More From Nicholas Kaldor

In a recent post, I quoted Kaldor and got a lot of response on what I quoted. So a post on more from the book The Scourge Of Monetarism from the early 80s.

In the following PSBR is Public Sector Borrowing Requirement – the term used often in the UK for net market borrowing of the UK Treasury for a given period such as a month/quarter/year.

The following appears in the Part II of the book. The Select Committee of the House of Commons on the Treasury and the Civil Service ordered an enquiry into monetary policy and Kaldor was invited to write on this in 1980. The whole text appears in the book and the following appears on pages 48-50:

In the Green Paper on Monetary Control of March 1980 it is asserted that ‘it is sometimes helpful to examine how a particular control will affect items on the asset side of the banking system’. The Paper then proceeds to state an accounting identity which shows the change in the money stock (£M3) in a given period as the sum of five separately identified items, of which PSBR is one (though it is not claimed that the five items are mutually invariant).

In my view it may be more helpful to view the effects of the PSBR on the asset side of the non-banking private sector, both at home and overseas. The PSBR in any year can be defined as the public sector’s net de-cumulation of financial assets (net dissaving) which by accounting identity must be equal to the net acquisition of financial assets (net saving) of the private sector, home and overseas; which in turn can be broken down to the net acquisition of financial assets of the personal sector, of the company sector, and the overseas sector (the latter is the negative of the balance of payments on current account). Ignoring capital flows of existing wealth to and from the country, the change in liabilities of the banking system is thus equal to that part of the net saving (or the net increment of financial assets) of the home and overseas private sector which persons and companies wish to hold in the form of sterling bank deposits as against other financial assets (such as ‘bonds’ or ‘gilts’) and which in turn is equal to that part of the PSBR which is financed by the addition of the banking system’s holding of the public sector debt.

The main monetarist thesis is that the net dissaving of the public sector is ‘inflationary’ in so far as it is ‘financed’ by the banking system and not by the sale of debt (bonds or gilts) to the public. But this view ignores the fact that the net saving, or net acquisition of financial assets of the private sector will be the same irrespective of whether it is held in the form of bank deposits or of bonds. The part of the current borrowing of the public sector which is directly financed by net purchases of public debt by the banking system – and which has its counterpart in a corresponding increase in bank deposits held by the non-banking private sector – is as much part of the net saving of the private sector as the part which is financed by the sale of gilts to the private sector. When the public sector’s de-cumulation of financial assets increases (i.e. the PSBR increases) there must be an equivalent increase in the net savings of the non-bank private sector (home and overseas) as compared with what net savings would have been with an unchanged PSBR which will be the same irrespective of how much that saving takes the form of purchases of gilts and how much takes the form of an increase in deposits with the banking system. The decision of how much of the increment in private wealth is held in one form or another is a portfolio decision depending on relative yields, the expectation of future changes in interest rates (long and short), and the premium which the owners are willing to pay for ‘liquidity’ – i.e. the possession of command over resources in a form that can be directly applied to extinguish debts or to meet financial commitments.

But it is a mistake to think that an individual’s spending plans (whether in a business or in a personal capacity) are significantly affected by the decision of how much of his wealth he decides to keep in the form of ‘money’ (broadly or narrowly defined) as against other financial assets that are readily convertible into money (including available overdraft facilities). It is equally mistaken (in my view) to assume that the part of current private saving which is held in the form of additional bank deposits gives rise to additional lending by the banks to the private sector, whereas the part which is held in the form of bonds does not. In the former case, the increase in the bank’s liabilities to depositors is matched by a corresponding increase in the banks’ holding of public sector debt.

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