The Central Banks: The International and European Directions

By William Frazer | Go to book overview

NOTES
1.
Actually each regional bank of the Federal Reserve System could set its own discount rate, but the practice became one of following the New York bank for the most part. Via this practice, I speak of one rate. The rate was never envisioned as working along purely incentive (or disincentive) lines, as a means of achieving faster or slower growth in bank reserves. Rather, it was part of the central bank's function as lender of last resort. The discount window was available to meet the temporary liquidity needs of banks, as it met seasonal and other drains on bank reserves, partly at times in response to seasonal and other needs for bank credit and currency.
2.
Compare note 1 regarding the discount and lombard rates.
3.
These statements are very much at odds with those that came from U.S.'s secretary of the treasury Nicholas Brady in the last years of the Bush administration and from U.S.'s vice president Albert Gore on CNN international news on Easter weekend 1993. Writing on Brady, the Wall Street: Journal ( 25 September 1992, A8) referred to him as an Ahah chasing "lower interest rates" around the globe. But Brady's credibility with financial markets was said to be somewhere south of the Italian government's.
4.
Viewing the definition of money in terms of its functions, Keynes added to the medium of exchange function the standard and store of value functions. As the reader may recall, the latter concerned speculation of two sorts and various motives for holding those assets that serve as money.

Each function was linked to motives for holding money. The complex arrangement is sketched in Figure 1-10. As indicated by moving down the first of the four columns, money is defined as a medium of exchange, a standard of value (i.e., simply the unit of account), and a store of value. This last function of money made the crucial difference, as it encompassed the speculative and precautionary demands for money. Although Keynes had dealt with the speculative demand for money in relation to price- level changes in 1923, in his most famous work the speculative demand for money was confined to speculation in bonds and the choice between holding money balances and bonds.

As Milton Friedman adopted the definition of money stated here, he did a number of additional things: (1) he went back to Keynes's treatment of the demand for money in 1923, where Keynes had first started dealing with speculative demand in relation to price level changes and the Cambridge equation M = k(. . .) Y; (2) he related the Cambridge equation to the liquidity preference construction; (3) he broadened the classes of assets held to four; and (4) he related all of this to his special use of time frames, which is pointed to later in the chapter. In doing all of these things, expectations about bond prices and inflation (or deflation) were no longer constant for policy execution purposes. Motion was added to the analysis. Thus across the lower part of Figure 1-10 are the store of values function of money extended to the two classes of speculation, and to the speculative and precautionary motives for holding money, which J. M. Keynes first introduced into economics.

5.
The "classical dichotomy" is the separation of the theory of money (M) from the production (Q). In terms of the Cambridge expression, M = k(. . .) PQ, the factor k (. . .) is truly constant and all more or less of the money stock can do is to influence the price level (P). The demand for money, the inverse of the k(. . .) factor, has nothing to do with production.

-32-

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