Hey there! Sign in to join this conversationNew here? Join for free
    • Thread Starter
    Offline

    0
    ReputationRep:
    Hello,

    I'm currently reading this book and I have got stuck on a certain passage. It is from chapter 7 'The meaning of saving and further investment further considered'

    'The reconciliation of the identity between saving and investment with the apparent “free-will” of the individual to save what he chooses irrespective of what he or others may be investing, essentially depends on saving being, like spending, a two-sided affair. For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.

    The above is closely analogous with the proposition which harmonises the liberty, which every individual possesses, to change, whenever he chooses, the amount of money he holds, with the necessity for the total amount of money, which individual balances add up to, to be exactly equal to the amount of cash which the banking system has created. In this latter case the equality is brought about by the fact that the amount of money which people choose to hold is not independent of their incomes or of the prices of the things (primarily securities), the purchase of which is the natural alternative to holding money. Thus incomes and such prices necessarily change until the aggregate of the amounts of money which individuals choose to hold at the new level of incomes and prices thus brought about has come to equality with the amount of money created by the banking system.'

    Sorry it's so long. If anybody can explain the gist of the argument it would be greatly appreciated.

    Thanks
    Offline

    0
    ReputationRep:
    (Original post by Gooj)
    Hello,

    I'm currently reading this book and I have got stuck on a certain passage. It is from chapter 7 'The meaning of saving and further investment further considered'

    'The reconciliation of the identity between saving and investment with the apparent “free-will” of the individual to save what he chooses irrespective of what he or others may be investing, essentially depends on saving being, like spending, a two-sided affair. For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.

    The above is closely analogous with the proposition which harmonises the liberty, which every individual possesses, to change, whenever he chooses, the amount of money he holds, with the necessity for the total amount of money, which individual balances add up to, to be exactly equal to the amount of cash which the banking system has created. In this latter case the equality is brought about by the fact that the amount of money which people choose to hold is not independent of their incomes or of the prices of the things (primarily securities), the purchase of which is the natural alternative to holding money. Thus incomes and such prices necessarily change until the aggregate of the amounts of money which individuals choose to hold at the new level of incomes and prices thus brought about has come to equality with the amount of money created by the banking system.'

    Sorry it's so long. If anybody can explain the gist of the argument it would be greatly appreciated.


    Thanks

    Wow this is an interesting statement. The first bit is saying how investment = savings. The banking system "creates" money through its use of fractional reserves. People have liquitidty preference, and so hold a certain amount of money as cash. And the 2nd bit it saying how people can deicde how much money the banking system creates by how much money they choose to hold.
    • Thread Starter
    Offline

    0
    ReputationRep:
    (Original post by Willis123)
    Wow this is an interesting statement. The first bit is saying how investment = savings. The banking system "creates" money through its use of fractional reserves. People have liquitidty preference, and so hold a certain amount of money as cash. And the 2nd bit it saying how people can deicde how much money the banking system creates by how much money they choose to hold.
    Thanks a lot, that was a great explanation.
    • Thread Starter
    Offline

    0
    ReputationRep:
    Hello, I have another question:

    I have got to chapter 15 and I am unsure about a certain part. Could somebody please briefly explain this to me.

    'If the monetary authority were prepared to deal both ways on specified terms in debts of all maturities, and even more so if it were prepared to deal in debts of varying degrees of risk, the relationship between the complex of rates of interest and the quantity of money would be direct. The complex of rates of interest would simply be an expression of the terms on which the banking system is prepared to acquire or part with debts; and the quantity of money would be the amount which can find a home in the possession of individuals who — after taking account of all relevant circumstances — prefer the control of liquid cash to parting with it in exchange for a debt on the terms indicated by the market rate of interest. Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.'

    Thank you
    Offline

    0
    ReputationRep:
    (Original post by Gooj)
    Hello, I have another question:

    I have got to chapter 15 and I am unsure about a certain part. Could somebody please briefly explain this to me.

    'If the monetary authority were prepared to deal both ways on specified terms in debts of all maturities, and even more so if it were prepared to deal in debts of varying degrees of risk, the relationship between the complex of rates of interest and the quantity of money would be direct. The complex of rates of interest would simply be an expression of the terms on which the banking system is prepared to acquire or part with debts; and the quantity of money would be the amount which can find a home in the possession of individuals who — after taking account of all relevant circumstances — prefer the control of liquid cash to parting with it in exchange for a debt on the terms indicated by the market rate of interest. Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.'

    Thank you
    This is mostly to do with how the central bank cannot affect long term rates of interest simply by changing the short term rate. So Keynes proposes the bank buys long term debt and so can change its value and affect the long term rate of interest.

    I think thats right ^^.
 
 
 
  • See more of what you like on The Student Room

    You can personalise what you see on TSR. Tell us a little about yourself to get started.

  • Poll
    Would you like to hibernate through the winter months?
  • See more of what you like on The Student Room

    You can personalise what you see on TSR. Tell us a little about yourself to get started.

  • The Student Room, Get Revising and Marked by Teachers are trading names of The Student Room Group Ltd.

    Register Number: 04666380 (England and Wales), VAT No. 806 8067 22 Registered Office: International House, Queens Road, Brighton, BN1 3XE

    Quick reply
    Reputation gems: You get these gems as you gain rep from other members for making good contributions and giving helpful advice.