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Published online by Cambridge University Press: 07 November 2014
To H. G. Johnson, “Johnson's Northern Tour: A Traveller's Guide Past the Marshes,” this Journal, XXX, no. 3, Aug., 1964, 435–8. Page references in parentheses throughout the present text refer to this “reply” article by Johnson.
1 Marsh, D. B., “Johnson's Tour of the Northern Dominion,” this Joubnal, XXX, no. 2, 05 1964, 258-65 (hereafter referred to as “Tour”).Google Scholar
2 “Tour,” 258.
3 Johnson, Harry G. and Winder, J. W. L., Lags in the Effects of Monetary Policy in Canada (Ottawa, 1964).Google Scholar
4 In spite of Johnson's comment at this point, I am no longer sure that my guess was entirely correct. A quick review of the relevant section of the larger study (now generally available) makes me less certain than Johnson that I had seen (even though dimly and with characteristic lack of understanding) what in fact his lag is intended to measure, or given this, what he actually did measure. The main difficulty seems to lie in applying standard techniques to the special Canadian system which averages cash over the reserve period (current month), and defines the reserve ratio as statutory till money plus current chartered-bank deposits in the Bank of Canada applied to statutory deposits, where statutory till money and statutory deposits are fixed sums established in an earlier base period. I do not agree with the authors that this system weakens the Bank of Canada's control over total chartered bank assets or deposits (p. 141); and, given its virtues, I certainly would not want to see the system scrapped merely as a contribution to econometric convenience. (For a full description and defence of the present method of calculating reserve requirements, see The Canadian Bankers' Association, Submission to the Royal Commission on Banking and Finance (Toronto: The Association, 07, 1962 Google Scholar; (reprinted in Supplement to the Canadian Banker, spring 1963), paragraphs 47–57 Google Scholar; and Report of the Royal Commission on Banking and Finance (Ottawa, 1964), 393, 462-3.Google Scholar) However, I do agree that “… in a financial system as concentrated as that of Canada, it should be possible to improve the model of the banking system's response to central bank cash management by bringing to bear more expert knowledge of the structure and behaviour of the banking system” ( Johnson, and Winder, , Lags, p. 149).Google Scholar In any case, Johnson and Winder's “Working Paper” deserves careful study and appraisal.
5 “Tour,” 258–9, and n. 4.
6 The difference between “actual” and “desired” reserves in this formulation measures “excess reserves” (plus or minus), and in seeking to reduce these to a minimum a bank, in my formulation, is seeking the ideal of “zero excess cash” (see section IV below).
7 Johnson, Harry G., “Monetary Theory and Policy,” American Economic Review, LII, no. 3, 06 1962, 358.Google Scholar
8 I shall not therefore deal in any detail with the little exercises in elementary monetary theory which Johnson presents from time to time for my enlightenment. But surely the antithesis (p. 437) involving the stale distinction between the individual bank and the system carries an uneconomic burden of over-simplification merely to make a doubtful point. The banking system, like the individual bank, may lose or gain cash in the adjustment process, unless there are no system leakages; and both the individual bank and the system “adjust cash to deposits” and “adjust deposits to cash” in any meaningful; sense of these words; or, better, both work off excess cash with corresponding effects on the amount and distribution of assets and deposit liabilities.
9 See “Tour,” n. 4 and 9.
10 Ibid., 260.1 have here italicized the five words ending the quotation.
11 For example, Johnson's treatment of legal minimum cash reserves and their possible variation as a means to effective monetary policy (Canadian Quandary, 218) does not question the original argument for legal minimum cash reserves. Yet surely one of the best arguments against legal reserve gadgetry of all kinds, including legally variable cash reserves, is that even a fixed legal minimum cash reserve requirement is unnecessary to the effectiveness of monetary policy. Nevertheless, in his evalution of the case for extending controls through variable reserve requirements, no mention is made of the considerable economic literature supporting the case against any legally fixed minimum cash reserve requirement in the first place. For a statement of the case against, complete with bibliography, see Galbraith, J. A., The Economics of Banking Operations (Montreal, 1963), 433, n. 136.Google Scholar A more recent, and perhaps unexpected, attack on legal reserve requirements appears in a letter from Mr. James J. Saxon, US Comptroller of the Currency, to the Presidents of the National Banks as reported and quoted in American Banker, 03 3, 1964, 1–2.Google Scholar See also McLaughlin, W. Earle, Some Preliminary Thoughts on the Porter Report (Montreal, The Royal Bank of Canada, 1964), pp. 10–12 Google Scholar; and “Tour,” n. 15.
12 Canadian Quandary, 180.
13 See Shelby, Donald, “Some Implications of the Growth of Financial Intermediaries,” Journal of Finance, XIII, no. 4, 12 1958, esp. 529-32.Google Scholar
14 See ibid., 534. “Presumably there exists some sort of aggregate diversification schedule of the community which is based upon a complex of shifting factors, some of which might be such obvious items as price and income expectations, the desire for liquidity, the acceptable degree of risk, the degree of substitutability between various classes of assets, and so forth.”
15 Ibid., 529–31.
16 Why not, for example, compute the multiplier linking Gross National Expenditure to chartered-bank cash?
17 Shelby, , “Growth of Financial Intermediaries,” 540.Google Scholar Italic in original.
18 Actually the limit of bank contraction would be reached when all bank deposits are held by near-banks as cash reserves against near-bank deposits. I have not tried to work out the full implications of this arrested euthanasia of the banking class.
19 Shelby, (“Growth of Financial Intermediaries,” 529-31Google Scholar) does this in giving values (admittedly extreme and unrealistic) to the parameters for the three cases examined in his formal proof.
20 See Gurley, J. G. and Shaw, E. S., “Reply,” American Economic Review, 48, 03, 1958, 137 Google Scholar; and Shelby (who cites an earlier paper), 540–1.
21 This point is implicit in the references cited in n. 11, above, and explicit in McLaughlin, W. Earle, Submission to the Royal Commission on Banking and Finance (Montreal: The Royal Bank of Canada, 07, 1962 Google Scholar; reprinted in Supplement to the Canadian Banker, spring, 1963), paragraphs 19 and 23–4.
22 “Tour,” 259–60 and n. 5–7.
23 I do not think that large Canadian banks are sensitive to the absolute level of rates in adjusting their cash positions. This may be true of small banks, notably in the United States, that would not ordinarily find it profitable to assume the overhead involved in skilled cash management. However, with a significant rise in interest rates, some of these banks, like other corporations, may find the extra overhead worth while. This would appear in aggregate figures as lower cash balances relative to total operations; or, in the case of banks, lower cash reserves relative to deposits. For large Canadian banks, the cost of investment relative to income from investment is extremely low, and it pays them to assume the overhead involved in skilled cash management regardless of the absolute level of interest rates (above zero plus cost of investment). As a result, in their money-market operations, the banks will move extremely fast for what may appear to be extremely small interest differentials.
24 But cf. Johnson, , Canadian Quandary, 218 Google Scholar: “This argument [for variable reserve ratios] assumes, plausibly, that banks will work closer to the minimum reserve ratio the higher that ratio is.”
25 See above, n. 6.