Chapter 25 - The supply of money

Abstract

This chapter discusses the supply of money. Banknotes are oblong pieces of paper decorated with a promise to pay whereas a bank account is an entry in a ledger. This entry gives the right to ask the bank for a specified amount of currency. Checks themselves are not money; they are devices for transferring the ownership of bank money from one person to another. But checkable bank deposits, or current accounts, can normally be classed as money. The convenience of using bank money is so great that one could almost manage without currency altogether, receiving incomes by check and paying them away by check or credit card. No money would ever change hands; one should simply instruct bankers to reduce the balance and increase the creditor's balance correspondingly. Everyone is free to decide for himself how much money he will keep on deposit with the banks; but the public as a body has little or no influence on the total volume of bank deposits. The primary function of banks, which is to mobilize savings, has become entangled with a second, and quite distinct, function—that of creating the means of payment. A central bank, unless required to do so by legislation, has normally no fixed ratio by which to regulate its behavior and unless it has some reason for anxiety about the absolute level of its reserves is under no compulsion to contract credit when a deficit occurs.