[OPE-L:429] Re: Comments from Riccardo-2

Riccardo Bellofiore (bellofio@cisi.unito.it)
Sun, 5 Nov 1995 02:19:07 -0800

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On Sun, 5 Nov 1995, Paul Cockshott wrote:

> Ricardo
> -------

Please, do not call me Ricardo on THIS list 8-)

> But what constitutes the reserves of
> the banks, if one abstracts from state money?
> And in the absence of an external determination of their reserves,
> how can one conceptualise the effect of the reserve ratio of
> the banks on the rate of interest and thus on the division of
> surplus value between bank and industrial capital.

A partial answer. If we talk of the banking *system*, there is no
need of reserves, UNLESS there is a central bank that wishes so.

That is chrystal clear, say, when you consider to have only a
single bank with many branches. But the same is true in ANY banking
system, even a free banking system where individual banks expand at the
same pace. In this system there is an unlimited credit potential from
banks, which thus can finance any inflation in the system. This was, in
fact, one of the reasons utilized by the economists who supported central
banking versus free banking - because the central bank MAY have at heart
to fight inflation while that is not true of self-interested banks (the
refernce is at the well known books by Vera Smith, pro-free banking, and,
recently, Goodhart, pro-central banking).

If you have a central bank,which issues base money (banknotes), so
you have a hyerarchy of monies, you still have an unlimited credit supply
for the *system* - because the central bank can refinance at wish
commercial banks or because they go on together and do not have problems
at the clearing. (Modern free bankers like Selgin deny this). But the
credit potential of the subsection of the commercial banks is now limited
by the base money - even when the latter expand together, if there is an
imposition of reserves from the bank.

Of course, if you put in the State, and the Central Bank finance a
budget deficit, you have a second channel from which money comes in (but
that is again bank money, the central bank being the third party). And if
you are not the world economy, there is the money coming from outside -
but here the *system* to consider is the global monetary system. If you
have the State who uses his *own* money to pay debts, than you have, in
fact, *seigniorage*: something which is not allowed to other agents in
the system; and something which, I think, must not presuppose at the
start of our enquiry.

Moreover, one rationale behind questions like yours is also the
following conundrum: what is, at the end of the period, the stock of money
if all the (private) agents, i.e. mainly firms, pay their debt to the
banking system? In fact there is none! All the money advanced at the
beginning of the period is cancelled at the end. If you have the state (in
deficit!) you now have a stock of money at the end. But the same would be
true if firms stay indebted with banks at the end of the circuit. This
could create problems for single banks but not for the system.

The idea, here, is that one thing is the macroeconomic picture of
the banking system, another the microeconomic picture of banks. AND THAT THE
FIRST PERSPECTIVE IS PRIMARY: macrofoundations of microeconomics.

In macroeconomic models, generally, the stock of money comes only from
the second channel, forgetting the first (Central Banks, commercial
banks); let alone they forget the theoretical possibility of pure credit

You can, of course, from the basic model complicate the picture,
and take full account of reserves, the central bank, the state.

I hope this syntetic reply gives you the idea. It all comes down
from Wicksell's Interest and Prices (but see also, without scandal,
Mises's Theory of Money, Hayek's Monetary Theory and the Trade Cycle,
Keynes's Treatise on Money). The best treatment, at an elemntary level,
of this I've ever seen comes from the first part in the second volume (on
macroeconomics) of Schneider's textbook on economics. It is a book of the
'50s, in German translated in Italian but also in English: Money, Income
and Employment, Allen & Unwin, sometime between 1952 and 1962.

This view is developed by Augusto Graziani, myself, and others in
Italy. It has strong point of contacts with the so-called French circuit
school and some sympathy for *some* post-keynesians (Wray, Moore, Lavoie,
Seccareccia, and the old father Minsky). It is implicit in my Schumpeter
article, in the Social Concept paper, in the comment to de Brunhoff's
paper at Bergamo (and more to the fore in a new one I'm translating in
English on Mises's monetary theory).

This is a partial answer - and looking back not too syntetic ...-
because of course to analyse capitalist dynamics we must take into
account also the microeconomics of banks, and problems of asymettric
information and all that. And on that we are still rather weak.

Ah! I forgot to quote Marx. Sorry.