Publications
Search by
1657 publications found
-
Working Paper No.90
10 April 1993
Narrow Banks
AbstractRecent banking problems have prompted a variety of proposals for reforming deposit insurance and the banking system. Nearly all of these proposals, however, suffer from a common flaw—they would fail to create a banking system that is both stable and free to respond to market forces and financial developments.
Narrow banking offers a possible means for accomplishing these objectives. Narrow banking would create a stable payments system by backing transaction deposits with only those assets that are truly appropriate for this task – marketable securities with virtually no interest rate or credit risk. As a result, narrow banks would essentially be "fail-safe" institutions and could operate without the inherent weaknesses of the current system. They would not pose a risk to depositors, taxpayers, or federal authorities and, unlike commercial banks, would not require extensive governmental support and intervention. These features of narrow banks would allow market forces to guide everyday banking decisions and the activities of any affiliated firms, thus returning the market to its proper role in allocating financial services.
In many respects, narrow banking mirrors another banking reform that took place in the 1860s—the use of U.S. Government securities to back national bank notes. This earlier reform and the following change to Federal Reserve Notes collateralized largely by U.S. obligations have produced a stable currency and ended any public concern about its acceptability. This success provides strong evidence that narrow banking is a workable system that could stabilize our deposit system and its transactions function.
Narrow banking, much like this earlier reform, appears to involve a dramatic change in the banking system. However, recent financial trends are making narrow banking a less radical change than commonly believed. In addition, most of the other approaches to recent banking problems entail a movement toward greater regulatory and governmental control of our financial system and its credit allocation functions— a response that is unlikely to make banking a vibrant, competitive industry. All of these factors thus suggest that narrow banking deserves careful consideration in efforts to reform the financial system.
Download Working Paper No. 90 PDF (2.30 MB) -
Working Paper No.89
01 April 1993
Profits for Economists
AbstractThere is no single best estimate of profits because different purposes require measures. For example, profits in national income should be different than profits in financial statements. But given these differences, there are certain economic standards that should apply to all profit measures. These standards are described and then used to evaluate the appropriateness of several currently available measures of profits including those reported by the National Income and Product Accounts, Internal Revenue Service, Quarterly Financial Report, Compustat, and Business Week.
Download Working Paper No. 89 PDF (2.26 MB) -
Working Paper No.88
10 March 1993
Limits of Prudential Supervision
AbstractBank supervision typically receives little if any attention when banks are operating without difficulty. But when banks fail in large numbers, or large banks fail, and the system itself is threatened, supervision becomes a focal point for criticism and reform (see, for example, Conference Report, 1998, Title I, IX; Pecchioli, 1987, pp. 11 ff.; and Comptroller General of the U.S., 1977). On such occasions, institutional changes may take equal billing with the "improvement" of supervision. But as often as not, the only thing Congress can agree on is that supervision needs to be better. This usually translates into more supervisors operating with more authority.
The repeated augmentation of bank supervision may give the impression that it is a solution rather that a symptom of recurring banking problems; and it is in the interest of supervisors to suggest that this is the case. Repeated disappointments about past performances never seem to undermine the promise that more and better supervisors, with more authority, will make things better in the future.
The historical record suggests that this is not true. There are, however, independent reasons for questioning whether, in and of itself, more supervisors with more restrictive authority will help very much. It is argued below that the promise of supervisory enhancement is an illusion traceable to the belief that ignores the limitations of supervision in dealing with the problems that actually exist. These limitations include: (1) the existence of an intractable economic problem confronting depository institutions; (2) at least two distinct institutional failures, a fragmented regulatory system composed of multiple agencies and the growth of opportunism among banking organizations, that make it difficult to formulate and implement appropriate policies; and, finally, (3) the inability of the existing supervisory establishment to deal with these economic and structural issues.
The nature of supervision is discussed. The limitations are reviewed in Section III, and the inadequacy of the current supervisory establishment to deal with the problems it must deal with to be successful is considered in Section IV. Some proposals to remedy the existing difficulties are presented in Section V. These include the consolidation of the "stand-alone" supervisory agencies with the monetary authority.
Download Working Paper No. 88 PDF (3.33 MB) -
Working Paper No.87
09 March 1993
The Psychology of Risk
AbstractRisk is commonly defined in negative terms-the probability of suffering a loss or factors and actions involving uncertain dangers or hazards. On the other hand, the term risk as used in the social sciences relies on simply the degree of uncertainty: It merely addresses how much variance exists among the possible outcomes associated with a particular choice or action. A counterintuitive example is the classifying of an investment that is certain to lose $5 as less risky than one that has an equal chance of yielding a gain of $10. Andreassen states that uncertainty and value are treated as separate entities because expanding the notion of risk to include gains as well as losses adds considerable conceptual power.
Economic theories based on perfect rationality are undoubtedly powerful. Andreassen states that id one wanted to predict human behavior in the simplest manner, one would certainly begin by assuming that people are motivated by self-interest, and that they can be extremely calculating when valuable opportunities arise, learning quickly from the success of others. Research on the psychology of risk does not begin by assuming that all human behavior is irrational, random, or thoughtless. Rather, this research has centered on how people may be biased by myriad social influences, the perceived choices available, or the cognitive rules of thumb used to simplify difficult economic and social decisions.
Download Working Paper No. 87 PDF (1.08 MB) -
Working Paper No.86
08 March 1993
The Origins of Money and the Development of the Modern Financial System
AbstractThe origins of money and banking are explained in nearly every introduction money and banking course, but Wray proposes an alternative approach that emerges from a comparative analysis of economic institutions. Orthodox theory suggests that barter replaced self-sufficiency and increased efficiency by fostering specialization- subsequently, establishing some object as a medium of exchange permits greater efficiency. In essence, the orthodox economist espouses the view that we operate in a free market economy in which "neutral money is used primarily to facilitate exchange of real goods, undertaken by self-interested maximizers for personal gain."
Institutionalists reject this argument because it emerges from the perspective of a rational economic agent facing scarce resources and unlimited wants-thus, the focus is on choice. Wray states that economic analyses must incorporate interactions between humans and nature, and that the economy is a "component of the material life process of society." Hence, the conventionalists’ focus on choice should instead be directed at production and distribution.
The Wray thesis suggests that money is necessarily endogenously determined: Monetary economies have not, and cannot, operate with exogenous money supply can function with a commodity reserve system, such a system is subject to periodic debt deflations. In sum, the monetarist policy prescription would be counterproductive to systemic stability and would not yield greater control of the money supply.
Download Working Paper No. 86 PDF (3.65 MB) -
Public Policy Brief No.4
03 March 1993
Public Infrastructure Investment: A Bridge to Productivity Growth?
AbstractThis brief presents contrasting views on the effects of public infrastructure investment on private sector productivity. David Alan Aschauer states that the slower rate of productivity growth since the early 1970s—coupled with an aging population, the declining proportion of workers to the total population, and other demographic factors—poses a dilemma for policymakers interested in strengthening the long-term relative position of the United States in an increasingly competitive global economic environment. He considers public infrastructure to be a factor in production and the decline in public capital to be responsible for part of the productivity slowdown. In contrast, Douglas Holtz-Eakin dismisses the conventional arguments for a federal infrastructure program by asserting that a large-scale public infrastructure program has no appreciable effect on productivity growth; in the current fiscal climate of scarce federal resources, a federal infrastructure program is not consistent with the goal of deficit reduction; there are better infrastructure strategies than new spending and massive construction programs; and policies aimed at increasing private rather than public investment will have a more positive impact on US competitiveness.
Download Public Policy Brief No. 4, 1993 PDF (8.87 MB) -
Working Paper No.85
10 February 1993
The Relationship between Public and Private Investment
AbstractThe relationship between government spending and aggregates such as output, employment, and prices has been the subject of many theoretical and empirical studies. Recently, however, interest has shifted to government spending on the provision of public capital (measured as fixed, nonresidential government capital) and various indicators of economic performance. Hence, government spending is now recognized to extend beyond the traditional view of strictly purchasing goods and services: The provision of public infrastructure has become an integral component.
Erenburg finds that empirical estimates from the short-run, first-difference model indicate that each additional one percentage point increase in public infrastructure and government investment spending is associated with an approximate three-fifths of a percentage point increase in private of a percentage point increase in private sector equipment were obtained by using the Stock-Watson method for testing for long-run relationships when variables are integrated of higher order, including different orders. These estimates indicate an increase of approximately two-fifths of a percentage point in private equipment investment per year. Projections reveal that if the rate of growth of public capital stock had continued from 1966 through 1987 at the 1947–1965 average annual growth rate (instead of decreasing), the growth rate of private sector equipment investment would have been between 4 to 6 percentage points above the actual rate of growth.
In addition to the impact on economic growth, Aschauer (1989) and Erenburg (1993) find a positive correlation between the public provision of infrastructure and private investment. As private investment activity enhances future growth of real income, these statistical results confirm that public policy has permanent effects on real output. The empirical results confirm that public policy has permanent effects on real output. The empirical results indicate that private sector equipment investment is inversely related to government investment spending and directly related to the existing public capital stock. Also, private equipment investment is much more sensitive to public provision of capital than either structures investment. These findings suggest that public infrastructure has an overall stimulative effect on private investment activity in the United States: In essence, these results verify Aschauer’s, while addressing concerns of spurious correlation.
Download Working Paper No. 85 PDF (1.70 MB) -
Working Paper No.84
07 February 1993
Migration of Talent
AbstractIn this paper, Rao tackles the reasons behind the increasing number and share of foreign students enrolled in Ph.D. economics programs in the U.S. The conventional argument of comparative advantage in U.S. graduate economics education fails to stand up under closer scrutiny. In addition to not explaining the actual and relative decline of American students pursuing graduate economics education, the traditional view fails to explain the relatively narrow scope of foreign students in these programs: The majority of foreign students come from a few Asian countries (e.g., India, South Korea, China, and Taiwan).
Among the questions posed in this paper are the reasons for the change in the proportion of foreign students over time, and the effect of this change on American graduate (and undergraduate) economics education. It is surmised that most foreign students enroll in American Ph.D. programs to facilitate their migration to this country. Given the relative ease of securing work permission as a university faculty member-for which a U.S. Ph.D. is essential-most foreign students view an American Ph.D. and a subsequent academic job as an ideal entree to the U.S.
In contrast, the most popular postgraduate path for American college economics majors is business or law school, and the appropriate strategy for these institutions is to offer a curriculum that fosters successful completion of an M.B.A. or J.D. via a general rather than a specialized economics training. Meanwhile, Rao ponders the possibility of "reverse foreign aid" occurring: After all, the home governments of these students are not compensated for their education subsidies through the undergraduate level. In sum, he suggests that the influx of foreign Ph.D. students—who typically receive financial aid from U.S. institutions—must be considered as a positive phenomenon. Since most of these students remain in the U.S. and become part of the vital stock of human capital, the financial aid awarded them should be regarded as an investment in a productive asset.
Download Working Paper No. 84 PDF (942.92 KB) -
Public Policy Brief No.3
01 January 1993
Community Development Banking
AbstractThis brief proposes that the establishment of a nationwide system of community development banks (CDBs) would advance the capital development of the economy. The proposal is based on the notion that a critical function of the financial system is not being adequately performed by existing institutions for low-income citizens, inner-city minorities, and entrepreneurs who seek modest financing for small businesses. The primary goals of the CDBs are to deliver credit, payment, and savings opportunities to communities not well served by banks, and to provide financing throughout a designated area for businesses too small to attract the interest of the investment banking and normal commercial banking communities.
Download Public Policy Brief No. 3, 1993 PDF (98.53 KB) -
Public Policy Brief No.3
01 January 1993
Τραπεζικό σύστημα κοινοτικής ανάπτυξης
AbstractΤο κείμενο προτείνει την εγκαθίδρυση ενός εθνικού συστήματος τραπεζών κοινοτικής ανάπτυξης για την προώθηση της κεφαλαιακής ανάπτυξης της οικονομίας. Η πρόταση βασίζεται στην άποψη ότι η υπάρχουσα χρηματοπιστωτική δομή είναι ιδιαίτερα αδύναμη όσον αφορά την εξυπηρέτηση ατόμων με χαμηλό εισόδημα, μειονότητες σε υποβαθμισμένες περιοχές του κέντρου και της πόλης, και μικρές και νεοσύστατες επιχειρήσεις. Οι πρωταρχικοί στόχοι των τραπεζών κοινοτικής ανάπτυξης είναι να προσφέρουν πίστωση, πληρωμές και προγράμματα αποταμίευσης σε κοινότητες που δεν εξυπηρετούνται επαρκώς από τις παραδοσιακές τράπεζες, καθώς και μορφές χρηματοδότησης για τις επιχειρήσεις που είναι πολύ μικρές για να προσελκύσουν το ενδιαφέρον των επενδυτικών και εμπορικών τραπεζών.
Download Κείμενο Δημόσιας Πολιτικής Νο. 3 PDF (558.90 KB) -
Working Paper No.82
01 December 1992
Job Quality and Labor Market Segmentation in the 1980s
AbstractThe authors examine the effects of employment restructuring in the 1980s on white, black, and Hispanic men and women within a labor market segmentation framework. Cluster analysis is used to determine whether jobs can be grouped into a small number of relatively homogeneous clusters on the basis of differences in job quality. With data centered on 1979, 621 occupation/ industry cells covering 94% of the workforce are analyzed with 17 measures of job quality, ranging from earnings and benefits to skill requirements and working conditions.
The paper finds strong support for dual and tripartite schemes that closely resemble those described, but never satisfactorily verified, by the segmented labor market (SLM) literature of the 1970s: the "primary" (independent and subordinate) and "secondary" segments. But the findings also show that each of these three large segments consists of two distinct and easily interpretable job clusters that are significantly different from one another in race and gender composition.
The job structure has become more bifurcated in the 1980s, as "middle-class" jobs (the subordinate primary segment) declined sharply and the workforce was increasingly employed in either the best (independent primary) or the worst (secondary) jobs. White women became much more concentrated at the top, while white men and black and Hispanic women were redistributed to both ends of the job structure. Black and Hispanic men, however, increased their presence only in the two secondary job clusters. Meanwhile, the quality of secondary jobs declined considerably, at least as measured by earnings, benefits, union coverage, and involuntary part-time employment. As these results would suggest, the paper research found that earnings differentials by cluster, controlling for education and experience, increased in the 1980s. The male and female wage gap also increased, as did the portion of these increasing differentials that were accounted for by changes in the distribution of racial groups among clusters.
-
Working Paper No.83
01 December 1992
Community Development Banks
AbstractThe Clinton/Gore proposal for the creation of a network of 100 community development banks (CDBs) to revitalize communities is bold, and will contribute to the success of the U.S. economy. Banks are essential institutions in any community, and the establishment of a bank is often a prerequisite for the investment process. For this reason, the creation of banks in communities lacking such institutions is important to the welfare of these communities.
The vitality of the American economy depends on the continual creation of new and initially small firms. Because it is in the public interest to foster the creation of new entrants into industry, trade, and finance, it is also in the public interest to have a set of strong, independent, profit-seeking banking institutions that specialize in financing smaller businesses.
When market forces fail to provide a service that is needed and potentially profitable, it is appropriate for government to help create the market. Community development banks fall into such a category. They do not require a government subsidy, and after start-up costs, the banks are expected to be profitable.
The primary perspective of this concept paper is that the main function of the financial structure is to advance the capital development of the economy-to increase the real productive capacity and wealth-producing ability of the economy. The second assumption is that capital development is encouraged by the provision of a broad range of financial services to various segments of the U.S. economy, including consumers, small and large businesses, retailers, developers, and all levels of government. The third is that the existing financial structure is particularly weak in servicing small and start-up businesses, and in servicing certain consumer groups. The fourth is that this problem has become more acute because of a decrease in the number of independent financing alternatives and a rise in the size distribution of financing sources, which have increased the financial system’s bias toward larger transactions. These are assumptions that appear to be supported by the evidence: they are also incorporated in other proposals that advance programs to develop community development banking.
-
Book Series
01 November 1992
Financial Conditions and Macroeconomic Performance
AbstractThis collection of papers on financial instability and its impact on macroeconomic performance honors Hyman P. Minsky and his lifelong work. The papers consider the clear and disturbing sequence of events described in Minsky’s definitive analysis: boom, government intervention to prevent debt contraction, new boom that causes progressive buildup of new debt and eventually leaves the economy more fragile financially. The collection is based on a 1990 conference at Washington University and contains papers by Benjamin M. Friedman, Charles P. Kindleberger, Jan A. Kregel, Steven M. Fazzari, and others.
-
Working Paper No.81
10 September 1992
The Impact of Profitability, Financial Fragility, and Competitive Regime Shifts on Investment Demand
AbstractCrotty and Goldstein have developed a hybrid post-Keynesian/ neo-Schumpeterian theory of investment demand. In this micro-founded theory of accumulation, the optimal investment decision depends on the level of expected profitability, the degree of competition, and the degree of financial fragility. Its core assumptions are: i)the future is unknowable in principle, ii) physical capital is ii) illiquid and the accumulation process is substantially irreversible, iii) managers and owners are distinct economic agents with an unresolved principal-agent conflict, and iv) management seeks the long-term growth and financial stability of the firm itself, and guards its decision-making authority against encroachment by stockholders and creditors. In this model, there is an unavoidable growth-safety tradeoff: the firm’s drive for growth and profits is constrained by management’s desire for financial security and decision-making autonomy.
In this paper, Crotty and Goldstein seek to provide empirical support for their earlier model through a polynomial-distributed lag regression analysis of the determinants of the rate of accumulation in the U.S. manufacturing sector between 1954 and 1988. The manufacturing sector was chosen as affording the best test of the Schumpeterian competition effect. The authors test econometrically for the presence of regime shifts at the end of the 1960s and the beginning of the 1980s—two periods in which foreign competition appears to have increased significantly.
The econometric results establish a strong Schumpeterian competition effect, in which intensified competition compels firms to undertake additional investment to defend existing illiquid capital. In addition, there is strong support for the notion of a post-Keynesian growth/financial security/autonomy tradeoff in the determination of the level of investment. Finally, the profit rate/competition/financial security nexus allows the authors to explain important trends in the post-war accumulation of capital.
Download Working Paper No. 81 PDF (620.48 KB) -
Public Policy Brief No.2
10 September 1992
An Economic Assessment: Contained Depression or the Foothills of Recovery?
AbstractRobert Barbera and David A. Levy offer contrasting assessments of the United States’ economy during the late 1980s and early 1990s. Barbera suggests that the behavior of the economy was typical for the early part of a recessionary stage in a standard business cycle: policymakers and business leaders, believing the downturn to be temporary, prolong economic distress by delaying action to reverse the trend. As hopes of recovery fade, they are forced to take drastic measures; corporations aggressively purge themselves of excesses and the Federal Reserve eases, thereby precipitating an economic rebound. Levy disagrees, asserting that the economic stagnation of that period was not simply a recessionary stage of the business cycle. Such a stage is characterized by overspeculation in inventories or short-term disruptions in demand, not by an extended period of severely reduced economic activity. Levy contends that massive federal government spending and the presence of financial safeguards (such as deposit insurance) were the only things containing the current recession from becoming a depression.
Download Public Policy Brief No. 2, 1992 PDF (17.09 MB) -
Working Paper No.80
09 September 1992
Growth and Structural Change in China-US Trade
AbstractSince the resumption of China-U.S. trade in 1972, and in particular since the establishment of diplomatic relations in early 1979, trade between the two countries has increased dramatically. By 1990, the United States was China’s third-largest trading partner, accounting for 10.2% of China’s total trade, 12.4% of Chinese imports, and 10.1% of total foreign investment. China’s foreign exchange holdings had grown to $40 billion (sixth largest in the world), and its foreign borrowing to $53 billion. This represents an integration into the world economy believed impossible by most observers a decade earlier. A key to this success has been the decentralization reform of foreign trade structures undertaken by the Chinese leadership, and the adoption of the devaluation policy aimed at emulating the trade and economic growth strategies of Taiwan and South Korea.
During the period examined, Hong Kong has played a crucial role in stimulating and facilitating trade between the two countries, and has provided experience in foreign trade operations to novice Chinese exporters. Furthermore, the British colony has aaed as a middleman-lowering transaction and transportation costs-for U.S. businesses wishing to trade with the rapidly growing number of Chinese foreign trade corporations. It is noted that the discrepancy in U.S. and Chinese government trade estimates results largely from the export of substantial Chinese goods to the U.S. through Hong Kong: Washington, unlike Beijing, counts these as Chinese goods. During this period, the slow growth in world trade has proved no constraint on the rapid growth in China-U.S. trade, and shows no signs of doing so. This is, in large part, due to the complementary nature of the two economies: Beijing sees the U.S. as a critical source of advanced technology and equipment to meet its modernization goals, while Washington regards China as a vast untapped marker for exports. The governments of the two countries have played a positive role in encouraging trade growth to date, and Wang points to the potentially disastrous consequences of revoking most-favored-nation trading status. The reduction in Chinese exports would, in turn, cause a loss of the foreign exchange needed to afford U.S. imports, and thus would have a negative effect on an already ailing U.S. domestic economy. The larger effects, particularly the "body blow" to Hong Kong, would reach far beyond the economic relations between the two countries.
Download Working Paper No. 80 PDF (327.08 KB) -
Working Paper No.79
04 September 1992
The Investment Decision of the Post Keynesian Firm
AbstractIn this paper, Crotty and Goldstein undertake the formulation of a model of enterprise investment decision that can provide a microeconomic foundation for the Keynes-Minsky macromodels developed by Delli Gatti & Gallegati, Jarsulic, Semmler and others. The authors address the difficulties inherent in the formulation of an investmes theory in which the future is unknowable, and investment substantially irreversible.
Where Minsky accepts a variation of the Tobin-q theory—in which owners and managers are assumed to be identical economic agents-Crotty and Goldstein look to Keynes’ insistence on their qualitative difference. Financial commitments to creditors are certain, while expected profits are not. Thus, the interests of stockholders and other creditors represent a potential threat to the autonomy management needs to ensure the security of the enterprise itself.
The authors derive the comparative static properties of the optimal investment decision, the essence of which they show to be the growth-safery tradeoff whereby management must sacrifice financial security to obtain growth and vice-versa. The model is shown to be able to generate both the "waiting to invest" result of the irreversible investment literature, and the major theoretical relation empirically tested and confirmed by Fazzari, Hubbard and Peterson (1988). This model explains a demand side effect rather than a supply side influence.
The many subjective and financial variables in the model reflect: i)managerial attitudes, ii) management’s confidence in its ability to forecast meaningfully, iii) the financial status of the firm, and iv) the profit markup. This theory is too complex to find incorporation in a formal, mathematical business cycle model. However, using the example of the end-of-expansion, onset-of-crisis phase of a Minsky cycle, the authors show that their results can be used to model the characteristics of post-war business cycles in a manner consistent with Minsky’s work.
Download Working Paper No. 79 PDF (844.00 KB) -
Working Paper No.78
10 August 1992
The Predication Semantics Model
AbstractThis paper presents and tests the predication semantics model, a computational model of text comprehension. It goes beyond previous case grammar approaches to text comprehension in employing a propositional rather than a rigid hierarchical tree notion, attempting to maintain a coherent set of propositions in working memory.
The authors’ assertion is that predicate class contains semantic information that readers use to make generally accurate predictions of a given proposition. Thus, the main purpose of the model-which works as a series of input and reduction cycles-is to explore the extent to which predicate categories play a role in reading comprehension and recall. In the reduction phase of the model, the propositions entered into the memory during the input phase are decreased while coherence is maintained among them. In an examination of the working memory at the end of each cycle, the computational model maintained coherence for 70% of cycles. The model appeared prone to serial dependence in errors: the coherence problem appears to occur because (unlike real readers) the simulation docs not reread when necessary.
Overall, the experiment suggested that the predication semantics model is robust. The results suggested that the model emulates a primary process in text comprehension: predicate categories provide semantic information that helps to initiate and control automatic processes in reading, and allows people to grasp the gist of a text even when they have only minimal background knowledge. While needing refinement in several areas presenting minor problems—for example, the lack of a sufficiently complex memory to ensure that when the simulation of the model goes wrong it does not, as at present, stay wrong for successive intervals—the success of the model even at the current restrictive level of detail demonstrates the importance of the semantic information in predicate categories.
Download Working Paper No. 78 PDF (425.10 KB) -
Working Paper No.77
10 July 1992
Credit Markets and Narrow Banking
AbstractMaurice Allais’s view that the credit created by fractional reserve banking is equivalent to counterfeiting has led him to recommend the separation of the depository and lending functions of banks. This proposal has recently been reintroduced by James Tobin and others under the term "narrow banking." Proponents cite the potential for enhanced safety of the payments mechanism and the elimination of costs associated with the preses system of Federal deposit insurance. This plan resembles the "100% reserves" and "100% money" proposals submitted by Irving Fisher, Henry Simons, and others in the 1930s.
The essence of banking today is that banks borrow short and lend long, while Allais’s proposal would require the reverse: borrow long and lend short. Among Allais’s objections to the fractional reserve system are the creation and destruction of money by private banks, the impossibility of control over the credit system, and the lack of efficient control of the aggregate money supply. The fundamental principles guiding reform are that (i) the creation of money should be the business of only the state, and (ii) no money should be created outside the monetary base, so that no one would be entitled to the benefits that attach to the creation of bank money. A corollary to this proposal is that the availability of credit is limited to just what the private sector is willing to lend on an equity basis.
Phillips addresses the common shortcomings of previous reform proposals (e.g. Peel’s Act of 1844 and 100% reserve plans of the 1930s), which failed to recognize the existence of substitutes to banknotes and demand deposits. The lingering question is how to "construct financial institutions which do not impede the development of the economy, yet are flexible enough to allow for technological innovation and market discipline." Narrow banking is a response (though not a panacea) to this dilemma, which clarifies the fundamental principles involved and "allows a way out of the Federal deposit insurance mess."
Download Working Paper No. 77 PDF (171.05 KB) -
Public Policy Brief No.1
02 July 1992
Restructuring the Financial Structure
AbstractTo avoid excessive concentration of economic and financial power, Athony M. Solomon recommends institutional and regulatory reform of the financial system by such means as nationwide banking, restrictions on federal deposit insurance, consolidation of financial regulation, balancing numerical standards with supervisory discretion, increased accountability of banks’ management boards, and leveling the playing field across institutions, markets, and countries. Alex J. Pollock notes that technological advances, demographic changes, and other dynamics have not been adequately absorbed in the theoretical or practical functions of financial institutions. He recommends narrow banking as the framework for the optimal banking system.
Download Public Policy Brief No. 1, 1992 PDF (7.65 MB) -
Working Paper No.76
10 June 1992
The “Chicago Plan” and New Deal Banking Reform
AbstractDuring the 1930s, there were numerous proposals put forth to modify the financial system. The “Chicago Plan,” submitted in 1933 by economists at the University of Chicago, recommended abolition of the fractional reserve system and imposition of 100% reserves on demand deposits. Despite the radical nature of this proposal, Phillips argues that it played an important, and hitherto neglected, role in the banking legislation passed during the New Deal. The paper addresses the question of whether our present financial problems might have been avoided had the “Chicago Plan” been fully implemented during the New Deal.
Phillips provides a historical analysis of banking reform during that era, and explores the reasons why the Chicago Plan was not adopted. On the surface, it appears to have been defeated as a matter of pure political expediency. The Banking Act of 1935, by institutionalizing Federal deposit insurance and the separation of commercial and investment banking, successfully restored the public’s confidence in the banking system. Moreover, Roosevelt was satisfied since the act permitted enhanced control over monetary policy by a reconstituted Federal Reserve.
The Chicago Plan ultimately succumbed to alternative (and less stringent) measures embodied in the Banking Act of 1935, but its principles (e.g. restricting bank assets and limiting taxpayers’ liability from Federal deposit insurance) have reemerged in the contemporary debate over banking reform in this country: after all, there has been a rejuvenation of the 100% reserve plan via “narrow banking” or “core banking” proposals. Though the early New Deal legislation must be considered a success since it remained relatively unchanged for almost fifty years, a formidable challenge is posed in devising a financial system that will last well into the twenty-first century.
Download Working Paper No. 76 PDF (276.58 KB) -
Working Paper No.75
01 June 1992
The Role of Unemployment in Triggering Internal Labor Migration
AbstractGeorge McCarthy’s paper explores the internal migration of labor in response to structural changes in the U.S. economy. He presents an empirical study of the relationship between wage determination and the migration decision co evaluate the role of both spiral wage differences and unemployment in motivating migration. Also, the paper assesses the relative homogeneity of the population pertaining to migration and wage determination.
Orthodox analyses label the economic actor as an autonomous agent seeking to maximize lifetime utility. McCarthy uses data from the National Longitudinal Survey of the Labor Market Experience of Youth to assess the unemployment and wage motivations for migratory behavior among young males. The findings suggest that unemployment (e.g. the condition of being unemployed at point of origin and the unemployment rate at the point of destination) plays a larger role in prompting migration than spatial wage differences, and heterogeneity exists within the population with regard to migration.for example, it is implied that a person who has migrated previously is more prone to migrate again.
The results challenge the validity of regarding labor and capital mobility as similarly motivated. Moreover, the conclusion is in contrast to the human capital view of migration as a voluntary investment decision: Wakin to the decision of labor to work or starve, migration involves the decision to move or adapt to a lower standard of living. To treat this as a voluntary decision is ludicrous." The public policy responses to address this problem can employ two distinct lines of attack: enhance the mobility of labor (e.g. increase skill or education levels) and minimize the social costs of mobility, or impede the mobility of capital by weakening its bargaining position through legislative action.
Download Working Paper No. 75 PDF (342.11 KB) -
Working Paper No.74
10 May 1992
The Financial Instability Hypothesis
AbstractThe Financial Instability Hypothesis (FIH) has both empirical and theoretical aspects that challenge the classic precepts of Smith and Walras, who implied that the economy can be best understood by assuming that it is constantly an equilibrium-seeking and sustaining system. The theoretical argument of the FIH emerges from the characterization of the economy as a capitalist economy with extensive capital assets and a sophisticated financial system.
In spite of the complexity of financial relations, the key determinant of system behavior remains the level of profits: the FIH incorporates a view in which aggregate demand determines profits. Hence, aggregate profits equal aggregate investment plus the government deficit. The FIH, therefore, considers the impact of debt on system behavior and also includes the manner in which debt is validated.
Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations for economic units. He asserts that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system: conversely, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a "deviation-amplifying" system. Thus, the FIH suggests that over periods of prolonged prosperity, capitalist economies tend to move from a financial structure dominated by hedge finance (stable) to a structure that increasingly emphasizes speculative and Ponzi finance (unstable). The FIH is a model of a capitalist economy that does not rely on exogenous shocks to generate business cycles of varying severity: business cycles of history are compounded out of (i) the internal dynamics of capitalist economies, and (ii) the system of interventions and regulations that are designed to keep the economy operating within reasonable bounds.
Download Working Paper No. 74 PDF (113.54 KB) -
Working Paper No.73
01 May 1992
Money, Growth, Distribution, and Prices in a Simple Sraffian Economy
AbstractRejecting neoclassical notions of supply and demand, Sraffa demonstrated that relative prices are determined by the profit rate. However, a Sraffa model fails to explicitly describe the determination of output, growth, and accumulation. Rao closes this model with a monetary sector, and examines the effects in both a Sraffian and a Classical world.
Rao integrates a two class, simple Sraffian production economy with an assets market. The production side yields capital and consumption goods using Sraffian technology, while assets consist of money (printed and distributed by the Central Bank) and the stock of capital. Different approaches to the labor market yield two distinct models: Sraffian and Classical. The principal conclusion is that, in a Sraffian world, Central Bank policy, via its influence on the profit rate, controls the long-run distribution of income and relative prices. In a Classical regime-in which the real wage (and so the profit rate) is exogenously driven the Central Bank controls long-run economic growth.
Download Working Paper No. 73 PDF (151.33 KB)