[OPE-L:1948] Re: [MIKE WILLIAMS] electronic money

riccardo bellofiore (bellofio@cisi.unito.it)
Thu, 25 Apr 1996 02:14:23 -0700

[ show plain text ]

At 13:23 24-04-1996 -0700, Duncan K Foley wrote:
>On Wed, 24 Apr 1996, riccardo bellofiore wrote:
>> 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.
>I'm not sure what you're thinking of here. Even in a closed economy, when
>the central bank (or the state) issues currency, it functions as a
>liability of the state (or the bank), and represents a loan from the
>public to the central bank or the state. It is true that in this case the
>issue of currency is not limited by an external drain of reserves (which
>is what I suppose you have in mind). On the other hand, if the state
>maintains convertibility into gold, issue of currency could lead to an
>internal drain of gold reserve to the public. It seems to me the issue
>have to do with the forces determining the valuation of the state debt in
>terms of commodities.

May be I jumped into a discussion which was explicitely framed to discuss
State debt, and not State debt *and* the nature of money: so may be I am
out of tune. What I wanted to say was the following. There is no inner
necessity to have State debt to have money in the system: this money may be
created by the banking system *without* a Central Bank; or by the banking
system *with* the Central Bank in. That is, the analysis of the economy as
a monetary circuit does not need to start presupposing the presence either
of the Central Bank or of the State. We should (and must, in my opinion)
start with only 'private' agents: commercial banks, firms, households. We
can then put in the Central Bank without the State, and then the Central
Bank and the State. Most of the outside money is money lent by the banking
system to the State. I am taking the money issued directly by the State,
independently from the Cntral Bank, to be a negligible phenomenon (am I
wrong?). In this latter case, we would have seignorage.

>From here, some consequences. All money is created by the banking
system.This money is totally issued ex nihilo (the banking *system* do not
need, and cannot, go into debt with the public in order to make loans).
*If* there are, or there have been in the past, State deficits financed
with money, and this money is still in the money holdings of the
households, this (stock of) money surely represents a liabilility of the
State and an asset for the household sector. But this is not a necessary
condition to have money in the system. We can have, for example, a (stock
of) (inside) money because debts have not repayed in its entirety their
loans to the commercial banks, and we have also here a liability (for the
firms), on one side, with assets for the households, on the other side. We
may even have no stock of money held in the system, and the system still
being a monetary economy (if all loans, by the firms or by the State, have
always been repaid at the end of each circuit in the past, as in the
current period).

Hence, I return to my two conclusions. In the macro view (closed economy)
the power of the banking *system* to create money is not limited by 'real'
assets (credit-money supply is not linked to 'credit'), because the banking
*system* can always make good its claims (this is not true, of course, for
individual banks: but we must distinguish the two things, the second, the
'micro' analysis, qualifying the first, the 'macro' analysis). It is true
that the convertibility may create the problem of the internal drain: this
is however an institutional constraint superimposed to the working of the
monetary system, though it may well 'peg' the valuation of money in terms
of commodities - and, I agree, a constraint which must be taken seriously
into account when turning to history or policy. What I contest is that it
must be included from the beginning as a necessary feature of the working
of the monetary economy 'as such', or 'in pure theory'.

I take this to be in the tradition of monetary theory of this century
before the General Theory, from Wicksell to Keynes Treatise on Money, now
being revived by some postkeynesian and (French and Italian) circuitist

Hoping to have clarified something.


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