Apple, Google and Microsoft Mock the Absurd 'Money Multiplier' Theory

Apple, Google and Microsoft Mock the Absurd 'Money Multiplier' Theory
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The holiday season is a time of gatherings. Since it is, here’s a proposal aimed to cure readers of a misbegotten obsession with banks, and their alleged ability to “multiply” money and credit. They can do no such thing.

To develop a sense for why, gather four friends at a kitchen table over the holidays and lay five crisp $20 bills on that same table. You’re Bank A, and let’s assume you face no reserve requirements since in a sane world, banks wouldn’t have to abide them.

Then look to your right, and Bank B. Lend Bank B the $100. Bank B should then look to his right and lend the $100 to Bank C, Bank C to Bank D, and Bank D to Bank E. According to money multiplier theory, there’s $500 liquefying your tiny kitchen table economy. Or maybe it's $600? When it comes to fabulist thinking, who really cares? In reality, there would still only be $100. Think about it. 

Which brings us to the odd, modern obsession with banks. Some believe that banks, for being banks, are agents of mass inflation by virtue of them multiplying money and credit in the way previously described. As Murray Rothbard long ago oddly put it, fractional reserve banks “create money out of thin air. Essentially they do it the same way as counterfeiters.” Oh dear….

The multiplier argument is that $900 loaned out on a $1,000 bank deposit (this assumes a 10% reserve requirement) soon morphs into many multiples of $900 as the initial funds are loaned over and over again. Except that such alarmism is defied by basic common sense.

Implicit in what has some up in arms is that in any market there are only buyers, or that in a lending market there are only borrowers. In truth, there are no buyers without sellers. For an individual to buy a good or a service, another individual must relinquish that good or service. Money is no different. For a borrower to borrow, a saver must hand over money. The lender relinquishes control of the “money” when lending.

Crucial here is that no one lends money as much as they lend what money can be exchanged for. Or as the great Austrian thinker Ludwig von Mises properly explained it in The Theory of Money and Credit, “He who tries to borrow ‘money’ needs it solely for procuring other economic goods.” It seems "money multiplier" theorists failed to internalize a basic truth uttered by this most consequential of thinkers. Indeed, looked at through the prism of Mises’s correct utterance about why people borrow, the whole “money multiplier” concept comes crashing down.

Mises’s point was that people don’t borrow money as much as they borrow goods. That being the case, any kind of money multiplier that, in the view of multiplier alarmists, “multiplies” money and credit, would quickly render the dollar useless. We know this because real economic goods can’t be multiplied nearly as fast as money theoretically can be. Assuming a multiplier effect, there would copious amounts of dollars chasing exceedingly few goods. If so, no one would borrow dollars. Why pay for the right to access a medium of exchange that banks are allegedly “multiplying” away the exchangeability of?

Except that individuals in the U.S. endlessly seek dollar credit. Not only do dollars liquefy most exchange and lending in the U.S., they increasingly do for the rest of the world. If readers doubt this, they need only enter “enemy” countries like Iran, North Korea and Venezuela with dollars, along with rials, won and bolivars respectively. They should then see which currency is actually exchangeable for real economic goods.

Funny about the truly absurd multiplier theory is that the proponents of same reserve their hatred for banks as the alleged instigator. It seems they think banks should operate as money warehouses as opposed to financial intermediaries. But if banks were the warehouses multiplier theorists want them to be, individuals would pay banks for the right to house money with them as opposed to being paid. Stating what should be obvious, they wouldn’t be banks if they didn’t lend out the vast majority of money deposited with them. They also wouldn’t be solvent….

To which a not infrequent reply is that banks have access to the Fed, and can borrow from the central bank when they run out of dollars, or if one day more depositors show up to withdraw more than there are dollars in said bank. Supposedly this is another source of the alleged multiplication. Except that it isn’t.

You see, it’s exceedingly rare for banks to show up with collateral to borrow at penalty rates from the Fed. To do so often fosters the “run” that banks aim to avoid precisely because accession of Fed credit is an admission of bankruptcy. That is so simply because there are so many market sources of credit for well-fun financial institutions, including banks. Translated, the Fed’s original role as lender of last resort has long been ably filled by non-Fed entities.

Which brings us to Apple, Google and Microsoft. Each is well known to have at least $100 billion in cash on its balance sheet. Think about that for a minute. None of the companies mentioned is warehousing its dollars; rather those monies are constantly being loaned out in the real economy.

And unlike banks that must meet reserve requirements, readers can rest assured that Apple, Google and Microsoft don’t suffer any kind of limits on their lending. Suffice it to say that every dollar in the control of each company is always in motion to a higher use. Readers can similarly rest assured that the financial position of the companies mentioned enables the cheapest borrowing in the world from other sources of credit; cheaper than banks. And much cheaper than banks would theoretically pay the Fed for dollar credit. Goodness, Apple borrows at rates that rival what the U.S. Treasury pays. Yet no multiplication.

How do we know no multiplication? We know not just because we have common sense, but also because these are three of the five most valuable companies in the world. And if dollars earned in the marketplace were constantly being multiplied into nothing by “counterfeiting” banks, then Apple, Google and Microsoft wouldn’t be three of the most valuable companies in the world. In fact, the shares of each would be in freefall to reflect the relentless erosion of corporate wealth denominated in dollars. And rich people so stupid as to hold dollar wealth would similarly go from the penthouse to the poorhouse in short order.

Except that’s not what happens. And it doesn’t because the very notion of a “money multiplier” brings new meaning to obtuse. It presumes that markets aren’t just stupid, but stupendously so. How odd that some would embrace what is so flamboyantly ludicrous, and anti-market. To see why, gather a few friends around a table this holiday season with $100...

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at  

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