Chat GPT: Artificial Intelligence Or Authentic Ignorance?
When it comes to explaining money creation, ChatGPT gets an "F."
Chat GPT, the popular online answer machine based on “artificial intelligence” (AI) is all the talk these days. (GPT stands for “Generative Pre-trained Transformer.”)
According to some news stories, the little AI critter is so intelligent that it can answer standard exam questions and write convincing essays. Chat is free and so easy to use that some teachers now employ special software to detect answers bootlegged from it.
Here at HardmoneyJim, our main interest is teaching people about money creation and its consequences, so we naturally wondered: Does Chat know anything about our subject?
Last week, during a family dinner discussion, we decided to find out, so we asked the little bot: “How is money created?”
Here is a screenshot of Chat’s first answer:
Chat’s first response is partially correct: When a bank lends, it credits the borrower's account and creates new money. But the answer is ambiguous in at least two respects. First, what does Chat mean by “fractional reserve banking” (FRB)? Is it referring to the Paul Samuelson version of FRB, still taught in college, which claims that banks loan out a portion of their reserves? (Not true, they don’t.) Or is Chat referring to an obsolescent regulatory requirement called the “reserve requirement ratio,” which once required commercial banks to hold reserves as a minimum fraction of deposits? The fact is, the reserve requirement ratio at most central banks has been zero for years.
Then there’s Chat’s last sentence, which alleges there is “another way” of creating money “in the central bank” through open market operations (OMO). That’s inaccurate. In OMO, the central bank purchases Treasury bonds in the open market. In the process, the seller receives new money as a commercial bank deposit. The point is that the “new money” created during open market operations resides in the commercial bank, not the central bank.
Still, there is a shred of truth in Chat’s answer. If this were an oral exam, I would offer Chat a follow-up question so it could clarify its position.
So we asked, “Are you sure?”
I welled up with sympathy as Chat dug itself into a deeper hole.
Chat claims, “…[M]oney is created by Central Banks.” No, no, Chat. Central banks can set the money creation process in motion through OMO or Quantitative Easing, which is Open Market Operations on a large scale, but central banks do not create money on their own. Money creation requires the participation of commercial banks because almost all new money shows up as new bank deposits.
Then in the last two sentences, Chat goes off the rails. First, it claims FRB is used “…to generate loans, not to create money.” This statement flatly contradicts the first answer, which correctly states that banks create money when making loans.
Then, like a student imploding during an oral exam, Chat concludes that when a bank makes a loan, it does not create money but “simply transfers money from one account to another.”
This final, fatal assertion is consistent with the widely-held and mistaken belief that commercial banks are merely financial intermediaries, not money creators. This belief is wrong, but it does reflect the prevailing theory of money and banking.
What can we learn from this little exercise in “artificial intelligence”? Unfortunately, Chat teaches us nothing and, indeed, sows confusion, as it is obviously ignorant of the basic facts of banking and money creation.
Still, we can learn something important from this experiment. By its nature, Chat reflects the common knowledge floating around online, which reflects beliefs held by most “informed” people. Chat’s answers in any field should reflect what most knowledgeable people already “know.” But if their common opinion is wrong, then Chat will also be wrong.
In this case, Chat corroborates something HardmoneyJim discovered several years ago: that the public’s knowledge of money creation is an assortment of myth and ignorance. You wonder what other erroneous, but widely-held notions inhabit Chat’s vast “intelligence” vault. The likely explanation is that ignorance starts at the top: understanding among our intellectual leaders is also defective.
The road to sound money has to start with the public’s understanding of our present money creation system. If Chat’s answers reflect current public knowledge, that road will be long and rough.
[Postscript: I had planned a podcast for Friday, February 10, on “Surviving Financial Repression,” but had to postpone due to a family medical issue (not too serious). I now plan to do that podcast on Friday, February 17.]
I guess I need to follow your Substack. I thought the Fed created money by balance sheet transactions that then flowed to reserve banks then to commercial banks. So how is money created?