[발췌 5장: Keynes's Tract on Monetary Reform] #5. Positive Suggestions for the Future Regulation of Money

자료: J. M. Keynes, A Tract on Monetary Reform (1923)

※ This is a reading note with excerpts taken, and personal annotations and remarks added, in trying to understand the above text. So, visit the above source links to see the original.

※ 발췌/ excerpts of which: chapter 5, p.177 (p. 184 on PDF) ~

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Chapter 5_  Positive Suggestions for the Future Regulation of Money

A sound constructive scheme must provideㅡif it is to satisfy the arguments and the analysis of this book:

I. A method for regulating the supply of currency and credit with a view to maintaining, so far as possible, the stability of the internal price level; and

II. A method for regulating the supply of foreign exchanges so as to avoid purely temporary fluctuations, caused by seasonal or other influences and not due to a lasting disturbance in the relation between the internal and the external price level.

  I believe that in Great Britain the ideal system can be most nearly and most easily reached by an adaptation of the actual system which has grown up, half haphazard, since the war.  After the general idea has been exhibited by an application in detail to the case of Great Britain, it will be sufficient to deal somewhat briefly with the modifications required in the case of other countries.


I. Great Britain

The system actually in operation to-day is broadly as follows:

  (1) The internal price level is mainly determined by the amount of credit created by the banks, chiefly the Big Five; though in a depression, when the public are increasing their real balances, a greater amount of credit has to be created to support a given price level (in accordance with the theory explained above in Chapter 3, p. 84) than is required in a boom, when real balances are being diminished.

  The amount of credit, so created, is in its turn roughly measured by the volume of the banks' depositsㅡsince variations in this total must correspond to variations in the total of their investments, bill-holdings, and advances.  Now there is no necessary reason ^a priori^ why the proportion between the banks' deposits and their "cash in hand and at the Bank of England" should not fluctuate within fairly wide limits in accordance with circumstances.  But in practice the banks usually work by rule of thumb and do not depart widely from their preconceived "proportions."[1]  In recent times their aggregate deposits have always been about 9 times their "cash."  Since this is what is generally considered a "safe" proportion, it is bad for a bank's reputation to fall below it, whilst on the other hand it is bad for its earning power to rise above it.  Thus in one way or another the banks generally adjust their total creation of credit in one form or another (investments, bills, and advances) up to their capacity as measured by the above criterion; from which it follows that the volume of their "cash" in the shape of Bank and Currency Notes and Deposits at the Bank of England closely determines the volume of credit which they create.

  In order to follow, therefore, the train of causation a stage further, we must consider what determines the volume of their "cash."  Its amount can only be altered in one or other three ways: (a) by the public requiring more or fewer notes in circulation, (b) by the Treasury borrowing more or less from the Currency Note Reserve, and (c) by the Bank of England increasing or diminishing its assets.[1]

[1] For the aggregate of its liabilities in the shape of deposits and of notes in circulation automatically depends on the volume of its assets.

  To complete the argument, one further factor, not yet mentioned, must be introduced, namely (d) the proportion of the banks' second-line reserve in the shape of their holdings of Treasury Bills, which can be regarded as cash at one remove.  In determining what is a safe proportion of "cash," they pay some regard to the amount of Treasury Bills which they hold, since by reducing this holding they can immediately increase their "cash" and compel the Treasury to borrow more either from the Currency Note Reserve or from the Bank of England.  The nine-fold proportion referred to above presumes a certain minimum holding of Treasury Bills, and might have to be modified if a sufficient volume of such Bills was not available.  This factor (d) is, however, also important because the banks in their turn are open to pressure by the Treasury, whenever it draws to itself the resources of their depositsㅡwhenever by taxation or by offering them attractive longer-dated loansㅡand uses them to pay off, if not Ways and Means advances from the Bank of England (which reduces the banks' first-line reserves of cash), then alternatively Treasury Bills held by the banks themselves (which reduces their second-line reserve of bills).

  ( ... p. 180, p. 187 on PDF ... ) ※ Much valuable comments to follow afterwards.