Monetary Policy and Central Banking

Monetary Policy and Central Banking

New Directions in Post-Keynesian Theory

Edited by Louis-Philippe Rochon and Salewa ‘Yinka Olawoye

Divided into two parts, this book presents a detailed, multi-faceted analysis of banking and monetary policy. The first part examines the role of central banks within an endogenous money framework. These chapters address post-Keynesian interest rate policy, monetary mercantilism, financial market organization and developing economies. In the second part of the book, the focus switches to the analysis of the financial crisis that began in 2007. The chapters in this section discuss the role of central banks in times of crisis.

Chapter 4: Proposals for the Banking System, the FDIC, the Fed, and the Treasury

Warren Mosler

Subjects: economics and finance, financial economics and regulation, money and banking, post-keynesian economics


Warren Mosler INTRODUCTION 1 The purpose of this chapter is to present proposals for the banking system, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve (Fed), and the Treasury. Government begins with an assumption that it exists for public purpose, and I use that as the guiding assumption of my proposals. I begin with my proposals for the banking system, as banking operations influence both Fed and Treasury operations. 2 PROPOSALS FOR THE BANKING SYSTEM US banks are public/private partnerships, established for the public purpose of providing loans based on credit analysis. Supporting this type of lending on an ongoing, stable basis demands a source of funding that is not market dependent. Hence most of the world’s banking systems include some form of government deposit insurance, as well as a central bank standing by to loan to its member banks. Under a gold standard or other fixed exchange rate regime, bank funding cannot be credibly guaranteed. In fact, fixed exchange rate regimes by design operate with an ongoing constraint on the supply side of the convertible currency. Banks are required to hold reserves of convertible currency, to be able to meet depositors’ demands for withdrawals. Confidence is critical for banks working under a gold standard. No bank can operate with 100 percent reserves. They depend on depositors not panicking and trying to cash in their deposits for convertible currency. The US experienced a series of severe depressions in the late 1800s, with the “panic” of 1907 disturbing enough to...

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