Reforms in China’s Monetary Policy Reforms in China’s Monetary
parties will increase the credit claims and debts to the other party, which
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parties will increase the credit claims and debts to the other party, which results in a simultaneous increase of both assets and liabilities in both par- ties’ balance sheets. Banks receive loan assets and deposit liabilities, whereas clients receive loan liabilities and deposits assets. This kind of exchanges is beneficial to both parties: banks receive the income of interest spread, and clients receive the assets accepted by others—the money—at the cost of the interest spread. In the analysis of conventional money theory on money creation, money is derived from the funds that are deposited by clients in banks. “The differ- ence between deposits and their required reserves may create deposits up to several times of the initial deposits, which is the result of the overall oper- ation of the process. If we look at every deposit and loan, there are always economic activities based on real money (or the real ‘funds’ that we used to say), and there is no sense of ‘creating’ from nowhere. In general, in view of the relations between banks and clients, neither any depositing activity nor any lending activity has ‘created’ money” (Huang, 1998). According to the conventional money theory, there is always a time dif- ference between the creation of deposits and that of loans. Therefore, we need to analyze whether the assets give rise to liabilities or liabilities give rise to assets, so that the simple fact has thus become a tangled “the chicken or the egg” puzzle. In reality, loans and deposits emerge at the same time when banks make loans. Cash is not an initial form of money because cash is always generated from the withdrawal of deposits; cash is either changed from hands to hand or is converted into deposits once again, becoming an interim form in the process of deposit changes. In the credit monetary system, if banks’ assets are limited to loans and required reserves, then every deposit in the society is originated from bank loans. 4 Cash emerges from the generation of bank loans, and deposits are exchanged among the nonbank public, per- haps through transitional cash movement. If we look at the source of every deposit, we will surely find out the corresponding loan. If banks have asset trading business, every deposit will have the corresponding asset such as for- eign exchanges and bonds. Bank loans create deposits, and money creation takes place and only takes place through banks’ lending activity. When banks make loans, deposit money is created, and this is the money creation mechanism. Transfer of deposit money 5 leads to the transfer of the same amount of monetary base held by 24 ● Reforms in China’s Monetary Policy banks. Bank adjust their own lending activities according to the changes of the monetary base, which is banks’ operating issues after the money creation process. 2. The conventional money theory confers the money creation function only to banks as a whole, whereas this chapter believes that the money crea- tion function belongs to individual banks. In the conventional money theory, extending loans is making the fund made available to clients. At the time of loan extension, deposits are not yet created, and clients need to deposit the borrowed funds and then deposits will be created. As for the money creation process in the conventional money theory, the deposit money is not created, but “deposited” by clients. This apparently contradicts with banks’ creation of credit money under the credit monetary system, making the conventional money theory very hard to under- stand. If this money creation process happens in an individual bank, it will be more difficult to understand. To solve this problem, other individual banks need to be involved to build a banking system, so there seems to be a funda- mental difference between an individual bank and the whole banking system. “Every individual bank only absorbs but does not create deposits; however, for the banking system as a whole, the deposit money is created on the basis of ini- tial deposits.” (Huang, 1999). Any increase or decrease of assets by banks can cause expansion or contraction of deposits. However, this cumulative expan- sion and contraction process does not occur in any individual bank, but in the entire banking system. Bankers tend to believe that banks should have deposits first and then extend loans and make investments. This is a conclusion in view of individual banks. From the perspective of the entire banking system, any bank’s lending and investment activities can ‘create’ deposits. (Rao, 1983). In fact, to create liabilities by increasing assets and thus creating money is neither the central bank’s privilege, nor can it only be realized through many rounds of depositing and lending activities by an individual bank. It is not the fantastic outcome by gathering many individual banks together as a whole. Instead, it indeed takes place in every lending activity of every commercial bank, and therefore it belongs to every individual bank. As for increasing asset to create deposit money, there is no essential difference between banks and the central bank. 3. The conventional money theory divides deposits into “original depos- its” and “derived deposits,” which makes no sense in both theory and prac- tice. This chapter disagrees with such distinction. The original deposits in the conventional money theory are the deposits initially absorbed by clients, and the derived deposits means that commercial banks lend out the remaining part of the deposits they absorbed after setting aside a certain amount of required reserves. What are original deposits? If Monetary Theory ● 25 they are deposits transferred to this bank from other banks, then the bank can lend out this money to create more deposits that clients can withdraw and deposit in another bank. Therefore such derived deposits will become original deposits of another bank. If they are the cash absorbed by the bank, we should recognize that the only source of the cash is the withdrawal of deposits, and there is no such thing as “the central bank puts cash into circu- lation, and the public deposits the cash in the bank.” For banks as a whole, at the initial stage when a credit monetary system is established, the public has no cash. Only when banks have generated deposits by extending loans or acquiring assets can the public convert deposits into cash. To meet the grow- ing demand for commodities and financial assets trading, the public’s cash holding is also growing, which is reflected in the fact that within a certain period of time, banks put more cash into circulation than that they withdraw from circulation. Consequently, banks as a whole cannot possibly get mone- tary base from the nonbank public. Therefore for banks as a whole, the so-called original deposits do not exist in theory or reality. If derived deposits refer to deposits generated from bank loans, then all deposits are “derived deposits.” Deposits are all created by banks, and the increase of aggregate deposits of banks as a whole only indi- cates that banks have created more money. Both in theory and practice, the conventional money theory adheres to the commodity money idea of “depos- its generate loans,” and to explain how deposits emerge, it argues that “loans generate deposits.” However, this leads to the “the chicken or the egg” puzzle. To solve this problem, the conventional money theory creates the concept of original deposits. But this original deposits concept fails to justify the theory; on the contrary, it gives rise to a bigger flaw: If the original deposits come from cash, where does the cash come from? The ultimate source of the cash is the required reserves in the central bank. Because of the doctrine that banks absorb deposits to make loans, the conventional money theory has to adhere to the concept of original deposits. In the conventional money theory, in respect of money creation, the idea on the balance sheet at the initial stage is also unclear. If the initial balance sheet inferred from the simplest assumption indicates that there is only one bank in the banking system or in the society, then loans should be greater than deposits, and the results of further derivation should be the same. But in the initial balance sheet and the follow-up deduction in all kinds of text- books, deposits are greater than loans. tải về 1.53 Mb. Chia sẻ với bạn bè của bạn:
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