The growth of bank reserves and the growth in the stock of money have followed a similar path in the recent crisis which signifies that credit creation has been tightly constrained by the recession.
Answer: True
The answer is True.
It has been demonstrated beyond doubt that there is no unique relationship of the sort characterised by the erroneous money multiplier model in mainstream economics textbooks between bank reserves and the "stock of money".
You will note that in MMT there is very little spoken about the money supply. In an endogenous money world there is very little meaning in the aggregate.
Central banks do still publish data on various measures of "money". The RBA, for example, provides data for:
Note that ADI are Australian deposit-taking institutions; AFI are Australian financial intermediaries; and the RFCs are Registered Financial Corporations. Here is the RBA's excellent glossary for future reference.
The mainstream theory of money and monetary policy asserts that the money supply (volume) is determined exogenously by the central bank. That is, they have the capacity to set this volume independent of the market. The monetarist portfolio approach claims that the money supply will reflect the central bank injection of high-powered (base) money and the preferences of private agents to hold that money. This is the so-called money multiplier.
So the central bank is alleged to exploit this multiplier (based on private portfolio preferences for cash and the reserve ratio of banks) and manipulate its control over base money to control the money supply.
To some extent these ideas were a residual of the commodity money systems where the central bank could clearly control the stock of gold, for example. But in a credit money system, this ability to control the stock of "money" is undermined by the demand for credit.
The theory of endogenous money is central to the horizontal analysis in MMT. When we talk about endogenous money we are referring to the outcomes that are arrived at after market participants respond to their own market prospects and central bank policy settings and make decisions about the liquid assets they will hold (deposits) and new liquid assets they will seek (loans).
A leading contributor to the endogenous money literature is Canadian Marc Lavoie. In his 1984 article ('The endogenous flow of credit and the Post Keynesian theory of money', Journal of Economic Issues, 18, 771-797) he wrote(page 774):
When entrepreneurs determine the effective demand, they must plan the level of production, prices, distributed dividends, and the average wage rate. Any production in a modern or in an "entrepreneur" economy is of a monetary nature and must involve some monetary outlays. When production is at a stationary level, it can be assumed that firms have at their disposal sufficient cash to finance their outlays. This working capital, in the aggregate, constitutes credits that have never been repaid. When firms want to increase their outlays, however, they clearly have to obtain extended credit lines or else additional loans from the banks. These flows of credit then reappear as deposits on the liability side of the balance sheets of banks when firms use these loans to remunerate their factors of production.
The essential idea is that the "money supply" in an "entrepreneurial economy" is demand-determined - as the demand for credit expands so does the money supply. As credit is repaid the money supply shrinks. These flows are going on all the time and the stock measure we choose to call the money supply, say M3 is just an arbitrary reflection of the credit circuit.
So the supply of money is determined endogenously by the level of GDP, which means it is a dynamic (rather than a static) concept.
Central banks clearly do not determine the volume of deposits held each day. These arise from decisions by commercial banks to make loans.
The central bank can determine the price of "money" by setting the interest rate on bank reserves. Further expanding the monetary base (bank reserves) as we have argued in recent blogs - Building bank reserves will not expand credit and Building bank reserves is not inflationary - does not lead to an expansion of credit.
So a rising ratio of bank reserves to some measure like M3 is consistent with the view that credit creation is being constrained by some factor - such as a recession.
You might like to read these blogs for further information: