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A very quick note on reserves

October 7, 2011

Bank reserves do not affect inflation. Money, like some bizarre quantum particle, only affects things when it is spent, and a pile of money sitting in a bank vault cannot be spent. In fact, that is true for all money holdings. Emerson said “To be great is to be misunderstood”. It has certainly been true among economists, and perhaps the biggest misunderstanding among Milton Friedman’s followers is the notion that money causes inflation. Money causes spending, if people try to spend down their real money balances, and spending causes inflation when it is not paired with increases in production.

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