"Otherwise what I was mostly trying to suggest was that the banks anticipate the fact that the central bank won't let them double the supply of money and factor this into their loan and deposit pricing. The idea is that the current amount of deposits is not so much based on the curren[t] supply of base but the supply expected in the future." (That was from commenter HJC, with my emphasis added and one assumed typo fixed).
Now that is what I call a real and important critique of the money multiplier, as exposited in the textbooks. Because the textbooks are implicitly assuming a permanent increase in the money base, but none of them AFAIK make that assumption really explicit and talk about the difference between the current monetary base and the expected future monetary base. And it is a critique that has important real world implications, like for the US right now. And it is us Market Monetarists who should be making that critique.
Compare two different cases:
1. The Bank of Canada announces it will permanently double the monetary base relative to what it would otherwise have done. It recognises that doing so will permanently (approximately) double the price level relative to the price level path that it would otherwise have chosen under 2% inflation targeting, and it wants this permanent doubling of the price level to happen.
2. The Bank of Canada announces that a computer glitch will cause the monetary base to double, but only for one month. Because the techies are absolutely certain that they can fix it, but are currently all on holiday. The Bank of Canada assures everyone that normal programming of 2% inflation targeting will resume shortly, and that it will take steps to ensure that this computer glitch will have zero permanent consequences for the price level, if necessary by tightening monetary policy in future to restore the previously planned path for the price level.
In the first case I would expect an (approximate) doubling of currency in public hands and doubling of deposits. The money supply would double, as would the price level and all nominal variables like NGDP. Nominal interest rates would rise temporarily, then revert to normal.
In the second case I would expect approximately nothing to happen. The banks would roll their eyes and sit on (approximately) all the extra base as reserves for one month. (Since Canadian banks normally hold very small amounts of reserves, because none are legally required, and the base is currency+reserves, the stock of reserves would much more than double.) The overnight rate would fall 0.25% to equal the deposit rate (the rate of interest the Bank of Canada pays on reserves), and one month interest rates on liquid assets would fall a little too, but approximately nothing would happen to loans and deposits and the stock of currency in public hands.
I think that the current US case is much closer to case 2 than to case 1. Yes, the US banks have been sitting on the extra reserves for much longer than one month, but it is the conditionality that matters more than the duration. As someone (sorry I forget who) once said: the Fed has put out a large punchbowl of free booze, but no individual bank wants to drink much unless the other banks drink too, and the Fed says it will take away the punchbowl as soon as they start drinking. The full punchbowl just sits there. The Fed would need to announce that it wanted the price level (or NGDP) path to be permanently higher to give them permission to start drinking. And if it did that, a much smaller punchbowl would work much better than the current uselessly large one.
Other critiques of the money multiplier totally miss the point. Like "loans create deposits!" or "base is endogenous!" or "banks don't lend reserves!" or "other things affect the money supply too!". This critique matters because the textbook exposition is designed to show (among other things) how the central bank's control over its own balance sheet (which is all it really controls) allows it to control the money supply, in the same sense that I control my car. (Yes, the position of the steering wheel is endogenous, given the bends in the road I have chosen to take.) The current state of the balance sheet matters less than the expected future balance sheet, and the expectations about the conditions under which the central bank will change that balance sheet.
Worthwhile Canadian Initiative 
Tom: Sounds like you guys want some more quotes from the book. What exactly is the “issue”? I haven’t been following your discussion.
HJC, the issue for me is well described by the following excerpts from JP Koning’s article:
http://jpkoning.blogspot.com/2014/03/credit-cards-as-media-of-account.html
Here are some of the issues: JP writes the following:
“The unit-of-account is a word or symbol like $, ¥, £. Inherent in the idea of UOA is the subdivision of the unit, so that $1 is comprised of 100 cents. (1)”
In JP’s previous post I asked him an off-topic question related to a previous statement he’d made very much like the above. Here’s my question and his response:
Me:
“Does that imply that the concept of UOA in isolation sets up a self contained system of names and symbols and relates the names and symbols to each other internal to this system with numerical ratios, but that this self contained system is not tied to any value or anything at all in the outside world? It sounds like the “definition” (which I take to be the thing which gives the UOA value in terms of an MOA) you now consider to be part of the MOA. Am I correct?”
JP responds:
“Yep, that’s right. (Funny you ask, my next post is on MOA. I’ll try to clarify therein.)”
Here’s that thread (it includes some links to further comments exchanged between myself and Mark A. Sadowski):
http://jpkoning.blogspot.com/2014/03/is-value-premium-liquidity-premium.html?showComment=1394474536196#c4054499394272339372
Mark A. Sadowski doesn’t agree: he says that there is a value associated with the unit of account. Which brings me to the footnote (1) JP included in the Credit Card post (then next post after the above thread: my first link up top):
“(1) As Tom Brown points out, some economists describe the unit-of-account not just as a sign, but also as a fixed quantity of the medium-of-account. So if the unit of account is the $, and the medium-of-account is gold, than the number of grains of gold that defines the dollar is rolled into the concept of unit-of-account. Alternatively, we can leave the unit-of-account as a mere sign, and refer to the medium-of-account not just gold but a given quantity of gold grains. Thirdly, we could give the quantity of the medium of account that defines the $ an entirely different term, say the “Tom Brown multiple”. As long as we remember that there’s a sign, the thing that represents that sign, and the quantity of that thing then we can avoid unnecessary semantic debates”
So that gets back to my four options on this I posted above:
Tom Brown | April 07, 2014 at 12:56 PM
Make sense?
Great post. You write, “And it is us Market Monetarists who should be making that critique.” It’s out there. See this recent post by David Beckworth. He writes, “To further unpack this idea, I want bring up a point I have repeatedly made here: open market operations (OMOs) and helicopter drops will only spur aggregate demand growth if they are expected to be permanent. This idea is not original to Market Monetarists and has been made by others including Paul Krugman, Michael Woodford, and Alan Auerbach and Maurice Obstfeld. Market Monetarists have been advocating a NGDP level target (NGDPLT) over the past five years for this very reason. It implies a commitment to permanently increase the monetary base, if needed.”
Mark,
“No, capital taxes are taxes on capital income: corporate profits, dividends, rent, interest and some kinds of proprietor income. A capital gains tax is a tax on property.”
A government does not collect a portion of the property when it assesses a tax, it collects a portion of the income from the sale of that property. A government usually limits the taxation to the net of resale price – purchase price and normally waits until gains / losses are realized before assessing the tax. And so how is economically different than a tax on dividends or interest or rent or any other income?
I can understand the argument that earnings obtained by a company (corporate income) are rolled back into funding the production of new goods and so taxing that income too heavily results in a reduced supply of goods.
Nick, can’t the arguments you present in this post be applied to this post: “There can be an excess supply of commercial bank money”
In other words, if people don’t expect the excess supply of commercial bank money to be permanent (and who’s telling them that anyway in that case?), won’t that affect the excess supply’s ability to do anything (i.e. raise the average price level)?
Tom: yes, I think you could make a similar sort of argument.
Thanks Nick. Do you suppose it’s possible for expectations to override the “mechanics” of a particular situation? Suppose, for example, that Neo-Fisherite thought does a great job of marketing itself and people really believe them to the exclusion of all other schools of thought. Then if the CB permanently reduces the monetary base saying it’s doing so to raise NGDP, could that actually happen?
BTW, have you seen McConnell and Brue’s intro macro text? The section on banking (Chapter 24) gives a formula for the “deposit multiplier” (money multiplier) and derives it in the usual way. But this is followed by a part describing why it’s a good idea to keep central bank plans secret. It raises the concept that this is controversial, but says the long success of that approach argues against making it public. I think the edition I was looking at was from the early 2000s, so perhaps that’s been amended since then.
This is fine as far as it goes.
You’re still missing something, which Bill Black has explained… and it’s the same dynamic but with a different cause…
“The current state of the balance sheet matters less than the expected future balance sheet,”
This is also true of the private commercial banks. In the US, all of the giant banks are insolvent and are hiding it with phony accounting. I could give a rundown of the phony accounting tricks, but mostly it’s a matter of keeping worthless assets on the books at inflated prices.
However, the insolvency doesn’t matter as long as the FDIC and OCC and Federal Reserve don’t swoop in to shut them down. At the moment, it seems like the FDIC and OCC and Federal Reserve have declared that they aren’t going to shut down insolvent, accounting-fraud banks.
But the insolvent, accounting-fraud banks know that eventually some regulator is going to catch up with them. So they are desperate to “repair their balance sheets” (you’ll see that phrase a lot in the papers) or “earn their way out of bankruptcy”, hoping that they will have a non-insolvent balance sheet by the time the regulators decide to crack down.
Accordingly, they hoard all the money they get; they only lend it out if they can get usurious rates of profit on it. They charge fees, often illegally, in order to try to extract more profit and “repair their balance sheets”. They steal houses.
None of the money coming from the Federal Reserve to the megabanks makes it into sensible business expansion or other real-world-useful lending. It all gets poured into these mad attempts to “repair the balance sheet”.
GM was simply declared bankrupt and recapitalized with new management. If the same had been done with the insolvent megabanks, we might see them behaving in a fashion which is more helpful to the general economy.
But instead we see the behavior of crooks who got caught, didn’t get punished, and are trying to scam money so they look better before the next audit.