Re: Zero debt and Monetary Policy

[Greg Nowell <GN842@xxxxxxxxxxxxxxxxx>]

You've got me there.  I just know that it was the B of E's involvement in bill
discounting which presaged the development of modern manipulation of the money
supply.  But the B of E is still active in commercial paper, reflecting a
different tradition of intervention from the U.S.

Something similar must have been going on in the early days of the fed but it is
speculative; I haven't read anything. I do know that the creation of the Fed in
'11 or '13 or thereabouts was linked to the generalization of banker's
acceptances in the U.S. as an alternative to commercial paper, the idea being
that if the Morgan bank and a few others, backed by a fed reserve, began to
certify paper, it would achieve wider circulation for the U.S. currency.   Given
the tightness of the budget at that time it must have been linked to the ability
to monetize commercial debt one way or another.

The US banks used to lendon call to the stock market and when their liquidity
reserves got low would either call loans or raise their call rate.  Thus a stock
market crash was a guaranteed outcome of a liquidity shortage.

But I haven't the vaguest notion of UK monetary policy in the 1960s and 970s.
-gn.

GGard97342@xxxxxx wrote:

> 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

--
Gregory P. Nowell
Associate Professor
Department of Political Science, Milne 100
State University of New York
135 Western Ave.
Albany, New York 12222

Fax 518-442-5298