Idle Money Research Articles

I mercati monetari negli Stati Uniti d'America.

The article presents a detailed description of the money markets in the U.S. In recent years, new markets such as bankers’ acceptances, commercial paper, Negotiable Certificates of Deposit and the external extension of the New York market into Euro-dollars have have been established. Despite the growth in some of these markets, however, the main markets in the U.S. remain those in Government securities and Federal funds. It is through these markets that idle money in the U.S. is mobilised and distributed across the country as a whole. In this context, full use is made of correspondent relationships and both the banks and the dealers attempt to tap every possible source of funds. The intensity of this search for new sources of money has had the effect of binding together much more closely the various parts of the financial mechanism and has made it much more sensitive to Federal Reserve action. JEL: E44, E58

COMPENSATORY CYCLICAL BANK ASSET ADJUSTMENTS*

MANY STUDENTS OF monetary policy have remarked in recent years on the problem of commercial bank dumping of U.S. government securities during periods of tight money. To put it briefly, the argument points out that short-term government securities may be shifted with a minimum of capital loss when interest rates are high; hence banks, faced with a rapidly loan demand and little or no increase in reserves, may expand their loan portfolios by liquidating Treasury bills. If the new holders of the Treasury bills had previously held idle demand deposits, then idle money is converted to active money via this process. The result is a rise in velocity and hence a weakening of the effectiveness of monetary policy. It is not the purpose of this note to quarrel with the substantive conclusions of the argument cited above. Rather, the point to be made here is that this argument incorporates an erroneous description of the adjustment process of commercial banks-an error that involves some serious consequences for monetary policy. The error lies in the belief that it is primarily their short-term securities that banks liquidate in tight-money periods. Thus, e.g., Warren Smith holds that rising interest rates do not seriously deter commercial banks, which commonly hold large portfolios of short-term government securities, from selling such securities to meet a demand for loans.1 And G. L. Bach and C. J. Huizenga remark that bankers are generally thought to draw first on short-term government securities to obtain loan funds when reserves become tight.2 It will be shown in Section I that it is, in fact, their longer-term governments that banks tend to liquidate during tight-money periods. Section II will consider some of the consequences of this distinction.

A contribution to the liquidity preference theory of interest

In the long controversy which succeeded Keynes’s presentation of the Liquidity Preference Theory, predominant attention was given to the interrelationship between national income and the rate of interest. The nature and significance of the demand for and supply of money have, by contrast, received considerably less attention. The present paper elucidates two unsolved problems in this regard: the determination of the supply of money in a model which admits of a simple banking system, and the nature and main determinants of the demand for idle money. An attempt is made at introducing to the theory the hypothesis that a rise in the amount of hoarded money in the economy is likely to be accompanied by a reduction in the public’s desire for notes and coins. For this purpose, the author distinguishes between the proportion of active money and that of passive money which the public desires to hold in the form of cash. Some statistical evidence is then presented which seems to support the presumption that the proportion of active money which people demand in the form of cash exceeds that of passive money. A second modification to the theory is based on the contention that the demand for idle money depends not only on the rate of interest but also on the amount of wealth in the economy and as the amount of idle money is part of that wealth any change in this amount may cause a change in the demand for idle money. Thus, the version of the Liquidity Preference Theory here presented makes explicit allowance for a causal relationship between, on the one hand, the supply of idle money and, on the other, the total supply of money and the demand for idle money. JEL: E41, E43, E51

"Free Money" of Large Manufacturing Corporations and the Rate of Interest: A Reply

The note by Professor Duncan is chiefly an elaboration of the qualification presented without ambiguity in the concluding section of my study of corporate cash balances.' However, one point that has been made by Professor Duncan requires clarification. If correlation coefficients and trend lines are laid aside Professor Duncan recognized that from 1935 to 1937 the data verify the liquiditypreference theory. It is evident, however, from the analysis of the series involved that the accumulation of which began in 1929 reached its peak in 1932 and decreased to its lowest point in 1937; but at that low point it still formed 20 per cent of cash balances. During this period (1929-37) the falling volume of marketable securities held by large manufacturing corporations was negatively correlated with rising prices of U. S. Government bonds without exception for each year. The liquidation of marketable securities during the thirties, at a time when there was free money, undoubtedly reflects the liquidity preference of the corporations which joined in the thirties the bear brigade, to use Keynes's expression. Therefore, the singling out of data for 1935-37 is arbitrary. In addition, Professor Duncan's calculations for this period are incomplete inasmuch as they do not take into account the rate of profit which reflects the business expectations of the corporations. Indeed, the actual volume of idle money is the combined result of the sales of marketable securities and the amount of money released or absorbed by the transaction sphere of large manufacturing corporations. The accumulation of idle money in the thirties should, therefore, be explained by the rate of profit and the rate of interest simultaneously, and that explanation can be achieved only by the use of the multiple-correlation technique.

INTEREST, PRICES, AND THE DEMAND SCHEDULE FOR IDLE MONEY

INTEREST, PRICES, AND THE DEMAND SCHEDULE FOR IDLE MONEY Get access A. J. BROWN A. J. BROWN Search for other works by this author on: Oxford Academic Google Scholar Oxford Economic Papers, Volume os-2, Issue 1, May 1939, Pages 46–69, https://doi.org/10.1093/oxepap/os-2.1.46 Published: 01 May 1939