Keynes assumes velocity constant ( habitual) , Schrumpeter pointed out this was not the case New deal pumped in the money but people saved and consumer demand remained low ( ie velocity of money decreased) Same under Carter.
Northern Rock 4 times cover
Competition and credit controls : David Llewellyn
For every one building society mortgage there are 6 depositors
80s expanded credit to the level the population demanded
(personal sector debt rose £350 billion (fivefold increasein the 80s))(mostly mortgages)
Britain has had a reserve requirement - Special Deposits
Demand is used as supply controls are often circumvented
HP is only 1% of debt
Debt to disposable income rose 59% to 115% in 80s
The demand for money is simply the demand for a consumption service
Money is a capital good , a source of productive services that are combined with others to produce the products.
The UK monetary authorities use int rates to choke off or increase the DD for money . If the bank gets it wrong it stands ready to supply the banks with all the liquidity they need to meet DD.
Int rates up then retail sales down then demand for notes and coins down (M0)
Demand for loans not really sensitve to interest rates. ( so better to control supply)
In 70s excess money used on goods, in 80s on houses and stocks
EcJan29,94 Physical cash as % of GDP is about 4% in US, 7% in Japanand Europe , and declined from 8 to 4 in UK (uniquely). Cost of moving cash around economy safely is about £2billion to banks per annum.
(ED in a low tax environment the remaining main need for cash : to avoid taxes, would disappear) Throughout the 1920s the government forced banks to keep interest rates artificially low , hence the monetary boom that led to the 1930s bust.
When Estonias banks went under the goverment did nothing and now thriving banks have grown up to replace them.
Bank of Scotland
Millions
1992 capital 487 reserves 773 notes 308 deposits 22064, advances 18,995
1993 capital 489, reserves 761, notes 345, deposits 25946, advances 22,006
1994 capital 491, reserves 813 notes 348, deposits 23437 , advances 25342
1992 c+r+d= 23664 n +a = 19,200
1993 C+r+d= 27,200 n+a = 22,345
1994 c+r+d= 24,700 n+a= 25,700 4% above deposits)
note issue used to be a lot more significant 25% ( 50% at one time) , 10% most of the time, now 2% or less of deposits.
If a bank expands deposits one year then if it lends less than its deposits the next year this wouldn't necessarily decrease the money supply ,would it?
FIm Most European countries use credit controls rather than interest rates to control MS
Why customers moved banks
30% excessive account charges
26% account charges imposed without warning
35% unfair charges
26% branch closed or inconveniently located
17% slow service, queues
14% poor advice from the inistitution
Sunday Times Feb25th 96
Tim Congdon Ec Aug 23 97, says broad money m4 ( bank and BS deposits - (not better to look at b and bs loans instead !) ) now growing faster than the 10% annual rate that would eventually cause the rate of inflation to rise at an annual rate of over 2.5% pa. In July M4 grew at an annual rate of 11.8%.
Banks A ,B all have £1000 of deposits and have loaned out 80% and have 20% in reserve
A man gets a loan for £100 from bank A ( now has 10% reserve) which he deposits in bank B, Bank B now has £1100 in deposits and still £800 in loans , bank A still has £1000 Bank B now has a reserve of only 27% no feels happy to lend £90 to another individual who deposits in bank A, bank A now has £1090 in deposits and and loans of £900 ( reserve of £190) which is 17% reserve, if it now lends £180 to another person ( to speed to process up ) then he deposits this with bank B then the reserves for bank A are at £10 on desposits of £1090 ( 1%) and B has £1280 in deposits and £890 in loans and lends £380 to another individual who deposits it in bank A . Bank A now has £1080 in loans and £1460 in deposits, bank B has £1280 in deposits and £1270 in loans. Total loans in the banking system now £2350 and total deposits are £2740 reserve ratio of 15%
Reserve ratios in the US helped develop the Eurodollar market and turned bank loans into tradable securities.
M4 is the best way to measure money supply because it includes building societies but not corporate bonds which has no multiplier effect.
A bank can lend out more than it has without necessarily changing its reserve ratio
Does the money supply have to rise "to keep up with increasing output"? Stanlake
If there is an increase in the demand for money ie the demand for credit then the price can go up rather than the supply increasing.
Gurley and Shaw ( no relation) : the Non bank financial companies restrict the growth of banks by competing for deposits and loans.
Other free market restrictions on bank lending is that as it increases the average return for risk decreases until is becomes zero at some point. Shortage of good risks restricts banks lending ( debt service makes it almost risk free , but may reduce the demand for loans precisely because of this)
Other companies can increase money supply by fractional reserve in exactly the same way that banks can. If GEC comes to the market and loans out more than it has on call but less than it has in assets then the money supply has increased. (if it merely loans out its deposits with banks then it hasn't, but if it loans out notes based on assets of other kinds( non financial) then it does increase the MS))
The transmission of assets like houses and unit trusts into deposits affects the money supply ( in the case of national unit trust - if the money to buy them comes from a deposit account and the seller redeposits it there then MS is not affected BUT if the money comes out of a deposit account and the seller puts it into other unit trusts and each successive seller does so then there is a withdrawal from the banking system and possibly a MS contraction). In other words if the trend is to hold assets in non-deposit ways then the banking system will be under pressure to shrink.
Changes in monetary policy will have quickest effect on housing and government departments capital spending
What about a tradable property right to lend a certain reserve requirement on a certain amount of assets , fixed in supply but freely tradable.
2.5% cash ratio fairly typical in Uk in 1987 Banking and money David King 87 Banks can expand both their assets and liablities by increasing the deposit in their clients account, it chooses not to do so only to ensure it can meet its likely future liabilities and to reduce risk of default, it is also limited by the demand for loans.
"high powered money": money capable of satisfying the reserve requirement of banks
The banking system created a deposit every time it creates a loan, thats not a problen if it does in fact have assets to cover that loan but it is a problem if it does not.
When the bank of England issues an instruction there is an understanding that if it isn't heeded the offending bank could loose its authorisation
What counts as money for the purpose of assuring no theft ? Perhaps its not important as long as we look at what can be multiplied, ie houses can't be multiplied however easily they could be turned into money
. Demand for money is demand for money to hold not to spend, and depends on interest rates ( if interest rates are zero you would presumably spend all your money , if they went up to 100% a month temporarily then you would presumably want to hold a great deal ).
Transactionary, Precautionary, Speculative
If the interest rate on securities fall , people will be more inclined to hold money
These demands for money rise with income
Monetary policy at the begining of the C20 was to maintain a fixed value for sterling (while on the gold standard)
Rise in the Volume of money has been of the same order as the rise in the level of prices (1939-1969)- about four times p82 (The Banks and the Monetary System in the UK 1959-71 (Wadsworth)
In aug 61 Finance cos were asked not to seek money for expansion from sources other than banks ( raising capital from individual would add to the money supply)
A simple measure to prevent banks creating money by creating an asset when it creates a loan would eliminate this source of money supply increase without reducing competition for deposits
The fact that a bank has a cash ratio of 2% doesn't mean it lends 98% because most keep 30% in other liquid assets. So if we were setting up a system of private rights they would be based on being able to loan x% of the given amount rather than x reserves
Kaldor - anti monetarist says:
Reagan monetarism: transition from notes to deposits at banks created vast increase in MS
In the UK , they were convinced wrongly that the defecit was a major cause of changes in MS
Commodity money is C19 in the C20 money is credit money
DD for money governed by levels of incomes
Kaldor says int rates doesn't change MS directly but through investment and thus income
Hal Hitch enquiry : apart from House prices and house building, interest rates have very little effect on capital expenditures or consumption expenditures
When Estonia's banks collapsed in 1992 the Estonian government did nothing and 3 thriving banks have grown up in its place ( constrast Lithuania still proping its banks up)(Economist )
In 90s interest rates were only 0.36% in Japan but there was still no rebound (Economist )
Banks take assets as security for debt
If the reserve ratio stays the same but the deposits increase because more money comes in from outside (abroad) then the money supply will increase
The extent to which not being able to pay reserves comes into it has all but disappeared since you can sell mortgage books. But despite being able to get access on demand there is still the multiplier effect as ratios fall.
Money that has effect on the price of goods is spent money ie cheques, notes, sight deposits
Money doesn't have any effect on the price level until its spent( on retail goods or on assets ) Increasing the money in time deposits rather than in houses does not increase the money supply at that point because its not spent. BUT it allows that bank to expand its lending which has the normal Fract Res effects which means it does increase the money supply and have a general effect on prices.
Money that is spent as soon as it goes into an account has no multiplier effects, people paid in cash by employers have not multiplier effects, its the same amount of cash that was going through the economy before the transaction.
If someone sells a house for £50,000 then to buy that for money the other person has to withdraw £50,000 from his deposit account . If he gets a mortgage its still a £50,000 withdrawal and a £50,000 deposit. So no change in the MS from selling assets and puting them into BSs.
Foreign : if another country buys currency and deposits £50,000 in a UK bank this would have multiplier effects. If someone digs up gold then the bank may buy it as reserves
If someone opens a new bank thats not a problem because deposits have to be withdrawn from one to be depositited in another
Why get rid of the central bank ?
Dont need a lender of last resort. Dont need management of national debt if we don't have one. BANKING
The other knock on problem involved in these crisis in the nature of the banking systems of mostly all countries in that they can lend more than their capital. This is inflationary as the system grows and makes the system highly leveraged. For example if the "cover" that the bank feels comfortable is 1.2 ( ie they lend out 1.2 times their capital) then if £1 billion in "hot" money is withdrawn from Thai banks because a currency devaluation is feared then the banks have to call in £1.2 billion in loans to compensate. This makes the system far more fragile than the Biblical system of only being able to lend out what you have. The recurring banking crises all over the world in Japan , Thailand ,etc make the Biblical system even more sensible in todays climate.
Lower interest rates do not boost growth, as it has been found that they reduce savings so the funds don't exist to lend. Economist 20th Sep 97
Economies that are open to trade but not capital flows are as vulnerable to crises as any other country
The fact bank notes were no longer backed in gold was not a problem as long as the banks had some assets to back the notes. If its note issue exceeded its reserves but not its total assets then this may lead to instability in the banking system (In C19 anyway) but its not morally or legally reprehensible. It may be unwise business practise of course but that's a different matter.
Competition and Credit Controls (IEA) Llewellyn and Holmes The authors argue specifically against reserve ratios (and in favour of interest rates ) so its interesting to consider their arguments. Reserve ratios constitute a tax on money and hence make them less competitive interernationally if other countries have less strict regimes. Banks get round them by guaranteeing company bonds instead of lending -securitisation of loans (but people have to withdraw money from their deposits at the bank in order to do this so money supply is not increased, in fact may be decreased since money is withdrawn in deposits) Lending goes to lenders not subject to ratios- disintermediation Double the reserve ratio and half the money supply, half it double it. (i.e. even from 98% to 99% lent is a doubling of the money supply. If you add deposits to the system even if there is no decrease in reserve ratio then a similar effect takes place- 1% change in deposits 18% change in MS, .5% -- 9%, 5% -90%, ( these figures work for all starting values at 5% ratio, at 99% a 1% increase in deposits is a 84% increase in MS, at 90% lent out a 1% increase in deposits is only an 8% increase in MS ) How is this insured in our system. Presumably any money holding citizen could sue the bank for theft in the ordinary way if its accounts showed an overall annual lend of more than it borrowed
We also need a once for all solution not one managed by government official in a central bank however independent. What financial incentive does a central banker have to ensure zero money supply growth ? Historically
Money Supply expansions have brought down as many regimes as taxation increases. What usually happens (2) is that due to increased population there is genuine pressure on the price of food etc Due to the difficulty under feudalism and its successors of expanding the supply of food, the price will tend to rise. Governments THEN increase the money supply by printing notes or debasing the coinage. This in C18 France led to wages falling behind prices. (in moral terms a (money supply) theft of the resource of the ordinary people by the government.), peasants spending 88% of their income on food when previously they had spent 50%. Vastly increased welfare corn didn't help as usual and the regime fell as a result of high taxation and money supply theft, couple with the supply inflexibility that was a result of feudal remnant in land ownership.
The revolution governments were far worse , the value of the assignat fell to less than half a percent of its former value ( 288 times less than it had been worth) despite huge penalties and controls. (Fiat Money Inflation in France)
Floating exchange rates are only inflationary if imports flow in and government prints money to accomodate them
In real life if a bank is short of reserves they don't at that point stop lending but they bid for deposits and hence reserves on the money market and in so doing raise interest rates. Required minimum reserve ratio between 1973 and 87 for the Bundesbank has fallen from 12 to 5%
Reasons for zero money supply growth
(1) Growth in theft
(2) The disincentive effect of interest rates on investment decision is slight
Developing the Hayek Thesis on the Denationalisation of Money
Free use of any currency in any country in Europe as a unit of account or coin is proposed, like dollars are used in other parts of the world.
Banks would grant loans in their own currencies
The introduction of such money is by a bank selling its new ducats to people for old £ or $ ( the bank thus getting an interest free loan) in return for a promise to pay back to the buyers the equivalent amount when the people wanted in back.
By this time the £ would have decreased in value against the ducat so when before 1 ducat bought 1 pound , now 1 ducat was worth 1.2 pounds. Prices of goods have gone up in terms of pounds but stayed the same in terms of ducats so no one would now want to convert back to pounds. Now everyone wants ducats and the bank would be tempted to issue more ( would that not bring them down in terms of pounds if more were issued) perhaps not because the bank would issue an amount equal to demand. The bank now has more money for making deposits and money supply of pounds is increasing due to the banks own activity. It has also made another profitable loan to the private sector , but there are now many more ducats than there were which must have reduced their value ? no ? Perhaps the ducat producer has only produced as many as the market will take without reducing its value.
Less demand for pounds will also diminish its value again unless its quantity decreases and so the process could move quickly towards ducats and its other competitors unless the pound was make solid i.e. money supply was not increased at all.
These new currencies would mostly be used for settling bills rather than cash transactions , because of the hastle. (ED)
The new currency issuers would propose a basket of currencies to keep the ducat constant with. ,(ED but this would allow money supply growth in some circumstances, and as raw material prices tend to fall, contraction of the MS in others)
Certainly the currency issuers wouldn't want everyone rushing back to pounds and thus removing its interest free loan of the funds.
Its value as a currency would depend on how much people wanted it and were thus prepared to pay for it on secondary markets. Its conceivable that the issuing bank might sell it at a discount to get the rest of the points of interest on the loan, and also more deposits to use for their other banking business. A note an the end of the day is just a loan without interest its difficult to see any reason for prohibitting loans in other currencies.
One wonders why people already don't keep their deposits in Swiss or German currency today in large numbers.
To have deposits in another bank in other currencies you would presumably have had to buy the currency from the issueing banks first.
Other banks would want to accept deposits in any currency so that it could lend ( in any currency). Rates would have to be lower to borrow in the new ducats or people would prefer to borrow in pounds and see the real value of their mortgage decrease.
Of all the suppliers of different moneys their rate against each other would be constant ( they might even arrange it to be 1-1 to encourage consumers to use their currency with min inconvenience - probably using switch or credit card) . This being the case it wouldn't be necessary for shops to have constantly changing tables to work out prices in different currencies. Even if this wasn't the case, if it was done electronically then I suppose it wouldn't be anymore complicated than the fact that I get pesos out of the cashline machine here in Mexico despite the fact that the rate constantly changes
This being the most dominant means of payment it is quite possible some suppliers might not issue notes and coins although Hayek thought they would have to
If currency value is constant then retail prices will in general be not constant but steadily decreasing
When do people want a non inflating currency? To denominate their assets i.e. their savings accounts mostly . The cash they have in the bank is gone too quickly to be bothered with inflation. So this would be the main driving force for bringing the new currencies in, and hence to loans where the new currencies would be the content of savings accounts and hence the denomination of mortgages ( at nominally lower rates )
In the new ducat/ real/ florin environment does the reserve effect still apply (after the central government's currency has been driven out) ? Surely its an externality situation because if non-issueing banks feel comfortable dropping their reserve ratio then they'll do so causing the usual growth in money supply. This might only work on any one currency at a time though because banks would now have several reserve ratios on several currencies. On the other hand, reduction in reserve ratio over the last 30 years has been a very gradual thing and probably would continue this way. Looking an one currency only though , if the banks in general were reducing reserve ratios and decreased this one first , how could this increase the amount in circulation if this figure is a fixed amount.
In the new environment the banks don't have to keep the currencies at zero growth they just have to keep them at about the same level of growth as the other companies. If there were sufficient numbers of companies and no barriers to entry then if the currencies started to depreciate then a good currency would move in and take the market forcing the other companies to decrease their issue as it is sold to buy the new currency. The question is whether the anticipated loss from this is enough to induce the companies to forego the profits of increasing their issue and thus their profits. In a competitive market it probably is because the savings market is reasonably liquid and would change substantially enough to hurt the bad issuer, reputation too would suffer.
On the other hand, might some of the companies actively apreciate the value of their currency to make it look more stable compared to the other currencies in order to gain larger market share afterwards.? Or in general might there not be a price war by reducing stocks in circulation leading to goods going down in price in money terms reasonably quickly and savings accounts denominated hence going up in value proportionately. However this is not advantagious to the suppliers as they are loosing their intererest free loans.
Or perhaps its stablity people are after and they want the currency rising in terms of the a basket of good so that they always pay the same for everything. This involves an increase in the quantity of money as with constant money good go down in price.
If people want to sell one currency and buy another then the bank buying back must buy the other banks currencies to be able to supply them thus reducing its profits from the continued use of the long term interest free loan.
If it has initially increased the supply of its issue by lending (rather than by selling the currency for pounds which can then be lent) then a withdrawal of lending with be a contraction of the currency. Just as if the lender at the non-issueing bank repays his loan, the bank repays the saver and the saver returns to the issueing bank and asks for his pounds back.
If the new currencies drive out pounds then the currency is essentially unbacked is it not? The pound has become much less valuable than the real, in fact no longer exists, and so nobody would want it back.. It would be better to denominate it in commodities initially than in pounds even though you may be paying in pounds to start with. But the pounds received in issuing new currency would still be used by the issuing banks to loan to people ( as higher nominal rates) otherwise its not an interest free loan at all . ? Possibly a bank might have some incentive to lend more and increase its currency issue that way. This would be the case if the cheapest rate at which the bank could borrow funds to lend ( the effective interest its getting on the capital provided by currency issued ) is less than the rate it can get on lending out the extra money ( presuming they are not doing so enough to cause a run)
People will then borrow to pay off loans in higher rate currencies and thus return the currency to the bank very quickly ( as if it they had spent the loans) this means the supply of currency hasn't expanded ?
Money is stable today if there is same number of pounds in circulation now as there was this time last year. With many currencies, money is perfectly stable if when you convert all the currencies into any of the others, there is the same value this year than there was last year. (ED not Hayek) This is surely a better definition than basing it on the constantly changing basket of commodity prices as Hayek does ( or gold for that matter)
A money supply that is increasing in terms of the general level of prices is still theft as the ordinary people are still being robbed of the natural fall in prices for say , food and clothes while the banks get to increase their circulations ( interest free loans to the banks) at a rate greater than their increase at the expense of their competitors. Its legitimate for one bank to increase its issue if another decreases it but not if it doesn't.
As Hayek points out its not because of the effect on the general level of prices that inflation is so dangerous but because it effects so many different prices in different ways distorting not just general but thousands of specific investment decisions.
Argues that keeping the quantity of money of money constant does not always keep the money stream constant as the velocity of money may change. .
Hayek argues that Friedman's proposal to have a legal limit in the rate at which MS allowed to increase would cause panic as the limit became close.
Inflation increases may cause a temporary drop in unemployment but only at the cost of much higher unemployment later on. .
Sterling was displaced as the currency of international trade when it began to constantly depreciate. The central banks role as lender of last resort might in fact have been the cause of the low reserve ratios that banks have chosen to have .
Competition amongst issuers ( who are basically borrowing at zero interest ) would be according to Hayek, in things like providing accounting services and presumably better rates on loans. to people that held its own currency. It should mean loans can be cheaper because the bank is making extra profit on currency. Alternatively when it first introduces currency into the market it could actually pay some interest on it (ED) , this is surely the most direct way of insuring people use your currency. .
With inflation it is key to the endevour to nip it in th bud "principiis obsta- resist beginnings" A little inflation boosts the economy, meaning some projects that would normally fail success. But once people are expecting this rate to continue, it is necessary to increase the money supply to prevent these projects from now failing, thus there is a continual incentive for accelerating inflation. .
Hayek emphasises that is the demand for money to hold that is most important rather than the demand for money for other reasons. .
In conditions of severe uncertainty even very low rates of interest cannot stop a shrinkage from one system to another.
Who does the new money go to first ? Extra profits for the banks, and for those who lend from them first, possibly. .
Its possible that only one issuer would emerge- competition in posse rather than in esse (potential competition can be as effective as real) .
Keynesian economics became popular with socialists precisely because it meant governments didn't have to live within their means. .
Best transition is to privatise the issueing department of the Bank of Eng immediately and thus make sure the pound is not eroded totally when the other currencies appear. Best to go over to the new system at once rather than gradually. Some currencies might fell we used internationally Different currencies might accept a common standard so their units were of identical value He says courts should enforce debts in new currencies if the bottom falls out of the value of the pound (third party action should not affect contracts) History In previous credit controls banks were protected ,in fact the regualations were designed as much to protect banks as to control the money supply. Asset price inflation in the late 80s in Britain finally spilled over into retail inflation as people borrowed their equity to spend. Historically Mrs. Thatcher thought that the defecit would have a big effect ( as the text book says- through driving out domestic investment and higher real interest rates but the reality is different since defecits are now financed internationally (Getting it right : Baro ) Falling wholesale prices in Japan for two years to 93 not that unusual Falling prices raise the value of debts which in Japan are comparatively high (200% of GDP ?) In the US in the 30s there were falling consumer prices 6.8% pa for 3 year 1930-33. (is this not after an initial MS boost though) Open market operations- selling bonds decreases ms because people pay with cheques drawn on commercial banks which means the banks now no longer have enough reserves with the Fed/ B of E As a way out of banking crises note that after the Weimar republic banks took equity in firms instead of the loans.