Tag Archives: Credit

“Money and Banking with Reserves and CBDC,” CEPR, 2023

CEPR Discussion Paper 18444, September 2023. HTML (local copy).

Abstract:

We analyze the role of retail central bank digital currency (CBDC) and reserves when banks exert deposit market power and liquidity transformation entails externalities. Optimal monetary architecture minimizes the social costs of liquidity provision and optimal monetary policy follows modified Friedman (1969) rules. Interest rates on reserves and CBDC should differ. Calibrations robustly suggest that CBDC provides liquidity more efficiently than deposits unless the central bank must refinance banks and this is very costly. Accordingly, the optimal share of CBDC in payments tends to exceed that of deposits.

David Graeber’s “Debt”

Goodreads rating 4.19.

Graeber’s book contains many interesting historical observations but lacks a concise argument to convince a brainwashed neoclassical economist looking for coherent arguments on money and debt. After 60 pages, 340 more seemed too much.

Chapter one:

… the central question of this book: What, precisely, does it man to say that our sense of morality and justice is reduced to the language of a business deal? What does it mean when we reduce moral obligations to debts? … debt, unlike any other form of obligation, can be precisely quantified. … to become simple, cold, and impersonal … transferable.

… money’s capacity to turn morality into a matter of impersonal arithmetic—and by doing so, to justify things that would otherwise seem outrageous or obscene. … the violence and the quantification—are intimately linked. … the threat of violence, turns human relations into mathematics.

…The United States was one of the last countries in the world to adopt a law of bankruptcy: despite the fact that in 1787, the Constitution specifically charged the new government with creating one, all attempts were rejected, or quickly reversed, on “moral grounds” until 1898.

… historically, credit money comes first [before bullion, coins]

… ages of virtual credit money almost invariably involve the creation of institutions designed to prevent everything going haywire—to stop the lenders from teaming up with bureaucrats and politicians to squeeze everybody dry … by the creation of institutions designed to protect debtors. The new age of credit money we are in seems to have started precisely backwards. It began with the creation of global institutions like the IMF designed to protect not debtors, but creditors.

… the book begins by attempting to puncture a series of myths—not only the Myth of Barter … but also rival myths about primordial debts to the gods, or to the state … Historical reality reveals [that the state and the market] have always been intertwined. … all these misconceptions … tend to reduce all human relations to exchange … [but] the very principle of exchange emerged largely as an effect of violence … the real origins of money are to be found in crime and recompense, war and slavery, honor, debt, and redemption. … an actual history of the last five thousand years of debt and credit, with its great alternations between ages of virtual and physical money …

… many of Adam Smith’s most famous arguments appear to have been cribbed from the works of free market theorists from medieval Persia …

Chapter two (“The Myth of Barter”) contains questionable claims about economics as well as interesting historical facts (or claims?):

When economists speak of the origins of money … debt is always something of an afterthought. First comes barter, then money; credit only develops later. …

Barter … was carried out between people who might otherwise be enemies …

… “truck and barter”’ [in many languages] literally meant ”to trick, bamboozle, or rip off.”

What we now call virtual money came first. Coins came much later, … never completely replacing credit systems. Barter, in turn, … has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency.

Chapter three (“Primordial Debts”) argues the the myth of barter is central to the discourse of economics, which according to Graeber downplays the state as opposed to markets, exchange, and individual choice. He tries to confront this view with Alfred Mitchell-Innes’ credit theory of money, Georg Friedrich Knapp’s state theory of money, the Wizard of Oz (i.e. “ounce”), and John Maynard Keynes (original?) claim that banks create money.

In all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt,” illustrating the links between religion, payment and the mediation of the sacred and profane realms by “money.” [money-Geld, sacrifice-Geild, tax-Gild, guilt]

Wikipedia article on the book:

A major argument of the book is that the imprecise, informal, community-building indebtedness of “human economies” is only replaced by mathematically precise, firmly enforced debts through the introduction of violence, usually state-sponsored violence in some form of military or police.

A second major argument of the book is that, contrary to standard accounts of the history of money, debt is probably the oldest means of trade, with cash and barter transactions being later developments.

Debt, the book argues, has typically retained its primacy, with cash and barter usually limited to situations of low trust involving strangers or those not considered credit-worthy. Graeber proposes that the second argument follows from the first; that, in his words, “markets are founded and usually maintained by systematic state violence”, though he goes on to show how “in the absence of such violence, they… can even come to be seen as the very basis of freedom and autonomy”.

Reception of the book was mixed, with praise for Graeber’s sweeping scope from earliest recorded history to the present; but others raised doubts about the accuracy of some statements in Debt, as outlined below in the section on “critical reception”.

 

Money and Credit in Germany

In its April 2017 Quarterly Report, the Deutsche Bundesbank discusses the role of banks in the creation of money. Findings from a wavelet analysis indicate that in Germany, money and credit move in parallel in the long run.

In an appendix, the report mentions possible welfare costs of curbing maturity transformation, with reference to Diamond and Dybvig’s work. This is not convincing. Unlike in the typical (microeconomic) banking model, aggregate central bank provided money need not be scarce, so there is no a priori social need for the private sector to create money.

How Problematic Is a Large Central Bank Balance Sheet?

On his blog, John Cochrane reports about a Hoover panel including him, Charles Plosser, and John Taylor.

Cochrane focuses on the liability side. He favors a large quantity of (possibly interest bearing) reserves for financial stability reasons. Plosser focuses on the asset side and is worried about credit allocation by the Fed, for political economy reasons. Taylor favors a small balance sheet. Cochrane also talks about reserves for everyone, but issued by the Treasury.

Banks Are Not Intermediaries of Loanable Funds

In a recent Vox blog post, Zoltan Jakab and Michael Kumhof argue that macroeconomic models where banks intermediate loanable funds get it seriously wrong.

In the intermediation of loanable funds model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers … [but in reality] [t]he key function of banks is the provision of financing, meaning the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor.

This difference has important implications. Compared to intermediation of loanable funds models, money creation models predict larger and faster changes in bank lending and real activity; pro- or acyclical rather than countercyclical bank leverage; and quantity rationing of credit after contractionary shocks. New loans in loanable funds model are accompanied by additional savings and thus, higher production or lower consumption. In money creation models, in contrast, they simply reflect an expansion of banks’ balance sheets that is only checked by profitability and solvency consideration. Moreover, “the availability of central bank reserves does not constitute a limit to lending and deposit creation. This … has been repeatedly stated in publications of the world’s leading central banks.”

A large part of [money creation banks’] response [to a contractionary shock], consistent with the data for many economies, is … in the form of quantity rationing rather than changes in spreads. … In the intermediation of loanable funds model leverage increases on impact because immediate net worth losses dominate the gradual decrease in loans. In the money creation model leverage remains constant (and for smaller shocks it drops significantly), because the rapid decrease in lending matches (and for smaller shocks more than matches) the change in net worth. … As for the effects on the real economy, the contraction in GDP in the money creation model is more than twice as large as in the intermediation of loanable funds model, as investment drops more strongly than in the intermediation of loanable funds model, and consumption decreases, while it increases in the intermediation of loanable funds model.