Creation of money occurs when banks make loans. Extension of credit is creation of money. Repayment of loans is destruction of money. When you say "actual money" you mean printed bills with the addition of, I suppose, bank deposits created by the Fed when they buy bonds from banks. Banks and the public at large can participate in the creation or destruction of money depending on their willingness to lend (banks) or borrow (the public). Both destructive things happened in the Great Depression and apparently central bankers think they could happen again; hence the sudden extension of huge lines of credit.
You are right, that if no one borrows using this new credit, there will be no increase of the money supply. But your refusal to admit that demand deposits created by lending-borrowing are not money is highly unorthodox, to use a restrained epithet.
Compare your statement:
"Massive amounts of credit can be extended by fractional reserve lending with only trivial increases in actual money supply."
with Anna J. Schwartz's account:
"If the Federal Reserve increases reserves, a single bank can make loans up to the amount of its excess reserves, creating an equal amount of deposits. The banking system, however, can create a multiple expansion of deposits. As each bank lends and creates a deposit, it loses reserves to other banks, which use them to increase their loans and, thus, create new deposits, until all excess reserves are used up.
If the required reserve ratio is 20 percent, then starting with new reserves of, say, $1,000, the most a bank can lend is $800, since it must keep $200 as reserves against the deposit it simultaneously sets up. When the borrower writes a check against this amount in his bank A, the payee deposits it in his bank B. Each new demand deposit that a bank receives creates an equal amount of new reserves. Bank B will now have additional reserves of $800 of which it must keep $160 in reserves, so it can lend out only $640. The total of new loans granted by the banking system as a whole in this example will be five times the initial amount of excess reserve, or $4,000: 800 + 640 + 512.40 + 409.60, and so on." |
