32 - METHODS OF NATIONAL MANAGEMENT—I. THE CONTROL OF THE MEMBER BANKS

Summary

The first necessity of a central bank, charged with responsibility for the management of the monetary system as a whole, is to make sure that it has an unchallengeable control over the total volume of bank money created by its member banks. We have seen in chapters 2 and 25 that the latter is determined, either rigidly or within certain defined limits, by the amount of the member banks' reserve resources. The first question, therefore, is how the central bank can control the amount of its member banks' reserves.

It will be convenient to assume that the central bank is also the note-issuing authority. (Where this is not the case, it must be supposed that, for the purpose of what follows, the balance sheets of the central bank and of the note-issuing authority are amalgamated.) On this assumption the currency in circulation in the hands of the public, plus the reserve resources of the member banks, will be equal to the total assets of the central bank minus its own capital and reserves, and minus also the deposits of the Government and of any depositors of the central bank other than the member banks. Thus, broadly speaking, the central bank will be able to control the volume of cash and of bank money in circulation, if it can control the volume of its own total assets. The member banks can only increase their own reserve resources (unless the volume of cash in circulation is falling off) by influencing the central bank to increase the volume of its total assets; and if the central bank can control the latter, it will control, indirectly, the total of cash and bank money.