It turns out that I may have been unfair to Patricia Croft (chief economist of RBC-whatever-it-is) over here. As Erin Weir points out, she's not the only high-profile professional economist to go from remarking on the relatively small quantity of Canada's official reserves to making the clanging error of concluding that the Bank of Canada's abilities to stop the appreciation of the Canadian dollar are limited.
And now this from the lead editorial in today's Globe and Mail:
The last time that the Bank of Canada intervened to affect the
Canadian dollar's exchange rate, by using the foreign exchange reserves
of the Crown in right of Canada, was in 1998; a once quite frequent
practice has become rare, in this era in which central banking is
highly focused on inflation targeting. But Mr. Carney has never ruled
out resorting to make sales from those reserves, which at present stand
at about $44-billion (U.S.), of which $25-billion is in U.S. dollars;
the bank is not wholly disarmed.Conceivably, the Bank of Canada could increase the money supply by
creating bank deposits in the course of buying government bonds, in
order to devalue the Canadian dollar, without taking the policy
interest rate even closer to zero. At this point, though, that would
amount to a demoralizing statement about the Canadian economy.The Bank of Canada would not be able to resist a sustained rise in demand for the Canadian dollar, but Mr. Carney and his colleagues have effectively reined in a movement toward parity with the U.S. dollar.
Presumably, the person who wrote this for the country's Newspaper of Record did some homework (for example, looking up the latest numbers for the official international reserves), but he never did get a firm grip of how monetary policy works.
But Mr. Carney has never ruled
out resorting to make sales from those reserves, which at present stand
at about $44-billion (U.S.), of which $25-billion is in U.S. dollars;
Indeed he hasn't. But he won't, because using those international reserves to buy up Canadian dollars would increase the value of the CAD in international markets; the problem is that the exchange rate is already too high.
Conceivably, the Bank of Canada could increase the money supply by
creating bank deposits in the course of buying government bonds, in
order to devalue the Canadian dollar, without taking the policy
interest rate even closer to zero. At this point, though, that would
amount to a demoralizing statement about the Canadian economy.
Increasing the money supply is exactly what the Bank of Canada should be doing – and has been doing, for more than 15 years – when inflation goes below its stated target.
The Bank of Canada would not be able to resist a sustained rise in demand for the Canadian dollar,
If the People's Bank of China can do it, so can the Bank of Canada. It's one thing to argue that a policy is undesirable. But that's not the same thing as saying that it is literally impossible.
I'm getting more and more depressed with this file. How are we supposed to have a discussion about what the Bank of Canada should do if no-one seems to understand what the options are?
Worthwhile Canadian Initiative 
You’d think these journalists might ask the Bank of Canada what their options are. One would hope that the BoC has competent economists on its payroll available to speak to the media.
Maybe you should start writing op-eds in newspapers, instead of only providing the National Post with free anti-NDP commentary.
“How are we supposed to have a discussion about what the Bank of Canada should do if no-one seems to understand what the options are?”
Ask my mother.
Horrific.
“If the People’s Bank of China can do it, so can the Bank of Canada.”
That’s actually the point, of course. As in, why not double our reserves, if need be? Maybe we could even make some money at it (dangerous objective).
For contrast, have a look in the next few days to see how one of Patti’s former employers, Sherry Cooper, weighs in. No doubt she’ll bring up the old saw of adopting the US dollar as Canada’s currency.
“adopting the US dollar as Canada’s currency”.
Oh God, spare me please. If she does, I hope someone points out just how well giving up control of monetary policy to a giant neighbor worked out for Spain and Ireland. And imagine the mess in the UK had they adopted the Euro and imported ECB policy!
“Increasing the money supply is exactly what the Bank of Canada should be doing – and has been doing, for more than 15 years – when inflation goes below its stated target.”
Could you please define money supply?
I also assume you mean price inflation?
Hello Mr. Gordon,
The Bank of Canada has little cash on hand had you bothered to look at its balance sheet as of late. How is the B of C going to buy bonds of any kind when it is nearly fully invested?
Here is the balance sheet: http://www.bankofcanada.ca/en/about/pdf/boc_balancesheet0909.pdf
As you will note, the Bank of Canada is a $75 billion institution.
About 14 months ago, it was a $50 billion institution. Strange that so puny an institution has such dominant control over lenders and markets many times its size! Ah, the myth of monetary policy: the biggest fraud going in finance. But a lack of discernment and reason is all that one usually may expect from the dullest scientists around, that is economists.
How did the BofC move from a $50 billion to a $75 billion institution?
It took Government of Canada bonds in an amount of about $25 billion and it exchanged them for assets from private borrowers of a value far diminished. The Government of Canada is owed a whopping $18 billion by the BofC, an amount that is sure to dwindle as the asset values purchased for the government bonds prove dubious. What this means is that the people of Canada have underwritten the poor loans and investments of various lenders and financial institutions, not the Bank of Canada. The taxpayer is on the hook for it all. This is exactly how the US taxpayer has underwritten the losses of financial borrowers from the Fed.
As for the BofC, it really has no cash on hand to buy any bonds. It is fully invested. It has $7 million currently on hand to pay off the Government of Canada its $18 billion deposit and the Canadian Payment’s members their $3 billion deposit.
How Mr. Genius can this negligible market player perform any financial feats as you implore?
If you would only read the basic financial information put out by your venerable BofC you would not blunder so badly.
Regards,
Gary Marshall
The Bank of Canada has the legal power to create as many Canadian dollars as it wishes. That’s pretty much the distinguishing feature of central banks.
I’ll be happy to cash that cheque for $1000, BTW.
I think “Gary Marshall” is really Patricia Croft.
anon : You called it, but it isn’t Sherry Copper. It’s Konrad Yak:
http://www.theglobeandmail.com/news/opinions/putting-to-rest-a-too-vigorous-bird/article1336485/
Ah jeez. I’m busy this weekend. Anyone else willing to take out the trash this time? I’ll be pleased to post it as a guest post with appropriate credit.
We really do need more academic econobloggers.
If I weren’t so embarrassingly totally phobically incompetent at doing the very basic empirical stuff (I mean like finding data, downloading it onto a spreadsheet, drawing a graph, calculating a correlation) I would do the following:
Look at the correlation between the Canada/US exchange rate and the (lagged a year or two) Canada-US inflation differential.
If a depreciation of the loonie were followed by Canadian inflation rising relative to US inflation, and appreciation of the loonie were followed by Canadian inflation falling relative to US inflation, I would conclude that the exchange rate had been too volatile. If the correlation went the other way, I would conclude that the exchange rate had not been allowed to move enough.
Goldilocks would imply zero correlation (the exchange rate had acted as the perfect shock-absorber for relative Canada/US demand/supply shocks). (Though zero correlation wouldn’t necessarily imply the exchange rate was right, since it might have been adjusting too much half of the sample and too little in the other half.)
Of course, finding that the exchange rate had been too volatile wouldn’t mean that zero volatility (fixed exchange rates) would be better. But it would give us a ballpark sense of whether more or less volatility would be better.
When I last looked at this correlation (or something similar), 8 years ago (when I had an RA to do the difficult work), I couldn’t reject Goldilocks. The Bank of Canada, on average, had let the exchange rate move by about the right amount.
h
Hello Mr. Gordon,
You offered a flippant response to my enquiry about your silly assertions that the puny BofCanada controls the Canadian financial universe and then cravenly chose to obstruct me in posting any further comments. How truly “Socialist” of you.
Now that the prohibition has been lifted, probably through inadvertence, do answer my earlier question: How, Mr. Gordon, does the BofC achieve this supremacy?
Any bank can create Canadian dollars through the loans process. The only difference with the central bank is that it can create currency or paper money. But to create prodigal amounts of currency will cause inflation that will destroy the financial system and quickly with the example of Germany and Zimbabwe. Thus, it is a tool that the BofC will not employ.
So do show me how the BofC can create as much money as it wishes and this time do include the details in its balance sheet operations.
An argument’s conclusion will not suffice for its proof. And any person who requests the reward before making the effort should be treated with caution.
Regards,
Gary Marshall
By the way, I have no connection with Ms. Croft though I do admire her analysis. She got it right.
Regards,
Gary Marshall
Yes, quantitative easing will be inflationary. That’s the point of the exercise: inflation is below the Bank’s target.
Gary: the key difference between the Bank of Canada and the other Canadian banks is this: The Bank of Montreal promises to redeem its liabilities (some of which are media of exchange – money) in Bank of Canada liabilities. The Bank of Canada does not promise to redeem its liabilities in Bank of Montreal liabilities. That is the fundamental asymmetry between the Bank of Canada and the Bank of Montreal which makes the first a central bank and the second a commercial bank. The tail wags the dog, even though it’s smaller than the dog, because the dog has promised to follow its tail. And you won’t see that fact anywhere on a balance sheet.
By the way, I have had difficulties posting comments over the last couple of days. Copy your comment, then log in again, paste your comment, add a space, then post, is what I do.
And Gary, it is worth someone adding that Ms. Croft’s statement that the BoC has a limited ability to lower the exchange value of the Candadian dollar is not correct.
Whatever else you might think about what Stephen is writing, Ms. Croft was not correct.
Hello Mr. Rowe,
The explanation offered will not satisfy myself or really any reasonable person.
The only difference between the BofC and any common bank is that the it issues the nation’s currency, which accounts for about 4% of the total stock of money outstanding. The 4% amounts to about $50 billion. The money created by the commercial banks is about 20 times this sum. Money comprises more than just currency notes. There is no tail wagging any dog here.
How does this small sum and prerogative translate into full control over Canada’s financial system? How does the rather tiny Bank of Canada enforce an overnight rate in the money market in which it rarely lends, save in present circumstances, and in which it has overwhelming competition? How does it purported control over its overnight lending rate force coherence in interest rates among lenders across the country in the overnight market and in lending for longer terms?
What are the BofC’s powers of enforcement?
In addition, what can the BofC do in the forex markets to drive down the value of the Canadian dollar? How does a fully invested $75 billion institution perform such a feat in a market far larger than itself?
Again, dear Adam P, emphatic assertions are never to substitute for good old fashioned and well reasoned argument. Did you learn the opposite in an economics class?
I find economists deliberately evasive on such questions because I do not believe they know the answers. I have also discovered over the years that there are no such answers because the theory of central bank control is a ridiculous as its premises.
To earn $1000, all anyone has to do is show me how the BofC attains to such omnipotence, preferably with balance sheet operations.
Regards,
Gary Marshall
Gary: I’m not interested in your $1,000. This is an attempt at learning from each other, not a contest. But I might do a post on this question, since I have asked it of myself at various times in the past, in various forms, and it continues to interest me. What makes a central bank a central bank? And one of the things I found fascinating about reading Bahegot was his trying to articulate/innovate the concept of a central bank, and how the Bank of England was different from all the other banks. And if paper money disappeared, so the Bank of Canada’s monopoly on note issue became moot, would the Bank of Canada still be able to control interest rates? Or if the commercial banks decided not to settle their payments on the books of the Bank of Canada? The answer(s) could be at many levels, and it’s not obvious there is one simple agreed on right answer. But the answer will not be found by looking at the balance sheets. Balance sheets show a snapshot, not the underlying behavioural relationships. And they don’t show the essential difference between money and other assets.
But tell me where you are coming from? Post-Keynesian perspective? Practical banker perspective? Because sometimes in order to really answer a question, you have to first figure out what the questioner is really asking: what he presumes and doesn’t presume.
Gary, I learned in economics class how it is that the BoC can lower the market value of the canadian dollar pretty much at will. Apparently Stephen’s students also learn this in his class.
Perhaps you should take your own advice and offer a well reasoned arguement.
Central banks control the overnight risk free rate by enforcing a competition for required reserve balances among commercial banks. The CB responds to any market deviation from its rate target by injecting or withdrawing a supply of reserves necessary for competitive forces to move the rate back toward target. The CB has absolute control over the level of reserve balances in aggregate since it creates them through open market operations.
The size of the CB balance sheet is immaterial. In Canada, required reserve balances are zero. If a bank insists on running a deficit balance for too long, it will either be out of business or its CEO will be in jail. If banks have surpluses, the central bank pays the target lower bound rate to prevent the risk free rate from falling below target.
The overnight risk free rate is the basis for longer term sovereign rates simply because market participants factor in an expected path for policy rates in determining the market trading level for the term rate.
The overnight risk free rate and the yield curve generated from it are also the basis for all other rates, since all other rates are derivable as a risk premium added onto the risk free rate.
All institutional market participants watch the central bank closely for its actions and its words. This gives them ample information in formulating expectations for monetary policy and for the path of the risk free rate.
The key to all of this is that the central bank is a monopolist supplier of bank reserves and therefore makes the price on those reserves – the overnight interest rate. Banks must pay the price the central bank demands for reserves (even if the required balance is zero, because the central bank has the power to drive balances negative). All other market rates and even non-market administered commercial bank interest rates are determined as a risk premium spread over the full yield curve consisting of the central bank policy rate and government bond rates.
As far as the FX rate is concerned, the central bank has unlimited operational ability to buy foreign exchange and issue interest paying domestic currency bank reserves in exchange. (The government can also issue debt that has the effect of withdrawing those domestic bank reserves while still funding FX reserves.)
Please address and send the $ 1000 check to the charity of Stephen and Nick’s choosing.
JKH: I agree with what you wrote, but I think one can go a bit deeper. “The key to all of this is that the central bank is a monopolist supplier of bank reserves and therefore makes the price on those reserves – the overnight interest rate.” But what is it that makes the Bank of Canada the monopolist supplier of bank reserves? This is where I think the one-way redeemability comes in. The Bank of Canada does not need to keep reserves of Bank of Montreal liabilities. The relationship is asymmetric.
Also, there’s this alternative answer that keeps creeping into my head: why is the Bank of Canada the central bank, and not the Bank of Montreal? Because the Bank of Canada wants to be the central bank, and the Bank of Montreal wants to maximise profits.
Nick,
Agreed, it’s certainly asymmetric by design – a central bank and circumferential commercial banks. The system is designed deliberately this way in order to allow the central bank to set monetary policy and exercise direct influence over the market response to the policy. The commercial banks are forced by law effectively to respond to the desired policy rate target. Then market rates radiate out from there, both in term structure (through expectations) and risk premiums,
Perhaps you can think of the Bank of Montreal as a lower tier or sub-central bank of sorts for its own customers. It does set monetary policy of sorts in the form of deposit and loan arrangements.
Nick I think you’re off track when you say “why is the Bank of Canada the central bank, and not the Bank of Montreal? Because the Bank of Canada wants to be the central bank, and the Bank of Montreal wants to maximise profits.”
That was roughly accurate about the BoE back in the day but now what makes the BoC the central bank is the legal right, given to it by the government, to create liabilities on behalf of that government. A Candian dollar is Canadian government debt.
The fact that the government only gives this right to a not-for-profit organization is a function of that government and the mandate society gives it.
Adam: yes, I was sort of thinking about something closer to the old BoE back in Gold Standard days. Except that the other banks chose to keep reserves at the BoE, and the BoE kept gold reserves. I’m trying to imagine banks that are otherwise symmetrical.
In other words, suppose there were 2 banks, and nothing distinguished them. They had some sort of bilateral fixed exchange rate between them (like France and Germany pre-Euro). Then bank 1 decided it wanted to control inflation, and bank 2 decided it didn’t care about inflation, but just wanted to maximise its shareholders’ profits. I think Bank 1, if it had deep enough pockets to be able to indulge its preference, would become de facto the central bank.
“To earn $1000, all anyone has to do is show me how the BofC attains to such omnipotence, preferably with balance sheet operations.”
Gary:
I don’t anybody is suggesting that the BoC has total control over the financial system, so that’s a bit of a straw man set up. Also, many have argued that part of the BoC’s substantial influence is based on the perception in financial markets of greater influence than it would otherwise have if perceptions were different. In other words, its about signaling. Can I have the $1000?
Hello Mr. Rowe,
My eagerness for the Truth inspires me.
When some person makes claims upon a certain subject that interests me, then I am bound by curiosity to inquire further.
Mr. Gordon has made a number of claims upon the subject of central bank powers and operations. Yet, he has provided no evidence for these claims.
The primary key to understanding the nature of the BofC or any bank or company is through its financial statements, of which the balance sheet is significant.
You surmise that without currency central bank control of interest rates would vanish. Well, in the present, with currency still in existence how does the BofC exert such control over the nation’s interest rates? What is the mechanism or apparatus with which it maintains supremacy?
How would this small market player then dictate the exchange rates for the national currency in the forex markets?
Mr. Gordon belittles others for their ignorance in national newspapers, yet he is reticent on supplying even a partial explanation of the concepts and instruments that others have failed to grasp?
It is my contention that the BofC has no such powers. They are mythical; a fraud perpetrated by ignorance. It has as much influence as any other $75 billion dollar institution might have.
Mr. Gordon’s reluctance to divulge answers only reassures me.
Regards,
Gary Marshall
Hello Adam,
Well, since you learned how this marvel occurs, would you be so kind as to explain it here, briefly if you wish.
I am not in the habit of forming arguments to dispute the ridiculous claims of others. It is up to those who make such claims to make them credible with evidence. It is then my obligation to attack that evidence. Unfortunately, no one, not even the sagacious you, will supply the material for my effort.
Regards,
Gary Marshall
Hello JKH,
I read through your response and I am left somewhat bewildered. Out of which economics text or rather multitude did this explanation come?
You say that the central bank manipulates the overnight rate by injecting or withdrawing funds into the overnight markets. How does it insert or remove funds?
You say the BofC has a monopoly on bank reserves.
There are funds of the commercial banks on deposit at the central bank, but only several $billion and only such a sum for these unsettled times.
What about the funds the banks hold in reserve for their clients! They hold many more $billions in currency in bank machines across the land. The creation of ATMs is the reason for the revocation of the rule concerning commercial bank holdings at the BofC. Banks also hold sizeable sums of money, not only currency, but ethereal money created by the commercial banks in the loans’ process for daily bank operations. If they should run short on a particular day, they then turn to other banks, certainly not the BofC, for loans. What do you think the LIBOR market is all about?
The BofC pays nothing on commercial bank deposits as far as I know.
What determines the overnight rate is simply supply of and demand for funds. When funds are scarce, rates ascend. When funds plenty, rates decline.
These same factors determine the mortgage rates for the near and long term, government borrowing rates near and long term, and the commercial lending rates.
If a banker requires funds in a borrower’s market, will he pay the central bank an elevated rate decided upon by the central banker seeking higher interest rates or would he take a lower rate as determined by the market? Similarly in a lenders’ market. Will a banker accept a lower rate of interest from a borrower just because the central banker has decided upon a lower rate of interest?
Because of certain regulations, the BofC overnight rate is always much higher than any competitors’ rate. You should know the BofC’s rules for borrowers, which is exactly why so few borrow from it.
The market participants observe the markets to discern direction, not some silly banker who rarely participates in the markets, save in the purchase of Government securities.
Therefore, the central banks have no monopoly in the overnight markets. They are surrounded with competitors offering money at far more favourable rates.
As the central banks do not control the overnight markets, they must have little influence over the longer term financial markets.
You say that a balance sheet is irrelevant in the case of a central bank.
Why is this so? The balance sheet discloses assets and liabilities. The financial reporting agencies demand them as does the securities commissions. Even the BofC and all the banks go to the trouble of maintaining and submitting these reports with accuracy and promptly. In fact the BofC spends inordinate resources verifying that these financial statements reflect the true condition of its authors.
But for you an enumeration of existing assets and liabilities of this corporation means nothing.
You are a strange fellow, JKH, one of a kind in this financial world.
Before I do issue the cheque, do show me with balance sheet operations how the central bank purchases all this forex with the small amounts of money its has on hand. But such operations and statements have negligible value for you. However, most other people find value in the concept and practices and demand them. So amuse me with an illustration. Go through the simple creation of bank reserves and the purchase of foreign exchange.
The only means to that end is through the creation of and distribution of currency, a foolish action fraught with inflationary dangers, and therefore a forbidden option. There is no other way.
Regards,
Gary Marshall
JKH,
What ‘law’ forces the banks to bend to the will of the central bank?
You neglected to mention it. I have yet to see a policeman ever enter a commercial bank to arrest one for failing to adhere to the BofC’s prescribed overnight rate.
Gary Marshall
Hello Mathew,
Perception is all fine, but would you pay a premium for a vehicle in a buyer’s market because some distant dullard who rarely sells any vehicles demands it? I would not, nor would most people.
Had the man the means to compel those prices by legal means, then I would have to pay the premium.
What legal means does the Carney possess?
Gary Marshall
Hello Gary Marshall,
Your reputation precedes you at Buiter’s.
You are a bit of a moron.
Just a bit.
Trolls like attention and causing a fuss. It’s best not to encourage them. Just ignore it and eventually it will go away.
Gary, you said “Well, since you learned how this marvel occurs, would you be so kind as to explain it here, briefly if you wish.”
But Gary, I am not in the habit of forming arguments to dispute the ridiculous claims of others.
Do grow up one day, Adam.
Grow up.
Gary Marshall
Anon,
I post everywhere there is a claim made that monetary policy exists beyond the imagination of a clown. You can try the National Post, the FT, the Globe, and numerous other publications.
No one has ever supplied the information I have sought. No one on this earth can explain how central banks control interest rates despite the brilliant minds that assure me it does.
The world, despite the relentless pertinacity of a majority of astronomers some 400 years ago, that the heliocentric theory better describes our universe. Maybe in 300 years the obstinate economists will finally admit monetary theory is just as ridiculous as the geocentric theory was.
Is it not strange that the experts Mr. Rowe and Mr. Gordon have gone silent!
Place your trust in senseless doctrines if you wish. I shall place mine, just as Ms. Croft, in the consequences of scientific investigation.
Regards,
Gary Marshall
Gary: Not silent at all, as you can see if you refresh screen. (Or just silently writing). But look, Stephen and I are not obliged to write a post to satisfy every demand for an explanation of something. We aren’t trained seals who perform for a fishy $1k waved above our noses.
JKH gave you a good answer. I have now added mine. Because I felt like it. It’s a question that has interested me for some time, and my views are perhaps not orthodox. Read it, and mind your manners please.
Hello Mr. Rowe,
Gibberish and senseless prattling do not constitute good answers. I responded to JHK’s argument and his erroneous premises and have yet to hear a word.
If the central banks have the powers asserted by both JHK and Mr. Gordon, who gleefully rebukes others for their supposed ignorance, then the mechanism of such control must be irrevocably clear. Unfortunately, neither have the words to make the proof clear. Not even a small financial reward for a person or favoured charity will induce the hoped for answer.
Not even you, Mr. Rowe, will accept the challenge.
I have sought such an answer for years. I have offered as much as $8000 to any person who could furnish a simple explanation to a facile question. But ‘how’ does not register with any economist speaking of the marvels of the central bank because the means does not exist. It is a myth.
How strange that so many eminent and learned people will continue to knowingly repeat an unsound and illogical statement! How poor a condition economics must be in when none within its sphere challenge this patent fraud!
Yuri Geller, the magician, has a cheque in his pocket in the amount of $100,000US. He will write it to any person that can demonstrate some unusual ability. He has devised a number of tests for the challenger. To this day he laments never having parted with his money. His retention of these funds is a swift and powerful confirmation of the absence of any such abnormal ability despite the myriads of declarations.
I do try to maintain a pleasant bearing, but it is difficult in such bewildering circumstances.
Perhaps you should also caution those who would smear others for their purported illiteracy when the known facts vindicate them or at least leave the matter in dispute.
Mr. JHK has said that the central banks have a monopoly on reserves when almost any person within and many without the field of banking know the opposite to be true. His entire argument collapses because of this overt blunder. Are you willing to ally yourself with his cause?
Regards,
Gary Marshall
Gary, I think we’ve had quite enough of that. Be civil, or be gone.
Gary: did you read my post? And the many comments on it? I think you must have missed it.
Hello Stephen and Nick,
I am being cordial. I have yet to impute illiteracy to any person, which attribution, confirmed errant by the lack of any evidence, has occasioned the entire exchange.
I am now waiting for a simple answer to a clear question as I have done for a decade. Many will tell me in the course of hours and days in numerous posts how powerful the Bank of Canada is; how impressive its arsenal is; how persuasive they are; how offensive, aggressive, persistent, and arrogant I am. Yet none will spend 2 minutes to divulge the source of all this power, the BofC’s supremacy in the financial markets.
How very odd!
No one at this time really knows who I am and they deal with me as lightly as they would with one of their fawning students. That is a big mistake.
I am not gently prodding and meekly deferring to those whose claims assault all sense and reason. The method I employ is known as the Socratic method, and I believe it earned the inquisitor whose name it carries a death sentence.
Because of the apparent inability to furnish such enlightenment, one of you will eventually pervert some comment of mine and employ it as pretext to prevent further participation and, perhaps, further embarrassment. I shall accordingly cease posting now.
However, the Post is not so inclined to such censorship and there you will find me eager to challenge and refute.
Regards,
Gary Marshall
Hello Stephen and Nick,
I am being cordial. I have yet to impute illiteracy to any person, which attribution, confirmed errant by the lack of any evidence, has occasioned the entire exchange.
I am now waiting for a simple answer to a clear question as I have done for a decade. Many will tell me in the course of hours and days in numerous posts how powerful the Bank of Canada is; how impressive its arsenal is; how persuasive they are; how offensive, aggressive, persistent, and arrogant I am. Yet none will spend 2 minutes to divulge the source of all this power, the BofC’s supremacy in the financial markets.
How very odd!
No one at this time really knows who I am and they deal with me as lightly as they would with one of their fawning students. That is a big mistake.
I am not gently prodding and meekly deferring to those whose claims assault all sense and reason. The method I employ is known as the Socratic method, and I believe it earned the inquisitor whose name it carries a death sentence.
Because of the apparent inability to furnish such enlightenment, one of you will eventually pervert some comment of mine and employ it as pretext to prevent further participation and, perhaps, further embarrassment. I shall accordingly cease posting now.
However, the Post is not so inclined to such censorship and there you will find me eager to challenge and refute.
Regards,
Gary Marshall
Sorry about posting twice.
GM
Mr. Marshall, Prof Rowe has answered it here.
Gary: I think you misunderstand me. Did you read my new post on “What makes a bank a central bank”?
Thanks edeast. I once knew how to do links in comments, but my computer literacy is not up to snuff.
Hello Mr. Rowe,
I read through the post offered as an explanation of central bank power. The problem with it is called equivocation. You are attempting to define an object, in this case money, in 2 different ways: Currency as money, which is acceptable, and money as currency, which is not acceptable.
The source of the error is not yours. It is to be found in every modern economics textbook. Is it any wonder that so many learned people blunder on this subject.
What is the standard definition of money: unit of account, store of value, and medium of exchange. This is not a definition of what money is, but rather what it does. It is a functional definition and one quite worthless for the task.
Imagine me defining water as: boiling at 100 C, or freezing at 0 Celcius. It is insufficient as a proper definition.
So let’s correct the mistake.
Currency is money, but it is one component and a small one, comprising about 5% of the stock of money in existence in this country.
There are $50 billion in Canadian dollar notes circulating mostly within Canada. However, there is over $1 trillion in Canadian dollars in existence. That money comprising the other $950 billion or more exists only in bank records. It has no physical existence. It is ethereal money, but it does exist. One just cannot physically hold it.
I shall admit that certain economists do distinguish between currency, calling it outside money, and ethereal money, calling it inside money. But they do not carry the distinction very far.
There are several differences between these 2 forms in creation and in operation. Most important is that currency or outside money earns no interest, whereas ethereal or inside money does. This is the primary reason that banks and people will hold as little currency as possible, just enough to fulfill their immediate financial obligations.
Mr. Rowe, you are attempting to equate currency with money when the definition only works about 5% of the time.
Here is what you said in your central bank article,
Suppose that under the gold standard, two large firms controlled gold mining. All banks promise to redeem their paper money for gold at a fixed rate,
Let us say that there are 100 ounces of gold in circulation. With the creation of money through the loans process, the relationship between currency and money is forever rent.
There is one bank in a community. It has no loans and liabilities of 100 gold coins to 1 depositor known as A. It lends out 100 coins to B. The bank has assets of 100 coins and liabilities of 100 coins after B has withdrawn the coins. B pays C for a service and C deposits the coins. The bank then has liabilities of 200 coins, 100 to A and 100 to C. It has assets of 200 coins in a loan of 100 to C and in currency on hand of 100 coins. The bank then lends out the 100 coins to D and shows assets and liabilities of 200 each when D withdraws the money. After repeating the process of loan, withdrawal, exchange, deposit a few times, the bank will have assets and liabilities at some point of say 1000 coins.
How many coins are in existence, Mr. Rowe?
I shall stop here for the moment to let you answer.
Regards,
Gary Marshall
Gary: “Currency is money, but it is one component and a small one, comprising about 5% of the stock of money in existence in this country.”
Yes, I know. That’s why in my example banks A and B both issue notes. And you can think of the notes of both banks as serving equally well as money. And there’s nothing in my example that says that A and B have to be the same size. B (or all the B’s put together), could be 19 times as big as A. So how can A have so much power over interest rates, when it only issues 5% of the notes? That’s the question I tried to answer.
“How many coins are in existence, Mr. Rowe?” 100 coins, as you said, but (if the deposits are chequeable, so we can count those deposits as media of exchange) the money supply is the same as if there were 1,000 coins and no bank. Standard banking system multiplier. Standard textbook stuff, if I understand you correctly.