Year:    1976

Author:    Menrad, Siegfried

Credit and Capital Markets – Kredit und Kapital, Vol. 9 (1976), Iss. 2 : pp. 220–237

Abstract

The Eurodollar Market as an Instrument of International Money Creation?

Prevailing theory describes “money creation on the Euro-money market” as a multiplier process, the course of which is analogous to that of the moneycreating processes of national banking systems, but is independent of the norms and conditions which apply to creation of money in an individual national banking system. For several reasons the author considers this description to be erroneous. First of all, it must be stated that there are no commercial banks with an exterritorial domicile and that therefore in their business activities all banks are tied down by national and currency-specific requirements. This position is not altered by settlements via (foreign) exchange accounts. Hence there is no “money creation on the Euro-money market” which ist autonomous and independent of national norms and conditions. It stands to reason, therefore, that only the influence of events on the Euro-money market on money creation in the various currency areas of the Euro banks can be investigated. Some reflections along this line show that, in the final analysis, the interdependence of all money markets compels us to set up a “world model of money creation” and to make the ceteris paribus clause unnecessary by means of a simultaneous solution. Furthermore, it becomes clear that, on account of the assumption of uniform reserve rates for deposits of bankers and deposits of non-bankers, and on account of the assumption of uniform outflow rates, the model used by the prevailing theory suppresses precisely those facts and relationships which are needed to explain and forecast events on the Euro-money market.