by Dirk Ehnts, Econoblog101
Rereading good books is always a pleasure, and one often discovers passages that shine in a new light given that the book has not changed but one’s mind has.
Knut Wicksell’s Interest and Prices contains a section towards the end which is very interesting:
Is it just me or is Wicksell saying that if banks do not provide enough bank deposits (by lending), then the state should take over this task? If that is so, doesn’t a state bank with the goal of creating deposits to aim at stability of prices resemble fiscal policy, which is a traditional Keynesian recipe?
This state bank would actually resemble a Treasury more than a modern central bank, if one remembers that Wicksell wrote his book in 1898 (and in German). A modern central bank cannot directly create deposits. They can indirectly create deposits through buying assets from the non-bank privat sector, but that it s shotgun policy because it is very difficult to target. When a central banks buy government securities, how do they know how is owning them? Banks or non-banks, it is impossible to forecast who is selling when the central bank is buying.
The modern Treasury could provide what Wicksell calls ‘a worthy activity for the State.’ It can create sovereign bonds, which it then deposits at the central bank in exchange for reserves, which are deposits at the central bank. It can then spend those reserves into the economy, thus creating additional deposits for the households and firms. This is the difference between the fiscal authority – the Treasury – and the monetary authority: the former can spend money and create deposits, the latter can lend money (reserves) to banks but it cannot create deposits. To create deposits, banks are necessary. Wicksell describes a pure credit system which is very close to the world we live in today:
Returning to the topic from above, if these banks fail to create an adequate amount of deposits (to sustain the price level), then Wicksell argues that the State should take over that ‘worthy activity’. If one understands Wicksell in this way, then Wicksell has provided even stronger foundations for later Keynesian economics and the economics of Keynes than is generally attributed.
These dead, old economists – there is still so much life in them!
