ABSTRACT
Suppose, however, that the authorities do draw a precise dividing line. Suppose, for example, that they define the total of notes, coin and current account deposits with the clearing banks as 'money' and all other assets as 'non-money'. To regard this quantity as a significant control for demandmanagement purposes could lead to ridiculous results. There have been periods, for example, when those who are in charge of choosing investments for the very large sums accumulated by pension funds, insurance funds and similar institutions have chosen to 'go liquid' because they have expected the prices of stock exchange securities and government bonds to fall in the future. During such a period the government has had to borrow by selling its securities to the banks, which have financed these purchases by means of the moneys that the pension fund managers have accumulated and kept in the form of additional deposits with the banks. When the pension fund managers have changed their minds and have decided to reduce the liquidity of their funds by investing their bank deposits in government securities, the banks have sold government securities to them in return for cancelling the deposit liabilities of the banks to the pension funds. While the pension funds went liquid, the amount of so called 'money' increased greatly because of the increased deposit liabilities of the banks; when the pension funds invested in less liquid assets, the amount of 'money' decreased greatly. It would be ridiculous to argue (although some observers have done so) that there was a great threat of demand-management inflation when the pension funds went liquid, a threat that was removed when they invested in less liquid assets. All that had happened was that the central bank (With its control over the banking system) and the government (with its control over the forms of national debt by which it will fmance its borrowings) had issued liquid assets
('money') when the pension funds chose to go liquid and less liquid assets ('non-money') when the pension funds chose less liquid investments.
