Topic: Banking

Quotes

Alex Salter, “Not All NGDP is Created Equal” (2013)

• Stable nominal spending is not the cause of economic prosperity; it is the consequence of the same institutions that produce prosperity.#

Benjamin Klein, “Money, Wealth, and Seignorage” (1978)

• The major way in which monetary confidence is produced is successful past performance.#Quoted in Lawrence White, Free Banking in Britain (1995)

George Selgin, The Theory of Free Banking (1988)

• Changes in the desire to hold inside money reflect the public’s willingness to lend “real capital” to and through the banking system.#
• It is perfectly possible that fiduciary media may arise from loans or investments involving transfer credit only [as opposed to created credit]. The expansion of bank liabilities may represent a response to greater abstinence by money holders and, hence, to a fall in the “natural” rate of interest.#
• Central banks’ ability to cut short the supply of currency once they possess a monopoly of note issue creates the need for them to serve as lenders of last resort in the first place.#
• The Bank of England was in a sensitive position: if it overissued, it lost specie abroad, which eventually necessitated either contraction or suspension of payments. If it underissued, it made the conversion of deposits to notes at other English banks impossible.#
• Competition in the supply of base money is no less desirable than competition in the supply of bank liabilities, including bank notes, redeemable in base money.#

Lawrence White, Free Banking in Britain (1995)

• In the crisis of 1839 the Bank of England turned to the Bank of France for an emergency extension of credit, to meet severe liquidity needs that had brought the BOE close to suspending payments. The Bank also arranged for sizeable credits in Hamburg. Yet no one would say that the London banking system customarily ‘depended’ on the Bank of France, or the Hamburg market, as a lender of last resort. Still less would anyone say that the London banking system was a ‘satellite’ to the Paris centre.#
• The English ‘one-reserve system’, whereby the Bank of England alone held substantial specie, was, as Bagehot explains, the product neither of conscious design nor of natural market evolution. It was instead ‘the gradual consequence of many singular events, and of an accumulation of legal privileges on a single bank’.#
• The larger the share of total circulation and deposits supplied by the expanding banks, the greater will be the role of the relatively disruptive process of external drain in bringing the expansion to an end.#
• In recommending that the Bank of England exercise discretion by distinguishing one case of adverse balances from the other and treating the two differently, Gilbart was in effect recommending that the Bank of England should act toward (e.g.) the Bank of France in the way that a competitive issuer acted toward its co-participants in a note-exchange system. Persistent reserve losses signalling a fundamentally excessive circulation should be met by contraction, but random week-to-week variations need not.#
• To suppose that competing banks could obey the currency principle, even were it a sound rule, was to suppose an impossible degree of collusion among them. Only a monopoly bank could act upon that sort of rule.#
• The whole point of engaging in note clearing was not simply to cancel equal reciprocal claims. It was rather to discover and settle the inequality between their reciprocal claims.#
• Rival banks of issue were correspondingly obliged to compete in cultivating public confidence in the redeemability of their notes. The creation and maintenance of that confidence was the production of a scarce good, subject like any other to limited economies of scale.#
• The function of an issuing bank was not so much to produce and sell money . . . Its function was rather to exchange recognised for unrecognised credit, or to provide a credit-certifying service based on its superior reputation. The substitution of bank notes for private bills of exchange as a circulating medium was to Scrope ‘a simple step in the division of labour’.#
• The issue of notes flowed naturally out of the business of receiving money in deposit and relending it. The great and widespread reputation of trustworthiness necessary to conduct that business made the banker’s promissory notes more generally acceptable in transactions than the commercial notes or bills of other merchants, thereby putting the banker in a position profitably to exchange his notes for commercial bills. #
• That the Bank of England had the power (in the short run) to alter the total supply of credit at the margin, and thereby to disturb interest rates, does not mean that any firm drawing on the total pool of funds in London was explicitly or implicitly borrowing from the Bank of England.#
• [A] bank cannot make additional loans (acquire more bills) without either also attracting additional depositors or note-holders, or reducing its specie reserves.#
• It may be nearly costless to print up additional notes and to initiate their circulation through loans or purchases of commercial biills, but it is quite another matter to maintain their circulation in a competitive environment under redeemability.#

Lawrence White, “Skepticism about Minsky’s Financial Instability Hypothesis” (2014)

• It would also be a mistake to think that the volume of checking account balances identically equals the volume of bank loans, or that banks automatically issue money in amounts corresponding to the quantity of investment and housing loans demanded by approved borrowers. Banks fund loans with non-deposit as well as deposit liabilities, and they intermediate deposit liabilities into non-loan assets (e.g., by holding reserves or bonds) as well as into loan assets. #

Milton Friedman, A Monetary History of the United States, 1867-1960 (1963)

• Cyclical fluctuations in credit quality, arising out of fluctuations in the standards used by lenders to assess risk and by borrowers to assess the prospects of ventures, may well play a part in the cyclical process. But it is the fluctuations, not the level of credit quality, that play a part; and it is fluctuations in the standards, not in the ex post outcome, that alone are a separate contribution of the credit mechanism toward the amplification of disturbances. Fluctuations in the ex post outcome without a change in standards are a consequence of other forces, and will have their impacts in turn elsewhere; they involve simply the transmission of impulses through the credit mechanism. In the 1929-33 episode, changes in the ex post outcome were far more dramatic than in the standards adopted.#

Nicholas Kaldor, “The Irrelevance of Equilibrium Economics” (1972)

• This is the real significance of the invention of paper money and of credit creation through the banking system. It provided the pre-condition of self-sustained growth. With a purely metallic currency, where the supply of money is given irrespective of the demand for credit, the ability of the system to expand in response to profit opportunities is far more narrowly confined. #

Peter King, Thoughts on the Restriction of Payments in Specie (1804)

• When we consider the nature of the banking system, of all other branches of trade the most complex and delicate and deriving its very essence and existence from the confidence of the public, it will appear that there is no subject upon which legislative interference would be more improper or more pernicious.#Quoted in Lawrence White, Free Banking in Britain (1995)

Steven Horwitz, Microfoundations and Macroeconomics (2000)

• Fundamentally, the advantage of free banking over central banking in maintaining monetary equilibrium is that free banking is not dependent on the centralization of information in order to generate the appropriate supply of money.#

Trevor Coombes, “What Central Banks May Legitimately Do” (2007)

• The conflict between monetary policy and the integrity of the banking system is only relevant to a system where central banks cultivate moral hazard.#