Abstract
The displacement of barter economy by the monetary economy required a continuous increase in the quantity of money according to the increase of trade and production. As long as money was just pieces of silver and gold, the quantity of money could only be increased by digging up more gold and silver. The rate of increase was very low. This first changed with the discovery of the Americas, resulting in a flood of gold and silver which, via Spain and Portugal, spread throughout Europe, chiefly to France, the Netherlands, and England. Prices rose, and there was also a demand for ever greater amounts of money, since the influx of gold and silver coins had stimulated trade and commerce, whose growth in turn depended on increasing amounts of coins. Therefore, the coinage was often debased creating alloys of gold and silver with less valuable metals. But this brought great disorder to the monetary system.
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Notes
- 1.
On the controversies related to the creation of money, see Bernd Senf (2005, pp. 88–110).
- 2.
“Banks are institutions whose debts—usually referred to as ‘bank deposits’—are commonly accepted in final settlement of other people’s debts.” R. Sayers (1964, p. 1)
- 3.
Josef Ackermann describes cash holding by banks in detail as follows: It “consists of central bank money, hence of cash and on demand credit balances at central banks. If for the time being we consider only the connections between credit institutes and the non-banking sector, changes in the cash balance arise from the demand for notes and the supply of notes by the banks arising from their deposit and credit activity. A credit bank needs central bank money so that it can make payments related to the activity on its asset and liability accounts. Such payments have to be made to creditors of the bank who want central bank money, or to borrowers who wish to make a withdrawal in notes on the credit they possess. They also have to be made to other credit institutions in the course of transactions arising if customers make a transfer to an agent who has an account at another bank. … Since it is usually the case that payments in and out of a bank in central bank money over any one period generally coincide, the bank only needs to hold a relatively small amount of central bank money to secure its liquidity. … Credit institutions can therefore reduce their cash balances in relation to turnover to a far greater degree than firms can. They can not only for the most part constantly balance the demand for and supply of notes in their transactions with the non-banking sector; they are also able to iron out peaks in payments among themselves through the clearing system. In addition to this a credit institution can purchase central bank money. If for example the prevailing level of cash holdings is smaller than the desired and necessary balance, central bank money is demanded by the banks and offer in exchange secondary liquid assets. Such secondary liquid assets are especially money market paper, rediscountable bills and securities. The actual level of cash held becomes a balance resulting from transactions with the non-banking sector, reduced by excess supply or increased by excess demand of central bank money in the money market” (Ackermann 1977, 112f.).
- 4.
This does not prevent the creation of money being treated as ex post savings in national income accounts, since all income that is not consumed is treated as “saving,” and in a closed economy investment is always equated ex post with savings, so that ex post the equation I = S can be assumed.
References
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Binswanger, H.C. (2013). Money and Money Creation in a Two-Stage Banking System. In: The Growth Spiral. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-31881-8_4
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