ABSTRACT
The structure and functioning of capital markets in developing economies has been extensively analyzed in the literature. Rural loan rates that are higher than urban rates are nearly universal in LDC's. In the monetarist model of capital markets, the role of financial centers, in which the large rural balances were kept, is to gather small quantities of savings from diverse sources, and allocate them to growth sectors via lending for large capital projects. Standing in self-described contradiction to the monetarist model is the 'structuralist' model. The structuralist explanation for bankers' balances - they enabled rural bankers to charge higher interest rates - diverges from the monetarist one. In its most highly developed form, the argument contends that balances qua reserves reinforced market failure, and that government contributed, however unwittingly, to misallocation of capital resources. There is a certain amount of evidence supporting the monetarist analysis. Bankers' balances formed a significant part of the New York bank funds.
