The Money Multiplier and Other Measures of Financial Sector Performance

Some claim that the money multiplier is useless and ought to be consigned to the dustbin of history. This paper shows that it is not useless, as it measures the degree of intermediation facilitated by a financial system. I study several ratios specifically selected to measure the degree of financial intermediation overall, as well as the two steps necessary for intermediation: attracting funds and lending them.

As the money multiplier is positively related to all of these ratios, it also measures financial intermediation. According to these measures, financial intermediation in the U.S. peaked in 1985 (using M2 as the money supply). Although intermediation plummeted with lending rates during the financial crisis of 2008, the data suggest that a relative decrease in deposits in the late 1980s that accelerated in the early 1990s catalyzed a drop in intermediation from its 1985 peak.