Monday, 28 April 2014

Full reserve equals monetarism?

A common criticism of full reserve banking is that it equals monetarism or Milton Friedman’s version of monetarism: that’s the idea that controlling the amount of money is the best way of controlling aggregate demand. E.g. see paragraph starting “This is very close…” here.
Apart from Friedman himself, I’ve never come across an advocate of full reserve who advocates monetarism. Certainly I don’t. Thus presumably most of them agree with the more conventional view, namely that while the quantity of money (base money in particular) does have an effect, the ACTUAL PROCESS of expanding that stock also has an effect, where that is done by simply creating new base money and spending it into the economy rather than done via QE. Moreover in his 1948 paper, "A monetary and fiscal framework for economic stability" (American Economic Review) he advocates full reserve, he does not put any emphasis on the monetary rather than fiscal effects of creating new monetary base and spending it into the economy (or cutting taxes). But looks like he changed his mind on that later in his career. (BTW that paper is normally available for free online, but it's vanished today.)
Incidentally, I said “rather than done via QE” above because QE has little effect on the stock of private sector net financial asserts, while in contrast, a “print and spend” policy DOES INCREASE that stock.
To illustrate the above “monetary / fiscal point” if the central bank / government machine creates and spends enough to employ an extra thousand government employees by this time next month, and those extra employees are actually hired, then employment rises by one thousand, all else equal. Revelation of the century that, wasn’t it?
But note, that when those extra employees start work, the money supply won’t have risen: that is, the employment increasing effect comes from what might be called the fiscal element in “print and spend”.
Of course the latter point assumes that the economy has spare capacity, i.e. that the effect of the extra money will not simply be to boost inflation. Plus I’m ignoring the multiplier to keep things simple, plus I’m assuming no Ricardian effects. But as Joseph Stiglitz said “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.” So my “no Ricardianism” assumption probably doesn’t fly in the face of the facts too much.

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