Munich Personal RePEc Archive

Privately issued money reduces GDP.

Musgrave, Ralph S. (2017): Privately issued money reduces GDP.

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The majority of the money supply is issued by private banks, not central banks. However a system that restricts money creation to central banks has been advocated for many years by leading economists. There is no reason interest rates would not be at some sort of genuine free market rate under the latter system. In contrast, when private bank money is allowed, those banks undercut the free market rate of interest because it costs them nothing to come by the money they lend out: they effectively just print it, much as counterfeiters print money. The result is a sub-optimum or “non GDP maximising” rate of interest and an above optimum amount of debt. An additional misallocation of resources is that if private corporations are to be allowed to create money, there is no good reason why money lenders (i.e. private banks) should be allowed to do that and not car manufacturers or any other set of corporations. I.e. a second reason why letting private banks create money misallocates resources and reduces GDP is that different types of corporation do not compete on a level playing field. In contrast, the field is level if only central banks create money.

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