[OPE-L:1993] Re: [MIKE WILLIAMS] electronic money

riccardo bellofiore (bellofio@cisi.unito.it)
Sat, 27 Apr 1996 02:52:00 -0700

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I think your post very clearly put on the table the issues, and
clarify many differences. I cannot now pursue all the threads, so I limit
myself to few considerations.

>I agree that the currency issued directly by Treasury Departments is of
>neglible importance in most contemporary countries that I know about. I
>also agree that in principle a monetary system could be an entirely
>"inside" money system, in which the deposits and notes issued by banks
>circulated as money. However, this would be possible only if the deposits
>and notes of the banks were convertible into some standard of value,
>historically either gold or the debt of the nation-state. While the
>banking system can bootstrap the quantity of credit, given a value for
>money, it cannot create a standard of value.

I agreed from the beginning that *historically* and for the problem of the
*standard of value* it may be useful to consider some kind of
convertibility - I would distinguish the conversion into basic money (say,
fiat legal tender) and the conversion in actually circulating gold. Where
we depart is in the fact that you say that an inside money system "wouuld
be possible only if" etc. If this is not put forward in an historical
sense, or as a policy proposition, it is plainly wrong. A pure credit
system is quite possible, in 'pure theory', even without convertibility.

>I think I disagree with you on this point. When the public holds deposits
>or notes of the banking system it is essentially making a loan to it.
>This point is clarified in Tobin's essay "Commercial Banks as Creators of
>'Money'". It is true that there is considerable elasticity in the size of
>the banking system, depending on the availability of reserves against
>deposits, reserve requirements, the degree of monopoly in banking, and so
>on. But even a competitive banking system could not issue more notes or
>deposits than the public is willing to hold. (Since the notes or deposits
>have to be convertible, if they overissue, the public will convert and
>reduce the issue, and the banks will run out of reserves.)

Here's the crux of the matter. It is of course true that deposits of the
public means a loan to the banking system - which is the counterpart of the
loan of the banking system either to firms or the State! Does that mean
that the banking system "could not issue more deposits than the *public* is
willing to hold? Not at all. It is right that there must be some demand for
the loans by the State or the firms for bank to expand loans. But it is not
true that it is relevant here household's portfolio choice, that is deposit
demand. An individual agent may of course reduce or enlarge the total of
the deposits she holsd; but that is not true for the whole of the household
sector. It can reduce the amount of deposits only if there is somewhere in
the system a reduction in loan demand, or in bank money supply: for
example, if there is a 'shift' of part of the deposits to indebted agents,
who cancel their debt with debts (but this means that the latter are
cancelling a loan!); and/or if, in a system with reserve requirements, with
the reserve ratio going up, commercial banks are compelled to reduce their
loans because there has been a squeeze in the credit potential.

Note that there is no need for reserves for the banking system as a whole
in a closed economy: so this reserve requirements must be introduced in the
analysis later, as a sort of policy constraint, not as something which is
proper to the working of the monetary system as such. Your argument
according to which "banks run out of reserves" etc. depends on the internal
drain, that is on a convertibility for which the banks may lose liquidity
in favour of the public. That may happen, of course, *if* it is allowed in
the system this kind of convertibility.

As Schumpeter said, one may be a theoretical cartalist (= support the idea
that the working of the money system can go on without any convertibility
in a money-commodity) and a practical metallist (= support the idea that
for the stability of the standard of value a convertibility in a
money-commodity is essential). With slight changes, this could be used to
describe my position towards yours.

Let me be clear. We agree on all the description of what happens, but not
on the language and on the theoretical foundations. I dare to say that it
is possible to show that there is a confusion in Tobin's approach when he
still tries to defend in some way the idea that banks depend on household's
portfolio choice, a confusion which reveals how still today it is difficult
to abandon the multiplier view of the money supply, which is there in all
the textbooks and even in Nobel laureates. A view which is in deep contrast
with the idea that loans make deposits - hence it is wrong, unless you show
me that the banking sector is able to collect deposits before making a loan
(here Steve K. post is relevant).
>The nation-state in contemporary institutional circumstances, faces no
>such constraint on the issue of its liabilities (whether monetary or
>interest bearing bonds), since the nation-state does not guarantee the
>convertibility of its debt into anything else at a particular rate of
>exchange. This raises the particulary acute question of locating within
>monetary theory the determinants of the value of the state debt. As I
>indicated in some posts, and in the paper you are about to publish from
>the Bergamo conference, I believe the right road to a solution of this
>problem lies in the theory of speculative valuation of assets.

As we are discussing of the nation-state, we are in fact not at the macro
level. For the rest, I agree that what you pose is a relevant issue: I
simply would include it in the more general monetary framework.

>Here again I could agree only with strong qualifications. The banking
>system cannot always make good its claims unless it holds reserves of
>whatever it undertakes to pay its deposits and notes in. The banking
>system has never, to my understanding, been in the position of the nation
>state, that is, with strong enough credit that its liabilities have a
>value without an convertibility into anything else.

I think that historical and policy questions, like the ones to which you
are always returning, *must* be addressed, but within a (macro-founded)
analysis which captures the logic of capital as such - and hence, also the
logic of the money circuit as such.
>I think convertibility is a necessity for the operation of a banking
>system, though it has turned out to be dispensable for the functioning of
>the state credit.

It is no new position, and I respect it a lot. By the way, it was the
position of Mises - it is interesting because he stresses the point
*together* with the idea that the banking system as a whole can create
money at will, hence producing hyperinflation (the problem of the standard
of value). I may even partly agree with this position: if what is said is
relative to the problem of the stability of the standard of value and not
to the working of the monetary system as such. But one can also reason in
the following way: the pure credit model shows that private banks can
expand in step, hence producing an unbearable instability. Hence, a central
bank (with reserve requirements) is needed to peg the standard of value.
>> 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
>> authors.
>Yes, but this shows exactly how confused this tradition has become, due
>to a sloppy use of the concept of "fiat" money.

I had to look in the dictionary for 'sloppy' (unsystematic? careless?). I
agree that tihs tradition, being a minority one, is far less developed and
refined (also because very few people work in it) than, say, neoclassical
monetary theory, which is a scholarly rigorous, precise, wrong theory,
especially on the fundamentals of money.

As for the Paul C. post: I agree with Steve K. Reply. Let me add that I did
not want to exclude the State, the Central Bank etc. from the picture.
Simply (as Marx in the first volume of Capital?) they are not there from
the start.


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