“The banks in their lending business are not only not limited by their own capital; they are not, at least not immediately, limited by any capital whatever; by concentrating in their hands almost all payments, they themselves create the money required, or, what is the same thing, they accelerate ad libitum the rapidity of the circulation of money. The sum borrowed to-day in order to buy commodities is placed by the seller of the goods on his account at the same bank or some other bank, and can be lent the very next day to some other person with the same effect. As the German author, Emil Struck, justly says in his well-known sketch of the English money market: in our days demand and supply of money have become about the same thing, the demand to a large extent creating its own supply.” (Wicksell 1907: 214–215).Wicksell, then, understood well the nature of endogenous money and how the financial and monetary system even of his day was endogenous to a significant degree, and the point that you can’t have an independent, exogenous money supply function that is truly independent if money can come into existence in response to the demand for it. In many ways, Wicksell’s work was an attempt to reconcile the classical quantity theory with the reality of endogenous money, but ultimately it was a failure.
BIBLIOGRAPHY
Wicksell, K. 1907. “The Influence of the Rate of Interest on Prices,” The Economic Journal 17.66: 213–220.
'The sum borrowed to-day in order to buy commodities is placed by the seller of the goods on his account at the same bank or some other bank, and can be lent the very next day to some other person with the same effect"
ReplyDeleteWicksell appears to be assuming that all banks expand lending in unison. If that wasn't the case then interbank clearances would lead to banks that expand lending faster than others experiencing a drain in reserves that will lead to bankruptcy if not checked.
that bank might face a rising cost to borrow from other banks to cover a net reserve outflow (or to attract depositors/other creditors), or it might not. It would only face bankruptcy if the value of its assets collapsed for some reason.
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