Book contents
- Frontmatter
- Contents
- List of figures and table
- The Raffaele Mattioli Lectures
- Preface
- Part I The principles of the new paradigm
- 1 Reflections on the current state of monetary economics
- 2 How finance differs
- 3 The ideal banking system
- 4 Restricted banking (or, the banking system of today)
- 5 Market equilibrium
- 6 From the corn economy to the monetary economy
- 7 Towards a general equilibrium theory of credit
- Part II Applications of the new paradigm
- Bibliography
- Index
6 - From the corn economy to the monetary economy
Published online by Cambridge University Press: 12 May 2010
- Frontmatter
- Contents
- List of figures and table
- The Raffaele Mattioli Lectures
- Preface
- Part I The principles of the new paradigm
- 1 Reflections on the current state of monetary economics
- 2 How finance differs
- 3 The ideal banking system
- 4 Restricted banking (or, the banking system of today)
- 5 Market equilibrium
- 6 From the corn economy to the monetary economy
- 7 Towards a general equilibrium theory of credit
- Part II Applications of the new paradigm
- Bibliography
- Index
Summary
The essential difference between a corn economy and a monetary economy is that in a monetary economy, banks do not actually have to give out seed to borrowers. They lend, creating a “deposit” which the borrower can use to obtain seed on the market. The deposit is, in effect, a “certification of credit worthiness.” The bank bears the risk of the borrower not repaying. Anyone who supplies seeds to farmers will be more willing to accept these certifications than to provide credit directly to the farmer himself. It is this certification which facilitates the transaction between the borrowing farmer and the seed supplier.
There are three problems posed by moving from the simple corn economy to the monetary economy with certifications. First, what ensures that the supply of these “certifications” will be equal to the supply of seeds on the market? Indeed, the fundamental macro–economic problem arises from the fact that it can be either greater or less than that number. Second, why is the process of screening linked to the process of banking? In principle, the bank's information services/activities could be separated from its lending activities. Why is that not more prevalent? And third, what is the role of public regulatory policy? While a fuller analysis of regulatory policy is postponed to part II, it is worthwhile at this juncture explaining the rationale for such policies.
- Type
- Chapter
- Information
- Towards a New Paradigm in Monetary Economics , pp. 117 - 136Publisher: Cambridge University PressPrint publication year: 2003