Endogenous Money in a Speculative World: a seventh stage of banking?

The point has often been made that institutional arrangements are important in determining the way in which money is created and the effects that it has. The most recent phases of institutional development have been currently identified with liability management and off-balance-sheet activity. This paper argues that more recent changes, only some of them associated with the practice of banks’ bidding for deposits, may have taken us to a new stage, at least in the UK. To begin with, competition for deposits has increased money’s own rate of return relative to the return on other assets (and the cost of liabilities) and has made that rate more sensitive to changes in market interest rates a s a whole. Taken together, these two developments have had major impacts: upon the money supply process, the willingness of agents to hold the resulting deposits and the ability of the authorities to influence the growth of credit. Furthermore, the origin of the demand for credit has undergone major changes in recent years. If it was ever true that loans originated largely with firms’ need for working capital, it is now abundantly clear that the demand for credit rests very heavily upon asset (‘speculative’) transactions which have grown much more rapidly than GDP. Changes in the quantity of money no longer reflect prior changes in the level and cost of production. Professor Peter G A Howells, Department of Economics, University of East London, Longbridge Road, Dagenham, Essex, UK. RM8 2AS. Email: [email protected] Tel: +44 (0) 20 8223 2213