bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

THE MONEY SUPPLY PROCESS 51
deposits and maybe other assets, exactly which assets are included will vary
from one system to another. This merely reflects what we said in Chapter
1, namely that different monetary systems have different institutional structures
and these structures change over time. What is accepted as money in
one system is not necessarily treated in the same way in another. To illustrate
the point, we show the components of broad and narrow monies in the
UK, the eurozone and the USA in Box 3.1. The box also gives an indication
of the relative magnitudes of the three measures.
In this chapter, we are going to explore how changes in the quantity of
money occur. For this purpose, ‘money’ consists of notes and coin in circulation
outside the banking system plus a comprehensive range of bank
deposits. It corresponds roughly, therefore, to the national measures of
broad money in Box 3.1 and is dominated by bank deposits. The magnitude
of bank deposits is important for two reasons. Firstly, it should alert us to
the fact that changes in the quantity of money are the outcomes of an interaction
between the preferences of banks, their customers and the monetary
authorities: the quantity of deposits will not expand (for example) unless
banks can find a profitable return from marginal additions to loans and
deposits and clients wish to add to loan and deposit portfolios on current
terms. Secondly, it should alert us to the likely difficulties that monetary
authorities will face when they try to constrain the growth of money and
credit. It is not a simple question of modifying their own actions but of
modifying the actions of other agents who have no particular interest in cooperating
to further the authorities’ objectives: indeed, these agents may
well feel that the authorities’ actions are designed to frustrate their own selfinterest.
Before we begin, it is worth noting that what we are describing here is a
particular set of institutional arrangements which, while their familiarity
may give them a sense of permanence, have not always prevailed. Money
has not always consisted of bank deposits and its quantity has not always
involved the interaction between the income-expenditure decisions and
portfolio preferences of non-bank agents, and the profit-seeking behaviour
of banks. Over the years, the importance of a correct understanding of monetary
institutions as an essential prerequisite for the understanding of how
money ‘works’ has been stressed by a number of writers (Hicks 1967, Dow
1988, 1996, Niggle 1990, 1991, Goodhart, 2002). The best results from
consistently applying this principle are revealed in the work of Victoria
Chick (for example, Chick 1986, 1993, 1996).
There are broadly speaking two approaches to the analysis of money
supply changes and both involve the manipulation of a series of (related)