BEE Partner, South Africa Economy Watch

A ‘transformational growth’ perspective (Nell, 1998a) would suggest that these principles are connected in an evolutionary pattern: as technology developed, production and employment took on new forms, and came to require different kinds of financing (Nell, 1998b). To keep pace, the monetary system also had to adapt and develop in new ways.

This took place in several stages. In the first instance, as transactions became more complex, metallic money proved inconvenient. Paper claims to gold could be used more easily, and came to replace gold. But bankers noticed very early that a given supply of gold could support a larger amount of circulating paper, since only a fraction would be presented for conversion at any given time. Convertible paper based on a fractional reserve, however, is fiduciary money. It is based on the trust the public has in the banks. Read the rest of this entry »

The government budget tends to move counter-cyclically. In a slump, incomes will be reduced and spending curtailed, so tax collections will fall, but welfare and related spending to support the unemployed will tend to rise. Other government budget items are likely to be unaffected. Hence, the overall effect will be to throw the budget into deficit. By contrast, in a boom, tax collections will rise and welfare spending will tend to decline, so a surplus will tend to emerge. In short, in an economy with demand-based cyclical fluctuations, the central government budget will tend to move in a counter-cyclical fashion.

Now consider the monetary implications of deficits and surpluses. A deficit arises when the government spends more than it receives in taxes; this means a net increase in money in the system. Such money will appear as excess reserves in the banking system. If allowed to remain, it will drive down interest rates. Looked at another way, it will drive up security prices. A surplus is just the opposite; it arises when the government spends less than it takes in, and it creates a reserve deficiency, tending to force interest rates up. Read the rest of this entry »