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2018 | Book

The Need for a Financial System? Read chapter Read first chapter

The Creators of Inside Money

A New Monetary Theory

Author: Dr. D. Gareth Thomas

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

The book explores the endogenous creators of inside money, the commercial banks, and their key role in igniting the 2007-8 monetary crisis and the aftermath of the Great Recession. This is an area of study overlooked by the traditional approach in the form of neo-classical analysis, a body of theory based on a barter system of exchange. Money has evolved from a construct of barter to become a medium of exchange based on fiat money and loan creation by the banking system, underpinned by legal tender, and therefore, a creature of law. It is not a phenomenon exogenously controlled by the monetary authorities and simply assumed to be a “veil” over the real economy, which just determines the absolute price level.

This monograph, in the eyes of the student, represents critical thinking and the realization of a more precise formulation of the endogenous money supply with various features systematically added in an attempt to derive a fully dynamic model of the monetary system, which will be straightforward to visualize and contrast with the benchmark approach.

Table of Contents

Frontmatter
Chapter 1. The Need for a Financial System?
Abstract
This introductory chapter presents the scope of the book and summarises its main theme, in particular the need to develop a monetary model that goes beyond the traditional theory of a barter system, or one with one-commodity used as money to proxy the ‘workings’ of a modern-day economy, with credit. The assumption of money neutrality is dropped along with treating the medium of exchange as a ‘veil’.
D. Gareth Thomas
Chapter 2. The Money Supply
Abstract
The analysis will involve a tripartite system of agents in the form of depositors (which includes households and firms), retail banks and the monetary authorities in determining the money supply process within the economic system. It is the interaction of these economic actors that determines the money supply process in the form a monetary multiplier that supports the real economy.
D. Gareth Thomas
Chapter 3. The Adjustment Process of the Money Multiplier and the Loanable Funds Model
Abstract
This section will show how the retail banks can create (or destroy) loans and liabilities in the form of money credit, depending on lending opportunities and interest rates in the prevailing winds of uncertainty and perceived credit risk. This is the main ingredient of the money supply, which retail banks create by using available reserves in the form of using internal profits from interest payments, the selling of financial assets and securities, buying reserves from other banks as well as using reserves held at the Central Bank or borrowing from it. This generates profit in the form of interest payments from the geometric process of credit growth and represents a cumulative (or diminishing) process based on monetary circuitism. This leads to the formation of the new loanable funds model when the demand is married with the supply, so that the equilibrium rate of interest on borrowing can be determined.
D. Gareth Thomas
Chapter 4. The Demand for Money: Another Piece of the Jigsaw Puzzle
Abstract
This part of the theory examines the desire to hold wealth and assets in the form of money balances by identifying the three motives for holding the medium of exchange in conjunction with saving. This will provide a clear description of the nature and origins of liquidity demand, which goes on to show it can be met by the various institutions providing time deposits, money and credit, exploring to what extent and under which conditions they are complements or substitutes. Once the scissors of supply and demand are applied to the ‘output’ of the banking sector, then the unregulated supply of loanable funds curve will appear as a crucial component of the model, which is the major theme of the next chapter.
D. Gareth Thomas
Chapter 5. The Rate of Interest and the New Monetary Theory of Loanable Funds
Abstract
The analysis reaches the stage where the new monetary model can be partly built on the endogenous loanable funds supply, which is partially controlled by the commercial banks, and partly with the demand for these funds. This supplements the exogenous assumption that underlies the majority of textbooks underpinning such theoretical models as the IS/LM analysis of macroeconomics. It should be noted, however, that this is going against the grain because a number of textbooks are no longer making any reference to the LM curve.
D. Gareth Thomas
Chapter 6. The Term Structure of Interest Rates
Abstract
If the banks have some control over the endogenous money supply, then they partly determine the market rates of interest in the borrowing and saving process on various terms through a mark-up on the ‘bank’ rate set by the Central Bank. The link between the rates implies that they could well be formed by the term structure through either the expectations theory or an imperfect configuration of it, with an empirical illustration.
D. Gareth Thomas
Chapter 7. The Loanable Funds Cycle and the Variability of the Deposit Base
Abstract
The analysis lays the foundation for Minsky’s theory, which exposes the states of the economy it goes through over evolutionary time: expansion and significant progress, then downturn either in the form of recession with negative development (or growth recession) or full-blown depression with heightened uncertainty and risk that seems uncontrollable. At some stage, the economy goes into recovery mode from Darwin’s ‘survival of fittest’ account of the intense market competition, travelling back to the expansion stage with fresh consumption and investment opportunities to explore and exploit on account of Schumpeter’s process of creative destruction. This will have significant implications for the variability of the banking sector’s deposit base, which can be modelled within the catastrophe framework to explain abrupt changes in money as loanable funds in relation to the build-up of uncertainty and default risk within the monetary economy.
D. Gareth Thomas
Chapter 8. A Catastrophe Theory of the Endogenous Cycle of Loanable Funds
Abstract
The discussion of Minsky’s theory reaches up to the macro-level to expose the full effect of the credit phases and the possibility of the catastrophic moment, triggered by changing perceptions of risk and uncertainty. This leads to the modelling exposition in the form of the catastrophe framework of thought, where a number of multiple equilibrium paths can be taken by the financial sector, driving business (or residential) cycles with either inflationary or deflationary tendencies. This links to the deposit base embodied in the components of the money multiplier, which is driven by the mechanism of credit creation (or extinction) of loans. The variability of the deposit base is largely dependent on the state of the economy in terms of the cyclical growth of GDP, intertwined with the financial cycle of the multiple equilibria.
D. Gareth Thomas
Chapter 9. Rebuilding the Theoretical Model of Inflation on Credit with Loanable Funds
Abstract
In this chapter, the core concepts of inflation, disinflation and deflation with expectations that underpin the credit cycle in Chapter 7 are modelled to provide a theoretical link that relates to the growth of loans and, consequently, to the endogenous flow of the money supply. The idea is to add to Friedman’s notion that ‘Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than output’. Now put this into reverse, disinflation and deflation are forever and ubiquitously a monetary occurrence in that it can only happen because of an abrupt decrease in the growth of the money supply, which is less than the expected change in production, leading to real, destabilising effects, triggered by endogenous changes to the desires of commercial banks to create money in the economy.
D. Gareth Thomas
Chapter 10. The Conclusions and the Policy Recommendations
Abstract
The book recommendations will be based on analysis of the properties of the new model, which explains the monetary system. This traces the development of catastrophes in the form of repeated financial instability leading to inflation, deflation and unemployment over the course of history, as the capitalist system evolves. The cycle either speeds up or it slows down improvements and progress in our standard of living. This phenomenon is ignored in the traditional neoclassical theory of economics, because of its emphasis on the rȏle of barter in exchange. The structure and behaviour of the banking system are regarded there as a ‘shroud’ over the real economy. The analysis here will show that in recent years, concerning the latest financial crisis, the lender of last resort interventions have staved off part of the deep economic depression, but the current demand management policies have perpetuated the current Great Recession with growing income inequality.
D. Gareth Thomas
Backmatter
Metadata
Title
The Creators of Inside Money
Author
Dr. D. Gareth Thomas
Copyright Year
2018
Electronic ISBN
978-3-319-90257-9
Print ISBN
978-3-319-90256-2
DOI
https://doi.org/10.1007/978-3-319-90257-9