Political Economy Of Money and Finance by Makoto Itoh & Costas Lapavitsas

Author:Makoto Itoh & Costas Lapavitsas
Language: eng
Format: epub

7 Central Banking

Central banks possess and utilise an element of economic rationality in the anarchical world of capitalist finance and accumulation. Consequently they have long been the object of the reformist zeal of credit practitioners and political radicals. They have also been subjected to withering criticism by those who think that the inherent instability of capitalist accumulation originates in money and finance. This chapter argues that there are narrow limits to the effectiveness of central bank operations determined by capitalist accumulation. That is not to negate the element of conscious policy-making and the possibility of partial success of central bank operations. However the crisis-ridden character of the capitalist economy cannot be abolished by central banking, regardless of the experience of the central bankers and the erudition of their economic advisers.

7.1 THE NATURE OF THE CENTRAL BANK

7.1.1 Bank of Banks

The central bank is the apex of the pyramid-like capitalist credit system. Participation in the main money market enables ordinary banks to pursue their lending business flexibly, and without issuing their own banknote liabilities. In order to maintain the adequacy of their reserves, such banks rely on deposit accruals, regular debt repayment and borrowing in the money market. The efficiency and flexibility of their lending business can be further increased through the centralisation of their reserves. Just as industrial and commercial capitalists economise on their reserves of idle money by depositing funds with a bank, so banks economise on their reserves by depositing funds with a central bank. The most elementary function of a central bank as bank of banks is to hold a centralised reserve for the banking system as a whole. Several important implications follow from this function.

The existence of a centralised reserve enables individual banks systematically to turn their own reserves from accumulations of ready money into accumulations of claims on others (above all, on the central bank). This process is again analogous to the transformation of the hoards of individual capitalists into claims on banks (Marx, 1894, p. 600). As shown in Chapters 4 and 6, a spontaneously established capitalist credit system is underpinned by commodity money. Consequently the reserves of the central bank are a hoard of gold. Although individual banks, especially those in local areas, must also hold some quantity of gold coin to meet the requirements of local circulation, the largest part of a country’s hoarded monetary gold becomes the reserve of the central bank. The main point of access to hoarded commodity money in advanced capitalist economies is provided by the liabilities of the central bank. Thus the gold hoard of the central bank can slowly assume a national character, it can become the national hoard of a capitalist economy.1

Given that it possesses the centralised banking hoard, the balance the central bank maintains between its liabilities and its reserves is critical for the operations of the banking system as a whole. As discussed in Chapter 4, the reserve requirements of individual banks are determined empirically and have an elastic relationship with the banks’ lending operations.

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