Abstract
The treatment of money in previous chapters may seem to violate the logic of flow-of-funds accounting. The idea of banks creating money to finance their bond purchases runs counter to the notion that holders of money balances advance funds to the bank sector. Certainly, the advancing of funds is a valid interpretation of increments in money being a “source of funds” for the banking system and “uses of funds” for holders of money. Morris A. Copeland, in his pioneering moneyflows study (1952, esp. chapters 13 and 14), distinguished three classes of transactors — those whose cash balances are increasing, those who are borrowing from the banks (the “loans and securities class”), and as an intermediary between them, the banks themselves. When cash balances are increasing, there is a “two-step moneyflow” from the cash balances class via the bank to the loans and securities class. A one-step moneyflow applies when the loans and securities class is identical with the cash balances class. In such a case, cash balance holders are advancing funds to the bank sector at the same time that the bank sector is advancing funds to cash balance holders. Such moneyflows are “equal and synchronous”.
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Notes
In fact, Copeland wrote moneyflows as one word rather than two to distinguish his accounting from “cash funds” accounting. The fear that this was not explicit enough led the Federal Reserve to adopt the terminology of “flow of funds.” See Cohen (1972), p. 15.
One author has sarcastically spoken of the humble borrower being converted into a proud lender by this approach. Boris P. Pesek, 1976, p. 878.
Treating demand deposits as bank product resolves the unsatisfactory treatment of the banking sector in the national income accounts. It is only by a complex imputation procedure that the Department of Commerce is able to assign a positive income originating to the bank sector. Now, all compensation of bank employees and corporate profits before taxes can be included in national income originating in the banking industry (Cohen, 1957, p. 428; Pesek, 1976, p. 868). The New View, coupled with a completely deregulated banking system would in theory resolve the imputation problem. Treating a bank deposit as a share in a mutual fund administered by the bank (a possible interpretation of the New View), and bank deregulation (including payment of interest on reserves, abolishing legal reserve requirements, and permitting interest payments on demand deposits) would result in bank service charges being equal to the cost of services provided by banks and equality in the interest rates on deposits and on loans and advances (Rymes, 1985). It is the absence of these equalities that explains the bank imputation problem.
Disequilibrium in the deposit market can also be measured by constructing demand and supply functions of the money market and taking minimum of demand and supply estimates as the desired value. A model for Switzerland generated excess demand and supply values that tested successfully against extraordinary financial events such as the largescale nonsterilized exchange-rate intervention by the Swiss National Bank in the first and fourth quarters of 1978 (Buttler, Frei, and Schips, 1986, p. 66).
J-S substitute the commercial paper rate for the own-rate of interest in the deposit market. The deposit supply curve is positively sloping because an increase in the commercial paper rate results in the public substituting commercial paper for nondeposit liabilities. Transactions deposits, as a result, replace nondeposit liabilities. (For a similar discussion, see Jonson, 1976, p. 506.)
Pesek and Saving’s emphasis on the noninterest-bearing characteristics of demand deposits has been called a “red herring” (Laidler, 1969, p. 513).
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© 1987 Martinus Nijhoff Publishers, Dordrecht.
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Cohen, J. (1987). Money and Banking in the Flow of Funds. In: The Flow of Funds in Theory and Practice. Financial and Monetary Policy Studies, vol 15. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-3675-1_5
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DOI: https://doi.org/10.1007/978-94-009-3675-1_5
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