“What, at any time, is regarded as ‘money’ are those forms of financial claims which are commonly used as means of clearing debts. But any shortage of commonly-used types is bound to lead to the emergence of new types; indeed, this is how, historically, first bank notes and then chequing accounts emerged. Of course, within limits, the ultimate monetary authority can and does exercise control over the volume of borrowing, because it can control interest rates, particularly at the short end, through open market operations, far more powerfully than other operators, and because, within limits, it can control the volume and direction of lending by the clearing banks, which have such a powerful role in the system as suppliers of credit. But when credit control is operated as an independent instrument—as a substitute for fiscal policy, and not as a complement to it—any forceful initiative by the monetary authorities weakens their hold over the market by diverting business from the clearing banks to other financial institutions. When the central bank succeeds in controlling the quantity of ‘conventional money’, lending and borrowing is diverted to other sources, and the ‘velocity of circulation’, in terms of conventional money, is automatically speeded up.” (Nicholas Kaldor—The New Monetarism, 1970)
If the central bank tries to control credit
Tap an option to check your answer.