[OPE-L:7362] [OPE-L:892] Re: r & i

Gerald Levy (glevy@pratt.edu)
Wed, 14 Apr 1999 07:02:20 -0400 (EDT)

Hi Allin. You wrote in [OPE-L:890]:

> The private sector can obtain reserves only from the central
> bank (i.e. only by selling securities to the central bank --
> which sets the terms of such transactions). Little room for
> manoever is obtained by the private banks' selling securities to
> non-bank private agents. This does not increase reserves, but
> eases the banks' balance sheets a little by reducing their
> deposit liabilities. And of course large-scale security sales
> will lower security prices and raise interest rates. It's part
> of the mechanism whereby higher interest rates are diffused
> throughout the system.

OK, I'll grant you this point. Yet, if the CB raises the discount rate
(or its equivalent in other countries) by too much, then a black market
can develop for lending funds. Indeed, we see something similar in many
countries with the exchange rate. If the government acts too much to
over-value its own currency in relationship to others, then a black market
exchange rate can develop. This is a phenomenon known well to many
tourists who are, oftentimes within minutes of stepping-off of the ship or
plane, offered a better exchange rate than can be obtained at private
banks. The point here, again, is that there are limits within which state
policy can effectively operate. This should not be surprising unless we
think that the state has a magical pull-the-rabbit-out-of-the-hat ability
to control the capitalist economy. (NB: I am not suggesting here that
Paul C or you do have a faith in magical abilities of the state).

> Paul's argument is that this has it backwards: modern money
> (maybe even money tout court) is inherently a "state"
> phenomenon.

I agree that the subjects of money and the state are linked. Indeed,
anyone who examines a coin or paper currency issued by national
governments would have to acknowledge this. I also agree with Paul that
if we look at this question historically, we will see that there has
always been a link between money and the state. So in that sense even
non-modern money is inherently a state phenomenon. We seem to disagree,
though, on: a) when and how (logically) the subject of the state's
monetary policy should be developed; b) the relationship of this analysis
to the prior analysis of capital, and; c) whether there are limits to the
effectiveness of state monetary policy set by the process of capital

> For a sustained argument to this effect see Randall
> Wray's "Modern Money" (Elgar).

I'll have to check that out. I agree that there may be some things about
the subject of money that Marxists can learn from Post-Keynesians (no
doubt, if Steve K were still on the list, he would want to add his 2 cents

> The trigger was a rise in interest, so the overall effect will
> be to depress real investment, employment, and wages.

Suppose that the Fed lowers the discount rate in an attempt to stimulate
real investment, employment, and wages. Will this be effective?

Before we can answer that question, don't we have to look at what is
happening in terms of the rate of accumulation and changes in aggregate
demand? If, for instance, the economy was in a depression, then would
decreasing interest rates alone stimulate capitalists into increasing

I think we have to remember not to assume Say's Law when considering the
effects of state monetary policy (or at other times as well).

In solidarity, Jerry