Mr. Crockett, Chief of the Special Studies Division of the Research Department, is a graduate of the University of Cambridge and of Yale University.
Manfred Willms, “Money Creation in the Euro-Currency Market” (unpublished, International Monetary Fund, December 17, 1975), contains an up-to-date list of references.
See, for example, Geoffrey L. Bell, “Credit Creation Through Euro-dollars?” The Banker, Vol. 114 (August 1964), pp. 424-502; Alexander K. Swoboda, “The Eurodollar Market: An Economist’s Point of View,” in The Eurodollar, ed. by Herbert V. Prochnow (Chicago, 1970), pp. 294–315.
This is the central point of the “New View” of financial markets. See John G. Gurley and Edward S. Shaw, Money in a Theory of Finance (The Brookings Institution, Washington, 1960); James Tobin, “Commercial Banks as Creators of ‘Money,’” in Banking and Monetary Studies, ed. by Deane Carson (Homewood, Illinois, 1963).
The analogy is from Tobin, op. cit.
The distinction between money and nonmoney is probably overdrawn, however. The existence of nonbank financial intermediaries that grant loans and issue liabilities presumably allows economies to be achieved in money holding. If, for example, savings and loan institutions were closed down by ordinance, and their business absorbed into the banking system, the time deposit liabilities of banks could presumably rise without a corresponding loosening of credit conditions.
For completeness, it should be noted that some small “cushion” of excess reserves has value to a bank in facilitating portfolio management decisions. The size of this cushion may be responsive to relative interest rates, and this would tend to reduce the precision with which the reserve asset multiplier could be used to predict changes in the money stock. However, since excess reserves are normally a small proportion of the total stock, it is a permissible simplification for present purposes to regard the reserve ratio as fixed.
This was indeed explicitly stated as a reason for reserve requirements in the new British arrangements for controlling the banking system introduced in 1971. See Bank of England, Quarterly Bulletin (December 1971), pp. 477-81.
The costs and returns involved must, of course, be understood to include nonpecuniary factors, such as liquidity.
Ranging from 0.50 to nearly 100. See Willms, op. cit.
Because not all assets can be invested in interest-earning form, however, the marginal yield on investments will be higher than the marginal cost to the individual bank of attracting funds.
See, for example, Malcolm Knight, “Euro-Dollars, Capital Mobility, and the Forward Exchange Market” (unpublished, International Monetary Fund, December 17, 1975).
For an ingenious attempt to construct a simplified model along these lines, see John Hewson and Eisuke Sakakibara, “The Euro-Dollar Deposit Multiplier: A Portfolio Approach,” Staff Papers, Vol. 21 (July 1974), pp. 307-28. This paper also contains a useful theoretical critique of the fixed multiplier approach.