That is not my primary criticism. My point, which I have not really made clear, is that the money multiplier analysis is pointless and things like the IS/LM model. The central bank does not influence, commercial bank, money supply to any significant extent. The banking system endogenously creates money, the system is not controlled by the central bank, the monetary base (central bank money), or the reserve requirement.
Here is an example that knocks the money multiplier analysis out of the window.
Suppose there are three parties.
The Bank.
The Man.
The Woman. The Woman owns a Car worth £10,000. The Man wants the car, but does not have £10,000.
The Man decides to take a loan out from the bank to buy the car. The Bank promises the the Man £10,000 and credits his account with £10,000. The Man in return promises to pay the bank £10,000 in the future (no interest in this example).
Looking at the balance sheets, this has happened.
_____________________
The Man______________________
__________Assets_____________|__________Liabilities___________
__
£10,000 [The Banks promise]__|_____
£10,000 [Debt to the bank]_____
____________________________|______________________________
____________________________|______________________________
_______________________
The Bank________________________________
____________Assets____________|____________Liabilities___________
_
£10,000 [The debt of The Man]___|__
£10,000 [Promise to the Man]____
_____________________________|____________________________
_____________________________|_____________________________
The Bank and the Man have in effected created £10,000 of commercial bank moeny. Now you are probably thinking that this is silly because I have not declared any reserves on the part of the bank and that the Bank will ask for central bank money to finance this. They do not need to. Observe the following.
The Man then buys the car, with the £10,000 promise from the Bank, from the Woman. The Woman then deposits this £10,000 promise into the Bank.
Looking at the balance sheets again, this has happened.
_____________________
The Man______________________
__________Assets_____________|__________Liabilities___________
__
£10,000 [The Car]______|_____
£10,000 [Debt to the bank]____
____________________________|______________________________
____________________________|______________________________
_____________________
The Woman______________________
__________Assets_____________|__________Liabilities___________
__
£10,000 [The Banks promise]__|__________________________
____________________________|______________________________
____________________________|______________________________
_______________________
The Bank________________________________
____________Assets____________|____________Liabilities___________
_
£10,000 [The debt of The Man]___|__
£10,000 [The deposit from the Woman]____
_____________________________|____________________________
_____________________________|_____________________________
Notice how the bank has met its own reserve requirements by lending the money. There is no need for central bank money. And the reserve requirement does nothing to stop the creation of commercial bank money. The money multiplier analysis is quite frankly, irrelevant.
Magic like this is usually only seen on stage
And once we add interest onto this, you can see that the banks are laughing.
(Now I am going to assume you will think, what about multiple banks? Well it makes no difference. But for the time being I cannot be bothered to type it up).