Slate Money: Money Talks – "Fixing a Broken Monetary System"

Date: August 19, 2025
Host: Elizabeth Spires
Guests: Steve Hanke (Professor of Applied Economics, Johns Hopkins), Matt Sikirchi (Fellow, Johns Hopkins & Durham University)
Main Topic: How to reform the U.S. and global monetary system, based on Hanke & Sikirchi’s new book Making Money Work: How to Rewrite the Rules of Our Financial System

Episode Overview

This episode dives into the structural flaws of the modern monetary system, especially the U.S. approach, and explores how misguided policy – particularly the abandonment of controlling money supply in favor of interest rate targeting – has led to cycles of inflation, asset bubbles, and a widening wealth gap. Drawing extensively from their new book, Steve Hanke and Matt Sikirchi advocate a return to treating money supply growth as the central lever of monetary policy and propose new models for the Federal Reserve and commercial banking regulation.

Key Discussion Points & Insights

1. Who Creates Money? Dispelling the Myths

• Money Creation by Banks:

  • Steve Hanke explains that most people are unaware that “roughly around 80% of the money supply is actually created by commercial banks. When they make a loan ... that checking account is counted as part of the money supply.” (02:11)
  • This creation of money via lending is central to how economies (particularly the U.S.) expand or contract the money supply.

• Correcting Misconceptions:

  • Elizabeth Spires notes most laypeople have it backwards, thinking “you use deposits to make loans.” Hanke confirms, “the process of originating the loan actually creates the deposit which expands the money supply.” (03:28)

2. Money Supply and Inflation: Cause or Coincidence?

• Quantity Theory of Money in Practice:

  • Hanke: “Inflation is always and everywhere a monetary phenomenon.” Supply shocks (like oil) move relative prices, but general inflation stems from excess money growth. (04:12)
  • Illustration: Japan’s contrasting responses to 1970s oil shocks; inflation only followed when the Bank of Japan increased money supply. (04:12-05:27)

• COVID and QE:

  • Matt Sikirchi: In COVID-19, “we created 20% new money supply or something of that order of magnitude. And there was no way the economy was going to grow 20% bigger in the next year or two.” (06:20)

3. Where Did the Fed Go Wrong?

• Overreliance on Interest Rates & Quantitative Easing:

  • Sikirchi argues, “Interest rate policy is not an effective way to control economic growth and ... leads to distortions ... especially in asset prices.” (07:33)
  • Hanke: QE increased the money supply at the fastest rate “since the Fed was founded in 1913” (over 18% YOY) with little awareness among Fed policymakers. (08:15)

• Resulting Instability:

  • “We were on a roller coaster,” says Hanke. “The down part will lead, I think ... to a big slowdown ... probably a recession.” Businesses are “paralyzed” by regime uncertainty, illustrated by reluctance to issue forward guidance. (08:15-09:24)

4. Policy Prescription: Focus on Money Supply, Not Rates

• Target 6% Annual Money Growth:

  • Hanke recommends policies ensuring “the money supply grows at about 6% per year” (2% for inflation target, 2% for real growth, 2% for increased money demand as people get wealthier). (06:24-07:33)

• Regulatory Focus:

  • Sikirchi outlines a model based on steady post-GFC money growth due to bank capital restrictions. Calls for the Fed to formalize controlling money growth via bank capital management rather than interest rates. (09:54-11:22)

5. Banking System Flaws & Needed Reforms

• Addiction to Real Estate & Land:

  • Sikirchi notes, “the banking system is just addicted to land and real estate,” partly because of regulatory favoritism and the structure of U.S. capital inflows. (11:22-13:38)
  • Without pressure to economize savings, U.S. banks have drifted from stable money creation.

• Split Investment and Commercial Banking:

  • Proposes incentives to separate those business models, reducing systemic risk and better harnessing commercial banks' role in money creation.

• Critique of Basel III:

  • Sikirchi: Basel III is “not very imaginative ... built around making sure the exact same kind of crisis doesn’t happen again.” (14:28)
  • Hanke: “Probably the people in Basel don’t even know what Basel is.” The U.S. could design a better, more modern risk framework. (14:47)

6. Trade Imbalances: Not “Foreigners' Fault”

• Trade Deficit Is Homegrown:

  • Hanke: “U.S. consumption, investment, [and] government spending since 1974 has always exceeded the value of GDP ... That’s where the trade deficit comes from. … savings are less than investment.” (19:30)

  • This undercuts narratives blaming other countries or trade deals; the issue is rooted in U.S. monetary and fiscal choices.

7. Policy Recommendations for the Fed

• Back to Basics:

  • Sikirchi: The Fed must put “the quantity of money on [its] radar.” Over 20 years, statistics on money supply have been suppressed or ignored. (20:41-21:12)
  • Hanke: Macroeconomic models at the Fed “don’t contain a monetary aggregate.” This has led to predictable failures, like missing the COVID inflation burst. (21:12)

• Lean on Regulation, Not Rates:

  • Use regulatory tools—bank capital requirements, etc.—rather than short-term rate tweaks to manage the economy.

8. Why Public Understanding Matters

• Broad Education Needed:

  • Hanke: “If you told [the average person] the Fed doesn’t pay any attention to [money supply], they’re shocked.” Yet, laypeople intuitively grasp money’s centrality in the economy. (22:41)

• Disaggregating the Money Supply:

  • Sikirchi highlights how government policies route money disproportionately into certain sectors (education, health care, real estate), affecting inflation regionally and by asset class. This explains diverging cost structures within the U.S. economy. (23:01-24:24)

9. Neutrality & Inequality: Asset Booms Benefit the Wealthy

• Asset Inflation Fuels Inequality:

  • Hanke: Before COVID, “billionaires in the U.S. held wealth equal to 14.1% of GDP. Now that number is 21.1%” due to asset price booms from excessive money creation. “Billionaires made out like bandits … The little guy ... is not benefiting from the asset price explosion.” (24:24-26:14)

• Structural Lessons:

  • Sikirchi: The rise of real estate–based wealth is “an accident of tax policy and bank regulation,” not natural economics. (26:14)
  • The solution is not fintech hype (“cryptocurrencies or defi”) but repairing and preserving solid, traditional fiat systems: “It’s really about fixing this social technology … that actually works pretty well.” (26:14)

Notable Quotes & Memorable Moments

• On money creation:

  “Roughly around 80% of the money supply is actually created by commercial banks. When they make a loan ... that checking account is counted as part of the money supply.”
  — Steve Hanke (02:11)

• On the Fed’s mistakes:

  “Quantitative easing got out of control. And now we have this long tail of quantitative tightening to resolve for which the Fed has no discernible plan.”
  — Matt Sikirchi (07:33)

• On ignoring the money supply:

  “No one pays any attention to [monetary statistics] ... That’s one reason why the Fed was unable to predict the inflation ... in 2020, 2021, 2022.”
  — Steve Hanke (21:12)

• On wealth inequality and policy:

  “The biggest distortion in the distribution of income in the U.S. since World War II occurred because of the Fed. ... Billionaires made out like bandits.”
  — Steve Hanke (24:24)

• On what needs fixing:

  “The best way forward isn’t a technological solution. ... It’s really about fixing this social technology ... that actually works pretty well.”
  — Matt Sikirchi (26:14)

• On the “One Fucking Man Theory” of regime risk:

  “[Regime uncertainty] is a very nice way of saying what one of our analysts ... called the one fucking man theory ... that Trump will come in and ... everybody’s subjected to [his unpredictable changes].”
  — Elizabeth Spires (09:24)

Timestamps for Key Segments

• 02:11–03:28: How banks actually create money
• 04:12–05:27: Money supply and inflation – the Japan example
• 06:20–07:33: What the Fed should do instead of QE
• 08:15–09:24: Consequences of Fed neglect, regime uncertainty
• 09:54–11:22: Proposal for regulating money growth via bank capital
• 11:22–13:38: U.S. banking’s “addiction” to real estate, roots in global capital flows
• 14:28–14:47: Main critique of Basel III (“just not very imaginative”)
• 19:30–20:25: Trade deficits explained as homegrown, not foreign-made
• 20:41–21:12: The Fed’s neglect of money supply metrics and the need to refocus
• 23:01–24:24: Disaggregating money supply and sectoral impact on inflation
• 24:24–26:14: Money supply, asset bubbles, and inequality after COVID
• 26:14–27:11: Fixing fiat; why technology isn’t the answer

Tone and Takeaways

The episode is direct, occasionally wry, and deeply critical of the last decade’s monetary policy consensus. Hanke and Sikirchi make a strong case for practical, time-tested solutions rooted in clear economic theory—namely, anchoring monetary policy on the money supply rather than tinkering with rates or chasing whiz-bang fintech. The discussion is both accessible and technically sound, aiming to reorient policymakers, the media, and even the lay public towards the core question: How much money is in the system, and is it growing at the right pace?

Summary in One Line:
Hanke and Sikirchi argue that to fix the U.S. monetary system, we must abandon the illusion that interest rates can fine-tune the economy and instead return to rigorously managing the money supply—before more cycles of inflation, recession, and inequality play out again.