[OPE-L:1930] Re: [MIKE WILLIAMS] electronic money

riccardo bellofiore (bellofio@cisi.unito.it)
Wed, 24 Apr 1996 07:38:47 -0700

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At 10:53 22-04-1996 -0700, Duncan K Foley wrote:

>The Central Bank must either be regarded as part of the nation-state, in
>which case the "outside money" (i.e. central bank reserves) must be
>regarded as a loan from the banks to the nation-state, or if you
>disaggregate the Central Bank as a separate bookkeeping entity, it
>borrows money from the banks in the form of reserve deposits, and lends
>it to the state in the form of purchases of state debt. The power of the
>nation state lies in its "credit", that is, its ability to borrow from
>the banks and the public in the form of reserves and currency. This
>credit, as I said, ultimately rests on its future taxing power and other

You are quite right. However, this follows from the fact that, as you quite
explicitely put forward, here you are looking at how national central banks
behave in an open economy setting, i.e. within the international payment
network. I think that when discussing how the monetary system works, we
must start from a *closed* economy (or, if you prefer, a world economy)
institutional framework. Here, the credit-money issued the banking system
as a whole (and hence, also State's liabilities towards the banking system)
is quite independent by definition on the holding of reserves. It is for
individual agents (like national central banks in an open economy) that
reserves may be a constraint. The point was already done, in a very clear
cut manner, by Schneider in his macro textbook of the '50s.

>Be careful here to specify which type of convertibility we are talking
>about. Electronic money that was not convertible into bank deposits (or
>ultimately into the reserve deposits of the Fed or currency) would not
>function as money. It is true that there is no guaranteed rate of
>convertibility of the debts of the nation-state into gold any more, but
>that is a different matter. The subsidiary forms of money still form a
>hierarchical pyramid with the debt of the state at the apex.

On this we agree (and I'll think more about the whole thing). Though I
would de-emphasize the stress on "the debt of the state at the apex". I
would rather say any kind of basic money. As I said, I think that monetary
theory should start from the working of a closed economy, but I would also
add closed economy *without the State*, hence without any past or current
budget deficit. I would even not put immediately the Central Bank into the
picture - see Wicksell's 1898 Interest and Prices.


P.S.: though, may be, written for a different stream of posts (my server
was dead for more than 20 days, so I'm not sure), I think that Mike
Williams [1919] is quite relevant here, and it is on the right track.

Riccardo Bellofiore e-mail: bellofio@cisi.unito.it
Department of Economics Tel: (39) -35- 277505 (direct)
University of Bergamo (39) -35- 277501 (dept.)
Piazza Rosate, 2 (39) -11- 5819619 (home)
I-24129 Bergamo Fax: (39) -35- 249975