A Simple Model with Private Bank Money

Abstract

As pointed out earlier, money is created in two fundamentally different ways. In Chapters 3–6, we only dealt with government money — indifferently called high-powered money, central bank money, cash money or outside money. This kind of money had a peculiar characteristic: it carried no interest yield. It is now time to introduce private money, that is, the money created by private banks. Although private, or commercial, banks could also print cash money or banknotes, as they indeed were allowed to do in the past before central banks were awarded the monopoly, we shall assume that all private money takes the form of money deposits. We shall further assume that these bank deposits carry an interest yield.