Money : A Zero-Sum Game -- Book Review by RR Cherla
‘Money : A Zero-Sum Game’ by Krishnamurthy Vaidyanathan and Krishnamurthy Subramanian
'Money : A Zero-Sum Game' boldly challenges traditional monetarist theory and proposes an alternate framework for money, while bringing clarity to the workings of the Banking system, money supply, credit creation process, and the roles of the Central and Commercial Banks. It also serves as a text for anyone desirious of understanding the underlying principles and the mechanics of credit creation
The authors use stylized Balance Sheets of Mint Street (RBI) and Lombard Street (Banks) to succinctly explain the impact of various triggers (govt borrowing, savings, loans, forex flows, tax payments etc.) on the monetary base and money supply. The derivation of their Vaidy-Subbu Equation of Money from the combined Balance sheets and the Vaidya-Subbu Interest Rate Equation as a derivative of the V-S Money equation is pure genius. These equations elegantly link all the 'money' variables and are ready reckoners as one tries to guage the impact of changes in constituent parts on the broader monetary system.
The authors have so clearly established that the Banking sector's Liquidity and Reserves are not limiting factors and credit growth is mainly a function of Banks' bold commitment to growth and fair and judicious allotment of credit. A lot of Economists, Senior Bankers, and policymakers, conditioned by decades of classical economic theories and tradition, must now be wondering why they did not see it all this time!
The authors are on a mission to help Banks own their power!
They point out that as primary (and not just intermediary) creators of money and credit, Banks are in a pole position as far as the economy and growth are concerned. While Money is a zero-sum game, the only growth game in town is Main Street (non-banking world) enterprise and entrepreneurship which generate real value and assets. The authors show that as credit creators Banks here have the real power, and responsibility to judiciously allot credit to the right enterprises and sectors - and accelerate and sustain growth.
As the primary financial services partners to millions of enterprises and entrepreneurs, Banks' sphere of influence is much larger than RBI/Central Banks. Banks can make or break our growth story. And with their direct influence on the all-important Main Street, they are in a position to soften the impact of crises and shocks too. The true 'central' Bank!
They go beyond theory and support their contrarian views on the correlation and direction of causality pertaining to variables like loans, deposits and money supply, using historical data and established economic tookits.
I do hope the policymakers on Parliament, Mint, and Lombard Streets, examine extant policies and tweak (overhaul?) them based on this fact and data-backed thesis.
- RR Cherla