Banks and the Design of the Financial System: Underpinnings in Steuart, Smith and Hilferding

Lapavitsas, Costas

Abstract

Banks in bank-based financial systems tend to engage in long-term lending that requires substantial own capital to guarantee solvency. In market-based systems, in contrast, they tend to undertake short-term lending that requires adequate reserves to guarantee liquidity. Theoretical support for these two approaches to banking can be found in,respectively, Steuart and Smith. The innovative Marxist analysis of banking by Hilferding combined elements of both. Banks in the early stages of development are Smith-like but, as the scale of fixed investment in industry grows, they lend long-term and become Steuart-like, also developing ‘commitment’ relations with enterprises. However, Hilferding also implied, erroneously, that financial systems historically evolve
in a bank-based direction. Based on Hilferding but also drawing on Japanese Marxist analysis of finance, it is suggested instead that bank behaviour in bank-based systems results from institutional changes imposed by policy-makers in order to achieve ‘catching up.’

Citation

Lapavitsas, C. Banks and the Design of the Financial System: Underpinnings in Steuart, Smith and Hilferding. London

• Working Paper Type: Working Paper
• Deposit Date: Mar 17, 2006
• Publicly Available Date: Jun 11, 2023
• Pages: 1-36
• Series ISSN: 17535816
• Keywords: Adam Smith, James Steuart, Rudolf Hilferding, banking theory, Marxist theory of finance
• Publisher URL: https://www.soas.ac.uk/sites/default/files/2022-10/economics-wp128.pdf
• Related Public URLs: https://ideas.repec.org/p/soa/wpaper/128.html