising interest rates can help curb inflation, but it will also suppress the economy!

Dai Zong sighed and said with emotion,

"Expanding M2 always feels like creating money for nothing?"

Hu Zhenhua quickly waved his hand and explained,

"Of course not! Bank money creation has a basis, requires original deposits, and is limited by factors such as the reserve ratio. It does not come out of nothing."