On 11/22/2013 8:25 PM, [log in to unmask] wrote:
> I am aware of Robertson's (1957) puzzling treatment of
> banks as financial intermediaries.  I write elsewhere
> (_Classical Macroeconomics_, p. 53) that "Robertson's
> description of banks as intermediaries between savers and
> borrowers (investors) [on pages 41-42] does not appear to
> be consistent.  He frequently treats banks as institutions
> capable of extending credit (loans) without relying on the
> deposits of savers, just Wicksell (1898), Fisher (1912),
> Pigou (1927, 123-4), and Keynes (1930, 1: 25-30)."




James seems to be relying on an ambiguity in the phrase
"relying on", perhaps introducing a stock-flow confusion.
A bank may certainly extend a loan (acquire a new asset)
without any corresponding change in stock of deposits
(liabilities).  It may give up some *asset* in exchange for
the new one, but this is just a portfolio adjustment. For
example, it may now have a new loan but lower reserves.

Nor need this loan involve any saving or dissaving.
(The borrower might for example use the loan
to pay off another loan.)

But the idea that a loan may be made out of "thin air"
is the idea that a bank can create a loan and a deposit
at one go (which is often the case), acquiring an asset
and a liability of equal size.  At the time of creation,
there is no other change, so the "thin air" description
seems fine.  James objects I think because it sounds like
a "thin air" process could go on forever, unconstrained.
And it seems he also wants to object to this simple
relationship between *stocks* by worrying about what will
happen over time, when the deposit is spent as a *flow*.
We can tell all the stories we want, but there a many
possibilities, and we leave it to banks to manage the
dynamic interactions with their depositors and borrowers.
And worrying about liquidity is different than worrying
about solvency.

The money multiplier is a relationship between stocks.
The size of the money supply (say, M1) depends in no way on
the flow of savings.  In the end, much of M1 is deposits
not cash. (The "thin air" phenomenon ...)
Maybe what Keynes was saying is not so puzzling after all.

Cheers,
Alan Isaac