How do banks operate and where does the money supply come from? The financial crisis has heightened awareness that these questions have been unduly neglected by many researchers. During the past ...century, three different theories of banking were dominant at different times: (1) The currently prevalent financial intermediation theory of banking says that banks collect deposits and then lend these out, just like other non-bank financial intermediaries. (2) The older fractional reserve theory of banking says that each individual bank is a financial intermediary without the power to create money, but the banking system collectively is able to create money through the process of ‘multiple deposit expansion’ (the ‘money multiplier’). (3) The credit creation theory of banking, predominant a century ago, does not consider banks as financial intermediaries that gather deposits to lend out, but instead argues that each individual bank creates credit and money newly when granting a bank loan. The theories differ in their accounting treatment of bank lending as well as in their policy implications. Since according to the dominant financial intermediation theory banks are virtually identical with other non-bank financial intermediaries, they are not usually included in the economic models used in economics or by central bankers. Moreover, the theory of banks as intermediaries provides the rationale for capital adequacy-based bank regulation. Should this theory not be correct, currently prevailing economics modelling and policy-making would be without empirical foundation. Despite the importance of this question, so far only one empirical test of the three theories has been reported in learned journals. This paper presents a second empirical test, using an alternative methodology, which allows control for all other factors. The financial intermediation and the fractional reserve theories of banking are rejected by the evidence. This finding throws doubt on the rationale for regulating bank capital adequacy to avoid banking crises, as the case study of Credit Suisse during the crisis illustrates. The finding indicates that advice to encourage developing countries to borrow from abroad is misguided. The question is considered why the economics profession has failed over most of the past century to make any progress concerning knowledge of the monetary system, and why it instead moved ever further away from the truth as already recognised by the credit creation theory well over a century ago. The role of conflicts of interest and interested parties in shaping the current bank-free academic consensus is discussed. A number of avenues for needed further research are indicated.
•The three theories of how banks function and whether they create money are reviewed•A new empirical test of the three theories is presented•The test allows to control for all transactions, delivering clear-cut results.•The fractional reserve and financial intermediation theories of banking are rejected•Capital adequacy based bank regulation is ineffective, credit guidance preferable•This is shown with the case study of Barclays Bank creating its own capital•Questions are raised concerning the lack of progress in economics in the past century•Policy implications: borrowing from abroad is unnecessary for growth
In the late nineteenth century, as much of the world adopted some variant of the gold standard, China remained the most populous country still using silver. Yet China had no unified national ...currency; there was not one monetary standard but many. Silver coins circulated alongside chunks of silver and every transaction became an "encounter of wits." China and the End of Global Silver, 1873–1937 focuses on how officials, policy makers, bankers, merchants, academics, and journalists in China and around the world answered a simple question: how should China change its monetary system? Far from a narrow, technical issue, Chinese monetary reform is a dramatic story full of political revolutions, economic depressions, chance, and contingency. As different governments in China attempted to create a unified monetary standard in the late nineteenth and early twentieth century, the United States, England, and Japan tried to shape the direction of Chinese monetary reform for their own benefit. Austin Dean argues convincingly that the Silver Era in world history ended owing to the interaction of imperial competition in East Asia and the state-building projects of different governments in China. When the Nationalist government of China went off the silver standard in 1935, it marked a key moment not just in Chinese history but in world history.
In regard to the purpose of money use, economic theory provides a functionalist answer, while a dominant sociological view focuses on culture. However, Simmel noted the paradoxical nature of money in ...this respect. Money brings together both quantity and quality; therefore, it simultaneously has different potentialities for its usage. We conducted an exploratory factor analysis by using a representative sample (n = 2000) of the population in Austria to explore the potentialities of money usage. We found seven factors: freedom, community, status, institutional control, conflict, work-related control and household control. A discussion of the factors reveals the simultaneous, ambiguous existence of the qualitative and quantitative potentialities of the usage of money. We conclude that the ambiguity of money can only be described in all its contradictoriness by distinguishing between the concrete earmarking money for specific social purposes (Zelizer) and the potentially unspecific, open usability for alternative concrete or fictional purposes (Simmel).
This book examines the entwined and simultaneous rise of graphic satire and cultures of paper money in late eighteenth- and early nineteenth-century Britain. Asking how Britons learned to value both ...graphic art and money, the book makes surprising connections between two types of engraved images that grew in popularity and influence during this time. Graphic satire grew in visual risk-taking, while paper money became a more standard carrier of financial value, courting controversy as a medium, moral problem, and factor in inflation. Through analysis of satirical prints, as well as case studies of monetary satires beyond London, this book demonstrates several key ways that cultures attach value to printed paper, accepting it as social reality and institutional fact. Thus, satirical banknotes were objects that broke down the distinction between paper money and graphic satire altogether.
This paper uses a quasi-natural experiment to estimate the premium for money-likeness. The 2014 Securities and Exchange Commission (SEC) reform of the money market fund (MMF) industry reduced the ...money-likeness of prime MMFs by increasing their information sensitivity, while leaving government MMFs unaffected. Investors fled from prime to government MMFs, with total outflows exceeding one trillion dollars. Using a difference-in-differences design, we estimate the premium for money-likeness to be between 20 and 30 basis points (bps). These premiums are not due to changes in investors’ risk tolerance or funds’ risk taking. Our results support recent developments in monetary theory identifying information insensitivity as a key feature of money.
The big problem of small change Sargent, Thomas J; Sargent, Thomas J; Velde, François R
2001., 20140424, 2014, 2002, 2002-01-01, Letnik:
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eBook
The Big Problem of Small Changeoffers the first credible and analytically sound explanation of how a problem that dogged monetary authorities for hundreds of years was finally solved. Two leading ...economists, Thomas Sargent and François Velde, examine the evolution of Western European economies through the lens of one of the classic problems of monetary history--the recurring scarcity and depreciation of small change. Through penetrating and clearly worded analysis, they tell the story of how monetary technologies, doctrines, and practices evolved from 1300 to 1850; of how the "standard formula" was devised to address an age-old dilemma without causing inflation.
One big problem had long plagued commodity money (that is, money literally worth its weight in gold): governments were hard-pressed to provide a steady supply of small change because of its high costs of production. The ensuing shortages hampered trade and, paradoxically, resulted in inflation and depreciation of small change. After centuries of technological progress that limited counterfeiting, in the nineteenth century governments replaced the small change in use until then with fiat money (money not literally equal to the value claimed for it)--ensuring a secure flow of small change. But this was not all. By solving this problem, suggest Sargent and Velde, modern European states laid the intellectual and practical basis for the diverse forms of money that make the world go round today.
This keenly argued, richly imaginative, and attractively illustrated study presents a comprehensive history and theory of small change. The authors skillfully convey the intuition that underlies their rigorous analysis. All those intrigued by monetary history will recognize this book for the standard that it is.
An accident of history, the international dollar standard has greatly facilitated multilateral trade and exchange since 1945. But beginning in 1971, erratic U.S. monetary and exchange rate policies ...have upset the world’s macro economy so as to make foreigners unhappy. Paradoxically, the asymmetrical nature of the dollar standard also makes Americans unhappy because they cannot control their own exchange rate. Although nobody loves the dollar standard, it is a remarkably robust institution that is too valuable to lose and too difficult to replace. Today, rehabilitating the dollar standard requires that American monetary and financial policies be “internationalized”: the Federal Reserve should aim for greater exchange rate stability by adjusting interest rates to prevent runs for or against the dollar, while the U.S. Treasury aims fiscal policy to balance exports and imports. 21China, now the world’s largest exporter and creditor country, has a critical role to play in sustaining the dollar standard. Because the renminbi is not much accepted internationally, China’s foreign trade is mainly invoiced in dollars, and interbank payments are cleared in dollars. So helping to stabilize the world dollar standard is in China’s, as well as America’s (and the world’s), own best interests. But how the now dominant “G-2” rationalize their mutual saving imbalances and debtor-creditor relationship, with China holding trillions of dollars of official exchange reserves, is the key question for sustainability.
How were the Greeks of the sixth century BC able to invent philosophy and tragedy? In this book Richard Seaford argues that a large part of the answer can be found in another momentous development, ...the invention and rapid spread of coinage which produced the first ever thoroughly monetised society. By transforming social relations, monetisation contributed to the ideas of the universe as an impersonal system (presocratic philosophy) and of the individual alienated from his own kin and from the gods (in tragedy). Seaford argues that an important precondition for this monetisation was the Greek practice of animal sacrifice, as represented in Homeric Epic, which describes a premonetary world on the point of producing money. This book combines social history, economic anthropology, numismatics and the close reading of literary, inscriptional, and philosophical texts. Questioning the origins and shaping force of Greek philosophy, this is a major book with wide appeal.
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