3.4 Indirect Ways of Helping the Macro-Economy
To have some lasting effect here a more profound Governmental policy is needed, of which the following are possible methods (with the comments being included here):
#1 to control the reserve-ratio of cash deposits held in banks,
#2 to reduce the prime rate of interest and
#3 to stimulate production by the proper use of the land.
3.4.1 The Control of the Reserve-Ratio of Cash Deposits Held in Banks
It is easy to blame the banks for allowing their reserves to become so low and (as collaborators with the land-owning investors and speculators) for being unable to determine when the land-value bubble is about to burst. Had the analysis been done properly and the degree of lending curtailed in enough time, the damage due to bank insolvency would not have occurred and the recession not progressed far beyond the real-estate business. But banks are too close to the action to be able to see the full picture. Their chief business-aim is to provide the investors with as much credit as possible without raising their reserves very far above the minimum, so it is difficult for them to decide how much money to store at any particular time. Some banks even find ways to disregard the minimum sum that they should be storing in their vaults and they are in big trouble at slump time. But even when the banks conform to this proportion, a "run on the bank" can still cause them financial embarrassment.
The National Bank has the power to supply credit to the banks at the "window of last resort", when their individual reserves are running low. This facility is provided because the banks are obliged to return money to the savers at the end of its duration, without it necessarily being re-invested. But, there is a limit to how much of this kind of credit can be provided. The effect of the slump can easily cause this additional reserve to be exceeded and the window closes.
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