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The Availability Doctrine: Development and Implications*

Published online by Cambridge University Press:  07 November 2014

Ira O. Scott Jr.
Ira O. Scott Jr.*
Affiliation:
University of Minnesota
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Extract

According to the classical theory of interest, which long served as a framework for the theory of money, prices, and income, the rate of interest is determined by the supply of and demand for savings. Monetary theorists, such as Wicksell, Fisher, Hawtrey, and Keynes, erected an imposing edifice on this foundation. Then came the Great Depression and disillusionment, the Second World War and the pegged market régime. At the same time, a growing ferment in the literature undermined the classical foundations. With regard to the savings function, agnosticism prevailed. As for investment demand, empirical studies and theoretical developments alike relegated the rate of interest to a minor role in entrepreneurial decision-making. In deference to considerations of debt management, open market operations were held in abeyance. Thus, little was to be expected of quantitative credit control as an instrument of public policy in the post-war period.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 23 , Issue 4 , February 1959 , pp. 532 - 539
Copyright
Copyright © Canadian Political Science Association 1959

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Footnotes

*

This paper was first presented to the Economics Faculty Seminar of the University of Minnesota. The author wishes to acknowledge his indebtedness to the members of that seminar, and to Sterie T. Beza, Gottfried Haberler, Alvin H. Hansen, Clifford Hildreth, and Alvin Marty for helpful suggestions and comments.

References

1 This reduction is quite apart from the effect upon credit availability of reduced bank reserves, should the action taken by the central bank entail open market sales.

2 See Gilbert, J. C., “The Demand for Money: The Development of an Economic Concept,” Journal of Political Economy, LXI, no. 2, 04, 1953, 144–59.CrossRefGoogle Scholar

3 Keynes, J. M., The General Theory of Employment, Interest, and Money (New York, 1936), 197–8.Google Scholar

4 See ibid., 201–2. Earlier, Keynes had noted the effect on security underwriters of changes in the bank rate. See his A Treatise on Money (London, 1930), I, 204.Google Scholar Later, Hawtrey and Lutz observed a similar reaction on the part of bankers. See Hawtrey, R. G., A Century of Bank Rate (London, 1938), 249 Google Scholar; Lutz, F. A., “The Interest Rate and Investment in a Dynamic Economy,” American Economic Review, XXXV, no. 5, 12, 1945, 829.Google Scholar In addition, see Musgrave, R. A., “Credit Controls, Interest Rates, and Management of Public Debt” in Income, Employment and Public Policy: Essays in Honor of Alvin H. Hansen (New York, 1948), 228.Google Scholar In 1941, J. H. Williams also emphasized the effect of interest rates on the lender as opposed to the borrower. See his “The Implications of Fiscal Policy for Monetary Policy and the Banking System,” American Economic Review, Supplement, XXXII, no. 1, Part 2, 03, 1943, 241 Google Scholar, reprinted in his Post-War Monetary Plans (Oxford, 1949), 243–4.Google Scholar Although he looked at liquidity preference in terms of supply rather than demand, in a static sense, Williams must be credited with the major responsibility for turning the attention of his profession to the role of the lender, both in discussions at Harvard and in the counsels of the Federal Reserve Bank of New York.

5 Hansen, A. H., Full Recovery or Stagnation? (New York, 1938), 271–2.Google Scholar Also see Twenty-Fifth Annual Report of the Board of Governors of the Federal Reserve System Covering Operations for the Year 1938 (Washington, D.C., 1939), 19.Google Scholar

6 Sayers, R. S., American Banking System (Oxford, 1948), 121–2.Google Scholar

7 Youngdahl, R. C., “Capitalism and Economic Stability: Direct versus Monetary and Fiscal Controls: Discussion,” Journal of Finance, V, no. 1, 03, 1950, 69.Google Scholar

8 McCracken, P. W., “The Present Status of Monetary and Fiscal Policy,” Journal of Finance, V, no. 1, 03, 1950, 30.Google Scholar

9 Roosa, R. V., “Interest Rates and the Central Bank” in Money, Trade, and Economic Growth: Essays in Honor of John Henry Williams (New York, 1951), 290.Google Scholar See also Musgrave, “Credit Controls, Interest Rates, and Management of Public Debt”; and McCracken, , “The Present Status of Monetary and Fiscal Policy,” 26.Google Scholar In addition, antipathy to the realization of a capital loss, in spite of the fact that the switch involved is demonstrably profitable, may have a restrictive effect. Moreover, the depreciated asset may be locked in because its sale would impair a required surplus position. On the other hand, the tax system may provide an incentive for realizing a capital loss.

10 See Roosa, R. V., “Monetary Policy Again: Comments,” Bulletin of the Oxford University Institute of Statistics, XIV, no. 8, 08, 1952, 256–7.Google Scholar

11 Roosa, , “Interest Rates and the Central Bank,” 289.Google Scholar

12 Of course, both effects may occur simultaneously.

13 Musgrave, , “Credit Controls, Interest Rates, and Management of Public Debt,” 229–30.Google Scholar

14 Even the demand for transactions balances may be interest-elastic at relatively high rates of interest. See Hansen, A. H., Monetary Theory and Fiscal Policy (New York, 1949), 66–8.Google Scholar

15 In order to have government securities remain competitively priced, the change in yields on private securities must lag behind those of government securities. This may be due to conventional rigidities as in the case of customer loan rates, or to legal limitations such as those which govern the rates of interest on guaranteed mortgages or municipal obligations.

16 Here, the elasticity of demand is significant only as a determinant of the resulting change in the rate of interest.

17 A Treatise on Money, I, 212–13Google Scholar; II, 364–6.

18 Though the analysis of this paper is not affected by the omission, it should be noted that this description of credit rationing overlooks the question raised by the refusal of a banker to purchase additional I.O.U.'s from the same borrower at scaled-down prices. In addition to conventional restrictions on easy movement from one category of risk-interest rate to another, this phenomenon may be explained by the possibility that the heavier burden imposed on the borrower by the higher interest rate will cause the risk of the loan to increase more rapidly than the rate of return.

19 These additional I.O.U.'s may consist of the third of one borrower, the second of another, and so on.