Reforms in China’s Monetary Policy Reforms in China’s Monetary


II. The Fundamental Ideas Formed During One’s Life Will Have an



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Reforms in China’s monetary policy a frontbencher’s perspective (Sun, Guofeng) (Z-Library)

II. The Fundamental Ideas Formed During One’s Life Will Have an 
Unconscious Influence on the Construction of a Theory 
The first concept of “finance” in childhood is piggy banks, into which we 
would scrupulously insert some coins given by our parents and break the 
piggy banks to get the money saved to buy toys. Many books also instill such 
a concept in parents that allows children to get to know “finance” from child-
hood. Nevertheless, the fact is that credit is at the core of finance, and putting 
coins into piggy banks has nothing to do with finance; it is only a transfer 
of the places for keeping coins. Moreover, during the process, a false concept 
that coins—money—come from nowhere enters the minds of children, and 
children in all events cannot figure out where the coins come from. The 
original deposit, which no one knows where it comes from in the conven-
tional money and banking theory, is just like the coins in the hands of chil-
dren. Under the traditional theory, the so-called original deposit is the “first” 
deposit that comes from nowhere (or presumed in a strict sense), or cash 
(coins in the hands of children) taken from citizens, or reloans issued by the 
central bank. What appears strange is that the refinancing from the central 
bank are the liabilities of commercial banks, but the deposit cannot be found 
in the balance sheet of commercial banks, so the traditional theory would be 
supplemented by asserting that the refinancing provided by the central bank 
would form the cash in the society, which would be absorbed by commercial 
banks to become the so-called original deposit. Let’s put aside the concept 
that commercial banks must make loans first to make cash available in the 
society for clients to withdraw deposit, and then commercial banks withdraw 
the deposit in the central bank (formed by refinancing). Actually the acts of 
taking loans and deposit have already taken place before the formation of 
the so-called original deposit; that is to say, the “original deposit” can in no 


Monetary Theory

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way be “original.” The belief of conventional money and banking theory on 
cash, the imagination of exogenous cash, and the instinctive resistance to the 
analysis of the source of cash are very much like the understanding of piggy 
banks in childhood. 
A further development of piggy banks is the act of depositing money into 
bank by teenagers, giving rise to the preliminary understanding of banks. 
Based on their understanding of piggy banks, they would naturally con-
sider banks as nothing but bigger piggy banks into which their deposits are 
absorbed, and the money deposited is the “original deposit” of banks. When 
they grow up a little and would ask why banks pay them interests, their par-
ents would explain the reason that banks make more interests by providing 
the money you deposited to other people in the form of loans, and after giving 
you some interests, the remainder becomes the profit of banks. Thus people’s 
concept of banks as reselling intermediary of “capital” for the so-called indi-
rect financing is formed. The understanding of money in upbringing is “cash 
before deposit” and “deposit before loan.” This direction of understanding is 
just in the opposite order with that of the real operation of money. 
After the formation of such conventional money and banking concepts 
with cash as the starting point accompanied by a vague definition of “cash,” 
it is extremely difficult to have a change of idea; therefore, the description 
of money from the perspective of conventional theory is oriented toward 
commodity money. Even when credit money is mentioned, the emphasis is 
on its relation with commodity money, while no attention is paid to such a 
critical issue that credit money relies on the liabilities of other entities as its 
own money. 
In fact, the monetary system develops from the commodity monetary sys-
tem to the mixed monetary system, followed by the credit monetary system, 
so the money and banking theory attaches great importance to the funda-
mental role of gold in the mixed system of commodity money and credit 
money and also to the fundamental role of cash in the credit monetary sys-
tem. Yet cash cannot be generated out of nothing, nor can it be explained 
with a simple sentence that “central banks put cash into circulation.” Cash 
comes from deposits withdrawn from banks by customers, while deposit 
comes from loans. In this regard, cash is not the monetary starting point 
of the credit monetary system; rather, loan is the starting point. In prac-
tice, the cash withdrawn from banks by customers is much more than the 
cash they deposit in banks, and cash withdrawal is more common than cash 
deposit, which can explain why cash circulation in society is going up, but 
not the opposite. Cash is not simply irrelevant to money creation, let alone 
a prerequisite for money creation. In the actual operation of banks, cash is 
not important at all. The conventional money and banking theory sets the 


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Reforms in China’s Monetary Policy
starting point of money creation at the cash deposited by customers that 
is absorbed by banks, which makes the mistake of putting the nonessential 
before the fundamental. As shown in Figure 1.1 , the genuine basis of money 
creation and bank operation is the lending of banks, beginning from a loan 
issued to Company A from Bank (A), which forms the deposit of Company 
A in Bank (A), and after the transfer and cash withdrawal, a teenager deposits 
cash in the bank—the concept of “original deposit” and the source of bank 
operation comes to his mind.

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