Thanks you Thomas, most helpful. May I pick your central banking brain further to guide me into what for me is a new area? 

I presume that c (the public’s desired cash/deposit) is relatively stable?

And that r (the bankers’ desired reserves/deposit ratio) has been sabotaging monetary policy intentions? 

Why does the Fed use "primary dealers" with long histories of fines and penalties? 

Banks have historically come to the Discount Window (e.g. in what is now the cafeteria of the New York Fed) when they require assistance. Why doesn't the Fed operate monetary policy *directly* through the banks that they wish to encourage to make loans?  

Is there any literature on the flows between the primary dealers and their secondary customers? E.g.: the Fed creates reserves by crediting MF Global's account - is there any literature on what MF Global does with those reserves (if they are acting on behalf of a secondary customer, the reserves will presumably be transferred out of their account - minus a commission?)     

________________________________________
From: Societies for the History of Economics <[log in to unmask]> on behalf of Thomas Humphrey <[log in to unmask]>
Sent: Monday, September 14, 2015 12:29 PM
To: [log in to unmask]
Subject: [SHOE] Leeson on the equation of exchange.

Robert Leeson (Sept. 12) asks of the equation of exchange: “Does it — anywhere — address the connection between M (currency + deposits) and the monetary base (currency + reserves)?”

Indeed it does. One merely substitutes for M in the exchange equation MV = PY the identity Bm(c, r) = M relating the base B to the broad money stock M by means of the money multiplier m(c, r), an inverse function of the public’s desired cash/deposit ratio c and bankers’ desired reserves/deposit ratio r. The result is an expansion of the exchange equation to take account of the base and the money multiplier, or Bm(c,r) = PY.

In the recent financial crisis and accompanying recession, two-, three-, and even fourfold increases in the base B were largely offset by compensating falls in the multiplier m. These falls nullified or severed the transmission of stimulus from the base B to the broad money stock M. This happened partly because bankers took advantage of the Federal Reserve’s payment of positive interest on excess reserves to hold larger-than-normal amounts of those reserves — raising the reserve/deposit ratio r — rather than lending those excess reserves out in the form of newly created deposits. The rise in the reserve ratio r produced the fall in the multiplier m that partly negated the base’s B’s impact on M.