I’m having a little battle with someone from wikipedia about time deposits. I stated that if banks exclusively used time deposits and banks gave no guarantees, then the money supply will remain constant. He has asked me to come up with a supporting reference. Can anyone help me out?
…and am I even right?
Do you mean banks that hold 100% reserves against demand deposits and only lend by issuing time deposits?
I think you are wrong. Money is that which is accepted as a medium of exchange, and its supply can increase spontaneously in the marketplace. Even within the present financial system, various safe and short term time deposits are included in broader measures of the money supply. In the absence of fractional reserves, I suspect such time deposits would become a significantly larger part of the money supply. Money is not the supply of anything in particular, it is just whatever is accepted as a medium of exchange. If the supply of a particular type of money is fixed, then people will discover another type of money when they need a medium of exchange. (This is not unlike the Mengerian story of the origin of money).
“Do you mean banks that hold 100% reserves against demand deposits and only lend by issuing time deposits?”.
Yes. Though I would phrase the last part as “and only lend from time deposits”.
I’ve just found this quote
“On the other hand, a genuine time deposit—a bank deposit that would indeed only be redeemable at a certain point of time in the future, would merit very different treatment. Such a time deposit, not being redeemable on demand, would instead be a credit instrument rather than a form of warehouse receipt. It would be the result of a credit transaction rather than a warehouse claim on cash; it would therefore not function in the market as a surrogate for cash.”
from “Austrian Definitions of the Supply of Money” By Murray N. Rothbard.
mickanomics,
Some time deposits are included as components of M2.
This is indeed true. But M2 is nothing but a statistical aggregate created by authority,. This does not prove that they are money. In fact, they are not.