Hanke and Greenwood Reply on the Money Supply

In his letter (October 27) in response to our editorial “Another Black Monday May Be Coming” (October 23), Em. Professor Robert Stauffer suggests one common mistake and one dangerous problem.

Stauffer said we are “ignoring the existence of a banking system that is flooded with liquidity with approximately $3.4 trillion in excess reserves,” and that these excess reserves are being lent out, “thereby increasing the money supply M2. “There is a possibility that there will be an increase in mistaken. Only the Fed, not commercial banks, determines the size of assets and liabilities. When commercial banks make loans, they cannot reduce the Fed’s reserves all at once. Commercial banks’ reserves are primarily used for interbank payments, which is a zero-sum game. And when it comes to bank lending, commercial banks are not adding to M2. Over the past year, commercial bank credit shrank by 0.7%.