Marco conceptual

finds its form in dominant paradigms and ideologies (called the blocco storico in Gramsci’s Italian context or hegemonic historic blocs in Cox’s), is a prime driver of human behaviour as well (Cox 1987, Gramsci 1991).149 A caveat, following Marx, is that dominant ideological paradigms merely reflect the interests pertaining to the production structure anyway. Lipietz noted that Marx had recognised the ‘enchanted world’ of appearances and subjectivity as instigator of specific human outcomes, but it is reasonable to suggest that Marx viewed these as secondary to the material relations (see 5.2) and (see 5.4) the law of value (Lipietz 1983). Strange explains how, for Cox, there are three levels of world order: the production structure (with material relations), the international society of states and international political economy (markets and finance). The levels are separate but interact, and the historic bloc (dominant cultural paradigm) acts to maintain and pervade the existing order. Cox maintains, that substantial transformation will only occur if a ‘counter-hegemonic bloc’ (in the normative world of ideas) works at all three levels in order to engender the change (Strange 1996). It is argued in the thesis that the Gramsci view of the blocco storico is not inconsistent with Marx’s materialism and law of value, and can be synthesised. The material relations and systemic imperatives of capitalism are the prime drivers of agent behaviour, but as Marx’s theory of historical materialism claims, contradictions lead to systemic change at pivotal moments in history and consciousness (ideology) is then a key factor. Ideological power is another source of social power, as Mann notes, and it is argued that the current capitalist economic order would be untenable without it (Mann 2001).

7.5. THE FINANCIAL STATE

The capitalist state has discharged various functions in their national monetary systems, depending on historic context and place. Karl Polanyi pointed out that power (including financial) ebbed and flowed between state and market, depending on the historical epoch in question (Polanyi 1944). The aim in this section is to illustrate financial capability actually discharged by the modern capitalist state as a prelude to the empirical work, and the next section explores credit intermediation in banks. The thesis cites Keynes as initiating the call (in the 1920s) for a dependable currency i.e with a stable purchasing power and quantity, directed by the state. In this regard, the gold standard (see 4.2) was inadequate due to the

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erratic nature of the gold supply (Houghton-Budd 2005, Keynes 1923). Knapp noted, the authorities are responsible for legitimating currency for the payment of taxes, and the state control of the quantity/value of money represented a logical progression (Knapp 1924). The thesis EMT argument is that in the modern era bank loans create deposits, which circulate as money, and the state (with private banks) regulates money volume and purchasing power via state influence of the interest rates (with absence of other credit controls).

One problem is that some finance literature, e.g. Pilbeam, presents the credit multiplier as determining credit levels, which itself depends on a state reserve asset ratio (Pilbeam 2005). Rochon has noted, this ratio has disappeared in a few western states (including the UK) and is minimal in others. Credit multiplier theory thus contradicts the reality (Rochon 2007). In contrast, EMT views bank credit as market-driven (see 4.2) that creates the reserves supplied by the national bank. The state still sets base interest rates, thus influencing the level of money created. The state targets the interbank interest rate via repos (traditionally OMO) that is a determinant of the spectrum of market interest rates. But since state authorities do not have accurate knowledge of money demand or the vagaries of private bank decision-making (see 7.6), both instruments provide incomplete control of the money supply. In this sense, credit-money is endogenously issued in response to demand at an exogenous/endogenous (state and market determined) interest rate. This is the central proposition of the thesis theory and changing use of monetary instruments reveals changing power relations between the state and market regarding money issue/value.

Since the 2008 financial crisis, discussion amongst PK’s on the mechanics of OMO and its impact on the interbank market has taken place. Selling securities to banks reduces liquidity in the aggregate system and raises interbank rates and vice versa. The policy aim is to (exogenously) determine the interbank interest rate that then influences the spectrum of market rates offered to businesses and consumers (Lavoie 2010, Rochon 2007, Gaspar et al. 2004, Jurgilas and Zikes 2012). In turn, these OMO directly affect the level of credit creation. Palley pointed out (see 9.4) that recent financial innovations (e.g. derivatives) and bank disintermediation (securitisation) have made it more difficult for the state to affect the interbank rate, since there is a reduced demand for the narrow money of the central bank for final settlements (Palley 2003: 67).150 In response the state has adopted the so-called corridor

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system, where the central banks pay interest on reserves and target an overnight rate that is set in the middle of a band between credit and deposit rates for the same reserves (Lavoie 2010, Rochon 2007).151 The payment of interest on reserve deposits is thus used to serve as a disincentive to interbank settlement outside of national bank control. The BOE adopted a policy of paying interest on positive balances in reserve accounts in 2009 (BOE 2009). Whilst the corridor system operation appears to indicate an increase in financial sovereignty over the level of credit money (via market interest rates), it is argued that the new policies are an attempt to reclaim capabilities that were lost through the processes of disintermediation and innovation (see 9.4 and 10.5). The idea of an exogenous interest rate per se has been questioned. Wray’s discussion of exogenous/endogenous interest rates (see 4.2), for instance, distinguished between the authority control sense of exogeneity and the causal sense (Wray 2004). A strong exogenous variable, in a causal sense, is one that is independent of all endogenous variables including lagged ones. A state target interest rate for the interbank market, may be state-determined chosen in a control sense but the decision may have been more or less driven by endogenous variables (Wray 2004). It is likely that in the neoliberal era, market signals have driven the authorities’ decisions more than during the BW era with its stronger ideology of an interventionist state. As has been posited by Moore, the demand for reserves is always fully accommodated (at least in daily operations) by the central bank (Wray 2004). This quick portfolio adjustment for the banks is not easy, and so the national bank operates as ‘lender of first resort’ (Chick’s phrase) in order to provide reserves needed as deposits rise from credit expansion (Chick 1986: 7). This may have encouraged less restrained lending from the private banks suggesting an erosion of state financial sovereignty. There have been times when there has been a serious attempt by the state to monitor and determine the nominal amount of monetary growth using monetary base (MB) control, based on the credit multiplier theory, but this led to practical difficulties (see 3.7, 9.4 and 10.4). The monetary base consists of notes and coins and commercial bank reserve accounts (see Table 7.1). If the state decides to target MB levels, this causes the interbank interest rates to fluctuate, which leads to undesirable macroeconomic instability. There may need to be structural changes to the banking system in order to target base money levels. In the UK, for

151 _{In the US, the use of the corridor to target the Federal Funds rate was made possible after Congress granted}

the Federal Reserve the right to pay interest on reserve deposits in 2008 (Lavoie 2010: 10). There has been the development of the so-called floor system in the US, which sets the target Federal Fund rate at the (low) level of the deposit rate paid on reserves. The only time inter-bank rates are likely to fall below this is if there is a particularly large volume of inter-bank transaction activity between non-settlement banks (Lavoie 2010).

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example, the clearing banks have overdraft facilities with each other, which makes it more difficult for the central bank officials to implement MB control of settlement bank reserves. Most of the assets of a typical bank consist of their non-marketable loan portfolio. It is not always possible for commercial banks to respond to reserve asset ratios, since they cannot sell parts of their non-liquid outstanding loan contracts. It was difficult for the state to control monetary aggregates because reserve requirements were unpopular with the banks. Prior to the financial crisis of 2008, for example, commercial bank reserves at the national bank used to pay zero interest (a de facto tax on banks) and this led to an increase in their spread between deposit and lending rates, affecting the real economy.

Table 7.1. National Bank Balance Sheet (Compiled by author).

Assets Liabilities

Loans to Commercial Banks Commercial Bank Reserve Accounts Loans to Government Government Deposits

Reserves of Foreign Exchange Notes and Coins in Circulation Government Debt Holdings

The lender of last resort facility at the national bank might be compromised when banks require emergency reserves during a time of tight MB control. Given these difficulties experienced when seeking to control monetary aggregates, it is perhaps unsurprising that this type of state action has waned in the last three decades. In summary, the capitalist state is able to exert capability to influence the issue of credit money and the purchasing power of money, but in the neoliberal era this takes place through the imposition of base rates and OMO to target interbank rates. During the BW era, in contrast, there were additional policy instruments at the hands of the state such as cash or liquidity ratios (see 9.4 and 10.5).