It shows us how new money introduced into a system can multiply to become worth more than its original amount.
This table will help explain.
This table represents $100 of new money entering the banking system for the first time. In this case, the reserve rate is set at 20%, meaning the bank has to hold onto 20% in cash, but can lend out the other 80% (Bank A). If this money goes back into the system (Bank B), the process repeats, and so on. Here the example stops at 10 repetitions, but if you kept going the final amount would reach approximately $500. So in this case, the money multiplier is 5.
It's this theory that is the reason why many governments give handouts or tax cuts in times of recession, in hoping citizens will spend it. The theory is somewhat flawed since people tend to save more in these times, but that is another issue.
Side note: It's also a factor behind the failure of so many banks in America, and why other countries such as Australia fared better. Before the crash, legal reserve rates in the US were lowered to about 3%. While this created a money multiplier of over 30, the result was that most banks didn't have enough cash on hand to weather the crisis intact.
The issue is important in monetary policy, because it shows how a small change in policy can create a big effect.
In our lives, when we examine our actions and their effect, we often underestimate them. Whether our actions are moral and good for everybody or not seem irrelevant in the face of the worlds problems. If we want to do something positive, we feel like it has to be a huge gesture. And we just don't have the time or energy for that right now. Maybe tomorrow. And tomorrow never comes.
However good deeds and bad deeds are subject to their own multiplier. What I call the moral multiplier.
How does the moral multiplier work?
Moods tend to be infectious. Ever remember someone that put you in a bad mood? And someone else that put you in a good mood? If you were observant, you probably also noticed that those moods then affected how you dealt with others. Perhaps after being put in a bad mood, you put someone else in a bad mood, and perhaps they did too. And so the multiplier goes.
We don't see usually the effect because we are just one step in a chain, but that doesn't mean it doesn't exist. I think the idea seems obvious to many people, common sense. But the problem with common sense is people often fail to fully follow it through to its end conclusion.
The way we interact with others doesn't just stop at that interaction, but extends outwards. It's important to think about that when we connect with other people. If even a small percentage of society start acting more negatively, it is possible to drag the whole society down. On the other hand, if each of us make a commitment to try and be more positive in our lives, it doesn't just help us be happy, but it helps everyone around us also.
Who knows what our moral multiplier is? But it is surely bigger than one. The implications of this are that acting in a moral way is more than just about making us feel good, but it's also about playing our part to create a better society.
Positivity isn't just about nice feelings. It has great implications in the creation and perpetuation of conflict, class and racial discrimination, crime, health and many more things.
On TED, Barry Schwartz has a great talk on the loss of morality and reliance on rules and incentives at inappropriate times. In it he gives examples of where adherence to rules and incentives can sometimes go wrong. It's not that we don't need them, but we need to have the moral will and the moral skill to adapt when necessary.
The creation of moral skill may seem difficult, but moral will is easy. We just have to want to make a change. And by finding the little ways we can be positive from day to day, we can take advantage of the multiplier and make a greater impact than we realize.
