Money v. moneyness

In conversation recently, I was called upon to defend the claim that banks are in the business of creating and destroying private money. This has been for me a working hypothesis for so long that I was unable to respond effectively or cogently to the argument. My interlocutor followed up in e-mail with a Cowles Foundation paper by Tobin in support of her case. Here is my response to Tobin, hopefully better articulated than I managed on the fly. In this post, I'll stick to the theoretical claim (the practical context was bank capital requirements).I agree wholeheartedly with Tobin's dismissal of themystique of "money"—the tradition of distinguishing sharply between those assets which are and those which are not "money," and accordingly between those institutions which emit "money" and those whose liabilities are not "money,"but rather than enclosing the difficult word in quotes, I prefer to try to understand it. By all means let us not draw an abritrary line between money and non-money. But Tobin is wrong to conclude that there is nothing special about money at all.There is indeed something special about money. All of the traditional functions of money come down to the certainty that one will be able to get rid of it, at a reasonably certain price, for a reasonably long distance into the future. That certainty amounts to money's liquidity, and the institutional setup of the payment system—including commercial banks, the central bank, and deposit insurance—all exist to support it. It is costly to do so; liquidity is not a free good.

This moneyness is not something that is inherent in the thing; it is present when institutions and individuals provide and maintain it.

Participation in the payment system is an expression of a bank's willingness to trade at par deposit claims on itself with those on other banks. To do this is to guarantee the liquidity of the bank's deposit liabilities—if a depositor wishes to enter or exit a position in some bank's deposits, it can do so, in size, without moving the price from par (i.e., from one). The central bank supports this guarantee by ensuring banks' access to clearing balances for the processing of interbank payments; deposit insurance supports it by protecting banks from runs.

Moneyness should, moreover, be viewed as a property which can be possessed in degrees. No arbitrary line should be drawn, but some things are more like money than others: federal funds are very money-like, T-bills less so, equity shares not so much at all. The degree depends on how deeply the liquidity of each type of claim is supported by the banking system.

Read the rest at The Money View
Banks as creators of money
by Daniel H. Neilson

Subsequently, Neilson says, "Moneyness should, moreover, be viewed as a property which can be possessed in degrees. No arbitrary line should be drawn, but some things are more like money than others: federal funds are very money-like, T-bills less so, equity shares not so much at all. The degree depends on how deeply the liquidity of each type of claim is supported by the banking system."

That seems wrong. Federal funds (reserves) are the basis for liquidity and cannot be less liquid than deposits even though they are only use for interbank settlement and never spent. Moreover, reserves are exchangeable for physical currency ("cash") dispensed into the economy through deposit windows, and cash is the most liquid spendable money.