I give Roger Sandilands an F for his attempted proof that banks create money:
>A propos James Ahiakpor's latest post, banks do indeed create money, 
>because indeed "money is what money does", and demand deposits are 
>transferred electronically to settle debts without the 
>intermediation of cash, and banks do create demand deposits. QED.

Roger arrives at his attempted proof by taking the quote I gave from 
Francis Walker out of context.  The first sentence from the Walker 
quote is that "Money is that which passes from hand to hand in final 
discharge of debts and full payment for goods."  A check does not 
pass from hand to hand in final discharge of debts.  Rather, a check 
is an order to pay money to its recipient.  In commercial 
transactions, the recipient first takes such precautions as obtaining 
the issuer's driver's license or social security number and other 
particulars before parting with the goods being purchased.  This is 
to enable the vendor go after the issuer in case the check turns not 
to be good for the amount specified.
The recipient then deposits the check with his/her  bank.  The bank 
may or may not grant the depositor the privilege to draw on that 
deposit until the check "clears."  That is, the bank sends the check 
on to the drawer's bank for a transfer of money (cash) to the 
depositor's bank.
If such transfer is not effected, the recipient of the check would be 
so informed.  If a hold had been placed on the recipient's account 
for the amount of the check, that hold would be lifted only after the 
recipient's bank gets payment from the drawer's bank.  Thus, a check 
is an instrument of credit -- a facility to make a purchase without income.

On the other hand, cash settles all debts immediately.  Cash also 
"passes from hand to hand in final discharge of debts."  The same 
dollar bill or pound sterling goes from hand to hand, to hand, to 
hand, till it gets worn out and is withdrawn from circulation.  Your 
check, Roger, doesn't do that.

Another reason for assigning Roger an F for his attempted proof is 
that he ignored Marshall's qualification of what is money that I also 
provided: "all those things which are (at any time and place) 
generally 'current,' without doubt or special inquiry, as a means of 
purchasing commodities or services."  Among friends, a check may be 
accepted without "special inquiry."  The request to provide a 
driver's license or social security number when attempting to pay 
with a check clearly shows the difference between cash and a check in 
serving as a means of payment "without doubt or special inquiry."

I think Irving Fisher was wise in noting that "although a bank 
deposit transferable by check is included in circulating media, it is 
not money.  A bank note, on the other hand, is both circulating 
medium and money" (1912, 148).

Roger may have rushed to his proof on the basis of the modern 
definition of money that starts with the medium of exchange 
function.  But the classical definition of money that F.A. Walker was 
summarizing defines money as the particular commodity that serves as 
a measure of value, as in money is "1st The measure by which we 
compute the value of commodities (as a measure of value), and 2nd the 
common instrument of commerce or exchange" (Smith, /Lectures in 
Jurisprudence/).  The measure of value as the primary distinction of 
money from other commodities or media of exchange features in the 
discussions of money in Hume, Thornton, Ricardo, and Mill.  Clearly, 
values are measured in a central bank's currency (cash), not in 
checkable deposits.
Roger also falls bank on the typical notion of a deposit multiplier 
under a fractional reserve system to insist that banks create money.
But that account can be  misleading when one does not reckon that the 
initial deposit is an income earner's savings deposited in 
cash.  That enables the bank to lend a fraction, say (1 - r)D 
,  where r = reserve to deposit ratio or R/D.  The borrower spends 
the loan amount and the bank balance sheet becomes D = R + BC, where 
BC = bank credit.  There is no further deposit expansion until a 
recipient of the loan expenditure deposits that income (new savings) 
in a bank.  A new loan created on the basis of that deposit would be 
in the amount of (1 - r)(1 - r)(1 - cu)D, where cu = currency drain 
or currency to deposit ratio of the new depositor.  In short, the 
so-called bank deposit multiplier is really a savings expansion 
multiplier.  And it is savers or income earners' deposits that drive 
the process, not the banks, as Keynes claims.
If banks could manufacture credit or loans without the public's 
savings, why would they ever need to borrow from other banks (on the 
Federal Funds market) or from the Discount Window (from the Fed)?

Mr. Rodney Brown, President of the California Bankers Association, 
opened his letter to the editor (/San Ramon Valley  Times/) on March 
14, 2009,  with the following: "There is no dispute that our country 
is facing some of the most troubled economic times that we have seen 
in decades.  However, what can be disputed is the disturbing amount 
of misinformation incorrectly characterizing the role of the banking 
industry  in the current economic crisis, providing the mistaken 
impression that banks are not lending and calling into question the 
safety and soundness of the nation's banking system."  Had Roger 
bothered to look up the data on the Federal Reserve web site I gave, 
he would have found ample support for Mr. Brown's protestation 
against the misleading claims that banks have not been 
lending.  Instead, he chooses simply to reassert the mistaken claim 
"there are times, like now, when they stop relending (re-circulating) 
loans as they are repaid. This takes money out of circulation as they 
then hold a higher proportion of their (declining) asset base as 
reserves instead of loans."  How unfortunate.

James Ahiakpor