Brian Romanchuk’s book Abolish Money (From Economics)! argues that money, in the form of money data, should be eliminated from economic discussion. Romanchuk speculates that moneys importance, as well as the importance of monetary aggregates, comes from money’s phycological hold on society (p.5). He would rather use more relevant financial indicators and in doing so the vague definition of money and the arguments surrounding its role would disappear, the importance put on bank reserves would go away, and the use of money as an indicator of the overall economy, which has been shown false, would no longer occur.
A common argument among economists is whether money is exogenous or endogenous. Exogenous money is the belief that the central bank …show more content…
Monetarists proclaim that inflation stems from monetary growth greater than the growth of output and the government can “cure” inflation by reducing the growth of money (Clark p.122). In the “Monetarist experiment” the central bank tried to target the money supply through reserves, however according to Romanchuk bank reserves are not significant when it comes to the money supply as banks do not need reserves to make loans (p.84). When a bank makes a loan, it is a promise to settle a payment. Reserves to settle payments, between banks payments are netted, and if reserves are not there, banks will overdraft but settle the overdraft by the end of the day, thus banks do not need reserves to make a loan, only to settle payments due to the overall structure of the payment system. To settle the end of day overdraft what is more important are financial assets. Banks will sell assets or borrow against assets to meet liquidity needs (p.87). With reserves being only a small portion of a banks liquidity portfolio, the elimination of “money” will show that central banks cannot control lending practices through operations effecting reserves (p.91). As reserves become less important in changing the overall economy one can see how the monetary base has little correlation to
A common argument among economists is whether money is exogenous or endogenous. Exogenous money is the belief that the central bank …show more content…
Monetarists proclaim that inflation stems from monetary growth greater than the growth of output and the government can “cure” inflation by reducing the growth of money (Clark p.122). In the “Monetarist experiment” the central bank tried to target the money supply through reserves, however according to Romanchuk bank reserves are not significant when it comes to the money supply as banks do not need reserves to make loans (p.84). When a bank makes a loan, it is a promise to settle a payment. Reserves to settle payments, between banks payments are netted, and if reserves are not there, banks will overdraft but settle the overdraft by the end of the day, thus banks do not need reserves to make a loan, only to settle payments due to the overall structure of the payment system. To settle the end of day overdraft what is more important are financial assets. Banks will sell assets or borrow against assets to meet liquidity needs (p.87). With reserves being only a small portion of a banks liquidity portfolio, the elimination of “money” will show that central banks cannot control lending practices through operations effecting reserves (p.91). As reserves become less important in changing the overall economy one can see how the monetary base has little correlation to