Friday, November 28, 2014

Wicksell on Endogenous Money

From a 1907 article:
“The banks in their lending business are not only not limited by their own capital; they are not, at least not immediately, limited by any capital whatever; by concentrating in their hands almost all payments, they themselves create the money required, or, what is the same thing, they accelerate ad libitum the rapidity of the circulation of money. The sum borrowed to-day in order to buy commodities is placed by the seller of the goods on his account at the same bank or some other bank, and can be lent the very next day to some other person with the same effect. As the German author, Emil Struck, justly says in his well-known sketch of the English money market: in our days demand and supply of money have become about the same thing, the demand to a large extent creating its own supply.” (Wicksell 1907: 214–215).
Wicksell, then, understood well the nature of endogenous money and how the financial and monetary system even of his day was endogenous to a significant degree, and the point that you can’t have an independent, exogenous money supply function that is truly independent if money can come into existence in response to the demand for it. In many ways, Wicksell’s work was an attempt to reconcile the classical quantity theory with the reality of endogenous money, but ultimately it was a failure.

Wicksell, K. 1907. “The Influence of the Rate of Interest on Prices,” The Economic Journal 17.66: 213–220.

Monday, November 24, 2014

The Federal Reserve and its Direct Purchases of US Government Debt

The following is a fascinating paper by Kenneth D. Garbade:
Kenneth D. Garbade, “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks,” Federal Reserve Bank of New York Staff Report No. 684, August 2014
Garbade examines how the US Federal Reserve originally had the power to directly buy US government debt, and how this was done frequently from 1917 to 1935, in 1942 (during WWII) and some other years too.

Bill Mitchell also has a nice analysis and summary here:
Bill Mitchell, “Direct Central Bank Purchases of Government Debt,” Billy Blog, October 2, 2014.
Bill Mitchell also notes how Australia (before the 1980s) had a similar “tap” system in which the Australian central bank could directly purchase government bonds from the Treasury.

This is all fascinating and lost history and, as Bill Mitchell notes, the idea that central banks should be forbidden from directly purchasing government debt is a piece of neoliberal fiction. There are clear lessons for today too. We have already seen how indirect central bank purchases of government debt on a large scale can limit government-debt-to-GDP ratios. It would be easier and more effective for central banks to do this directly, especially for nations like Japan where government-debt-to-GDP ratios are already very high.

Garbade, Kenneth D. 2014. “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks,” Federal Reserve Bank of New York Staff Report No. 684, August.