Is the Money Multiplier Real?

Mainstream economics teaches that banks create money through a 'money multiplier' process where the central bank controls the money supply by setting reserve requirements and providing base money to banks, which then lend out a fraction of deposits, creating new deposits in a multiplicative chain. According to this fractional reserve banking model, if the reserve requirement is 10%, banks can theoretically create $10 of new money for every $1 of reserves, with the central bank controlling this process through monetary policy tools like open market operations and reserve requirements.

MMT shows that the money multiplier is a misleading fiction that gets the operational reality of banking backwards. As demonstrated by MMT economists like L. Randall Wray and Bill Mitchell, banks do not wait for deposits to make loans—they create loans first, which simultaneously create deposits. When a bank approves a loan, it credits the borrower's account with new money created ex nihilo (out of nothing) through keyboard entries. The bank then seeks reserves afterward to meet regulatory requirements, either by borrowing from other banks in the interbank market or from the central bank's discount window. Central banks accommodate this demand for reserves because they must to maintain their target interest rate—they are not in control of the money creation process but rather respond to it. Warren Mosler's foundational insight is that the central bank is like a dog being walked by banks: it appears to be leading, but it's actually being dragged along by the operational needs of the banking system. Reserve requirements, where they exist, are not binding constraints but accounting residuals that banks meet after the fact of lending.