> Does anyone know of anyplace with an intelligent discussion of the
> discount rate issue. I've gone through parts of the Stern report and
> am somewhat stymied by the technical detail.
I had a quick look on Wikipedia but their entry for Discount Rate seemed
wrong to me. 'Discount Rate' is generally taken to mean the US equivalent
of the UK's 'Bank Rate.' In the UK the Bank Rate is set by the Bank of
England, which is the governments bank. In the US the Discount Rate is set
by the Federal Reserve Boards which are also government regulators. The
national control of the banks was resisted for a long time in the US, but
without such a thing then you get the banks going bust which is very bad for
business and employment.
What is not generally known is that banks generate money. When they receive
a deposit of $100 they lend $90 and the lender pays it into his bank. His
bank then lends $80. Thus the $100 has been turned into $270 at least. If
all the money is gold, then there is a limit to how much money can be
produced, but if you have a country with paper money than the banks can
print as much as they want. You need the king to regulate the gold coinage,
and the government to regulate the paper money if you want a stable economy.
Hence the creation of the Federal Reserve Boards and the Bank of England
which every country has and are usually called "Central Banks."
The Central Banks cannot control the amount of money in circulation by
printing less, because the banks can produce more by issuing checks, and now
with the use of credit and debit cards. If a bank is going bust it can
always borrow money from the central bank at the central bank's rate - Band
Rate in Britain, Discount Rate in the USA. But when the central bank
increases its rate that forces the other banks to raise their rates too
which slows the growth of money. If the money grows too fast then you get
inflation, so inflation can be controlled by the central bank. This would
all work fine if there was only one country, but the Federal Reserve cannot
control what the central bank of China, or Japan does and so it is not as
simple as I have explained above.
J.K. Galbraith's book "The Age of Uncertainty" explains the whole thing but
it is a little out of date since it was written before the fall of
communism. However that did not dispense with the need for central banks, so
it is still a good read. J.K. Galbraith wrote "The Affluent Society" and
was an
economic advisor to President Kennedy, and US ambassador to India.
HTH,
Cheers, Alastair.
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