Deepak Lal’s interesting column “Money matters” (June 30) revisits the old controversy on the focus of monetary policy. Should it be money supply or interest rate? Traditionally, monetary policy has been expected to deal with the regulation of money supply, while credit policy has a bearing on terms and conditions for the issue of loans. They are two sides of the same coin. Ceteris paribus, the availability (influenced by money supply) and the cost of credit (interest rate) are inversely related. The article argues implicitly that money matters in stimulating economic activity. But, as we know, much of the money created by the US Fed in the recent past made a round trip to it in the context of risk aversion and avoidance of additional capital requirements on lending on the part of banks. Such hassles are absent in the safe-keeping of funds with the Fed. It is further made attractive by the interest of 25 basis points paid to banks on their entire cash reserves. The process of credit creation is the process of money creation. The Fed’s effort to lower interest rate is aimed at encouraging borrowing against household mortgages that will raise the deposit multiplier. But today there is an all-round atmosphere of gloom among the general public. They are also risk averse and have started saving instead of spending, having experienced the Great Recession. The solution lies in massive public works of the type seen under the New Deal of President Roosevelt.
A Seshan Mumbai
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number