Re: Zero debt and Monetary Policy

[GGard97342@xxxxxx]

In a message dated 05/02/2000 05:44:06 GMT Standard Time,
GN842@xxxxxxxxxxxxxxxxx writes:

> t's fairly simple.  The Fed can open "deposit accounts"
>  with banks and deposit in them or withdraw from them
>  depending on the liquidity goals.  If it doesn't want to
>  appear to be favoring a few banks, it can make these
>  deposits based on capital (or other) ratios across the
>  full spectrum of the banking system.
>
>  Or it can work like the B of E, and discount commercial
>  paper.

7 February 2000

Am I not right in thinking that the Bank of England's holdings of commercial
bills of exchange are only for the purpose of providing a counterpart to M0
and to the exchange equalisation reserve? They were also used as the
counterpart for "special deposits" when that farce was in vogue in the
sixties and seventies. The BofE had not much choice but to buy bills as the
Banks ran out of other assets it might have been prepared to purchase.

Charles Goodhart in one of his books describes the "bill mountain" which was
accumulated, and says that the BoE's activities lowered the discount rate on
commercial bills. As they are commonly used to finance importers, the effect
must have been to lower the cost of imports just at the time the government
was trying to discourage them.

A few years ago, before they won power, the Labour Party promised it would
reintroduce special deposits. The then leader of the party, John Smith, was
interviewed at length on television by the redoubtable and magnificent Mary
Goldring. Smith said "We will use special deposits so that the money cannot
be lent." I fell off my seat laughing as clearly Smith did not understand
that all money is lent. All special deposits did was to transfer lending from
the commercial banks to the BofE, and the banks would then make further loans
to replace them and go back up to the limit permitted by their capital
adequacy. (A special deposit at the Bank of England must carry a far lower
weighting for capital adequacy purposes than a commercial bill of exchange.)
So the effect was inflationary, not the opposite. I tried to explain this to
James Meade back in the 1960s when we used to discuss economic theory after
lunch. I was not absolutely sure he got the point, though he appeared to
agree.

Mary did not try to explain this to Smith; she probably guessed he could not
understand, and she had already wiped the floor with him several times over
in the course of the interview.

Geoffrey Gardiner