Reforming Domestic Payment Systems

Alvaro Cencini and Sergio Rossi
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Alvaro Cencini: University of Lugano
Sergio Rossi: University of Fribourg

Chapter 10 in Economic and Financial Crises, 2015, pp 226-240 from Palgrave Macmillan

Abstract: Abstract The global financial crisis that erupted in 2008 highlighted that banks do not make a clear distinction between the monetary and the financial intermediation they carry out, as explained in this volume. Indeed, in the early drafts of his Treatise on Money, Keynes (1973a: 91) noted that a bank is both a ‘money purveyor’ and a ‘credit purveyor’ within a monetary economy of production. This distinction has been lost in both economic theory and policy since then. It was, nevertheless, at the core of Ricardo’s (1824) Plan for the Establishment of a National Bank. As he observed, ‘[t]he Bank of England performs two operations of banking, which are quite distinct, and have no necessary connection with each other: it issues a paper currency as a substitute for a metallic one; and it advances money in the way of loan, to merchants and others’ (ibid.: 276). Since these two operations are conceptually distinct, Ricardo (1824: 276) explained that they can be carried out by two separate bodies, ‘without the slightest loss of advantage, either to the country, or to the merchants who receive accommodation from such loans’. In fact, as we will argue in this chapter, this functional separation is not only harmless but a structural factor of financial stability, because it allows to avoid that banks issue empty money in purely financial transactions that do not generate new income within the economic system as a whole.

Keywords: Capital Good; Structural Reform; Wage Earner; Bank Deposit; Wage Bill (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-46190-2_11

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DOI: 10.1057/9781137461902_11

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